SOURCE: Luxury Institute, LLC

Luxury Institute, LLC

July 14, 2015 10:22 ET

Luxury Institute's Operations Optimization Summer Checklist

NEW YORK, NY--(Marketwired - July 14, 2015) - The luxury industry enters the second half of 2015 with the market in a state of major flux. Growth rates are slowing and profit margins are shrinking as high-end goods and services companies grapple with a generational changing of the guard in their client base, and struggle to differentiate themselves from competitors.

Summer is a time to relax and reinvigorate, and as they unwind, many top leaders at luxury brands will no doubt be pondering some of the essential questions about their business operations that need to be addressed in the Fall. With our history of managing regional and global operations for major multinationals, and more than a decade consulting with, and coaching, hundreds of senior luxury executives, we know many of the questions that they are asking right now. Peak-performers are not resting easy this summer. They can't afford to.

Below, we have created a checklist addressing eight concerns that we hear over and over in our engagements with executives at luxury firms as they wrestle with how to allocate resources across the organization to optimize performance.

1. Should I right-size my organization?
When most consultants ask this question, they usually mean downsizing, slashing and burning. Then, they charge you a percentage of the savings for making your organization anorexic as they walk away. What we mean is to look at your operations objectively, and identify the areas in need of adjustment. It's quite possible that you might be better off allocating fewer resources to your corporate headquarters and spending more on customer-facing sales channels online and in-store. Give store associates the education and coaching they need to help them turn casual shoppers into long-term clients, and remember that customer relationship management and analytics experts are critical to support your field teams. Also, consider whether you have enough creative people in marketing who are capable of generating one-to-one tested and proven offers to the right client segments for maximum results. Right-sizing does not need to mean downsizing, but it does mean that you need to take a critical look at your business to determine where allocating scarce resources would be most effective.

2. Should I right-size my distribution network?
Given the amount of analysis, time and capital required to right-size distribution, many executives would rather ignore this question. Getting it wrong, however, will cost you dearly. Start by taking a closer look at your brick-and-mortar stores to identify those that are performing above and below average. Consider closing underperforming stores and opening new ones in locations that are inadequately served. Also, think about streamlining distribution, and fixing or eliminating partners who are underperforming. Study what some stores are doing right and allow your organization to learn by adopting successful methods and techniques system-wide. Are some of your flagship stores large, impersonal spaces and maze-like? Is our global online reach adequate?

3. Should I outsource my Information Technology?
It is virtually impossible for in-house IT teams to stay on top of new technology developments, never mind build them optimally, on time, or on budget. With software services such a competitive business, a number of top-tier providers can often deliver world-class service in a more cost-effective manner than a company can do on its own. We continue to see luxury brands build their own CRM and e-commerce systems when there are expert partners out there who can do it far better. Let your IT team focus on conducting rigorous due diligence to find the right hardware, software and systems integration partners and to negotiate and manage them vigorously on your behalf. This will open up resources for your IT team to innovate around the edges and to make technology user-friendly and effective for the front lines.

4. Should I implement zero-based budgeting?
Zero-based budgeting is a top-of-mind topic for luxury executives as cost discipline has become very much in fashion in the luxury realm. Zero-based budgeting does not mean draconian cost cutting. Instead, it simply means that you develop a discipline of intelligent cost management based on rational justifications for the expenditure of resources. Empower teams to analyze costs on a micro level, and to determine which costs are necessary and which can be eliminated. Proceeds from the cost savings can be reinvested in more profitable areas of the business to boost the company's bottom line and profit margins. Expect up to 10 extra margin points if you get this one right.

5. How much are out-of-stocks hurting my ability to build long-term client relationships?
We live in a world where the luxury client expects to get what they want immediately. When an item is out-of-stock, is not located in another channel, and/or forces a customer to wait, the emotional impulse to buy is diminished. So is the customer's propensity to complete a purchase again with your brand. Supply chain experts estimate that retailers forego 10% to 20% in lost revenue each year because an item is out-of-stock. With top-line growth so hard to come by, cutting the incidence of out-of-stock inventory can significantly aid in producing sales growth. Despite this, we know of no luxury companies keeping rigorous track of how many sales and customers are lost due to this easily measurable problem. In today's world, where we can make a product fast, access the product from anywhere, and ship it anywhere, out-of-stock and back-orders should be a dramatically shrinking problem. Get your supply-chain and front-line teams to coordinate better so they can keep disciplined track of out-of-stock data on a daily basis and act quickly to minimize losses. This is a no-brainer, but it is hard work, so most executives fail to measure or fix this problem. This one is worth at least 10 percentage growth points to any brand.

6. How much is our failure to consistently offer and deliver first-rate made-to-measure and bespoke items hurting sales and margins?
There is a lot of mythology about how luxury brands have an advantage because they can deliver made-to-measure and bespoke better than anyone else. Costs are, at most, 10% more, but pricing can be more than 25% higher when we customize. It can even be all out-sourced to trusted experts we all know. From the inside, we see Sales Associates failing to offer this lucrative product. We also see that brands direly need upgraded technology to get a customer's measurements right the first time, instead of aggravating them by forcing them to come back for multiple fittings before your team gets it right. Delivery times are slow. These critical flaws are costing you market share. Young entrepreneurs with well-funded start-ups are buying the same fabrics, emulating fast-fashion brands by adapting quickly to evolving market demand, and dramatically shrinking delivery times, at half the price. It's probably time to review your made-to-measure and bespoke processes from top to bottom.

7. How much is our failure to sell online, wherever in the world that potential demand exists, hurting our sales?
A recent study by reports that luxury brands, on average, sell online to 63% of the population in the developed world, but to only 28% of people in emerging economies. This means that hundreds of millions of potential luxury clients, who could easily shop online and receive shipments, are ignored or have to wait until they travel to buy. Additionally, your products may be finding their way to consumers through an unsavory lot of black-market arbitrageurs who are stealing your client relationships. Examine surgically where you can sell and ship safely and close transactions securely. If you have gaps in geographies, close them. This one is worth about 10 points in sales growth if executed properly.

8. Do outlets and discounter partners help or hurt my business?
Just about all of luxury's most revered brands have either dipped their toes into the water or jumped into the deep end when it comes to outlet and discount selling. Most executives tell us that outlet sales are needed to introduce the aspirational consumer to their brands, and that a soft economy makes outlet sales an operational necessity. Luxury executives say that even if they wanted to, they can't back out because outlet sales are so profitable. Be careful, however, that your brand doesn't become irretrievably diluted. Consider the long-term consequences and the recent examples of companies that have suffered a diminished popularity with the wealthy or an inability to command premium pricing for their offerings. Managing this balance right is worth a lot more than just margin points. It will determine the long-term viability of your business.

Measuring the opportunity cost of operational inefficiency and ineffectiveness is critical when you go back to the office in September. It's a process that peak performers know very well. It is really hard work, yet, a disciplined measurement and execution approach is exactly what it takes to dramatically out-think, out-smart, out-perform, and out-behave your competition in the rugged terrain of 2015.

About Milton Pedraza and Luxury Institute, LLC
Milton Pedraza is the CEO of the Luxury Institute. Over the past 12 years, Milton has established the Luxury Institute as the most trusted global luxury research provider, and the proven high performance luxury client relationships consulting firm. Known globally as the foremost resource for affluent and wealthy consumer insights and client experience best practices, the Luxury Institute has served over 1,000 global luxury goods and services brands across dozens of luxury goods and services categories.

Milton advises and coaches luxury CEOs and serves on the Boards of top-tier luxury and premium brands, and luxury startups. He is sought after worldwide for his practical, innovative and humanistic insights and recommendations on luxury and is the most quoted global luxury industry expert in leading media and publications.

Milton is also an authority on CRM Technology, Analytics and Big Data. Prior to founding the Luxury Institute, his successful career at Fortune 100 companies included executive roles at Altria, PepsiCo, Colgate, Citigroup and Wyndham Worldwide.

Milton was born in Colombia, raised in the United States, has lived in several countries, conducted business in over 100 countries, and speaks several languages.

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