Copyright 2009 by Kelley School of Business, Indiana University. For reprints, call HBS Publishing at (800) 545-7685.

BH 322
Business Horizons (2009) 52, 187—197

t
os
www.elsevier.com/locate/bushor

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How far can luxury brands travel? Avoiding the
pitfalls of luxury brand extension
Mergen Reddy a, Nic Terblanche b, Leyland Pitt c,*, Michael Parent c

yo
a
Capgemini Consulting, P.O. Box 785827, Sandton, 2146, South Africa
b
Stellenbosch University, Private Bag X1, Matieland, 7602, South Africa
c
Segal Graduate School of Business, Simon Fraser University, 500 Granville Street, Vancouver,
BC V6C 1W6, Canada
op
KEYWORDS Abstract Brand extensions are always tempting to marketers, and in the case of
Luxury brands; luxury brands the allure is particularly strong. While the path to luxury brand success
Brand extensions; may be partly paved with extensions, there are even more examples of brand
Degree of adjacency; extension disasters that litter the way. Brand extensions continue to be among the
Premium adjacency most researched and studied phenomena in marketing. When it comes to luxury
matrix brands, however, the factors that lead to successful extension have received far less
attention. In this article, we consider the notion of perceived premium degree of the
tC

brand as a function of its category, and what we term the degree of adjacency
between its product categories. Building on our research, which found that a
luxury brand’s perceived premium degree has a different impact on profitability
depending on whether or not the brand is spread across adjacent product categories,
we demonstrate when luxury brand extensions work–—and when they fail. Perhaps
most importantly, we herein introduce the premium adjacency matrix as a tool for
luxury brand managers to consider in formulating extension strategies.
# 2008 Kelley School of Business, Indiana University. All rights reserved.
No

1. The temptation of luxury brand would agree that Château Margaux, the famous
extension Bordeaux first growth, is up there with the very
best. It is a wine of which author William Styron
While there are almost as many opinions on fine (1992) wrote, in the novel Sophie’s Choice, ‘‘when
wines as there are wines and wine critics, most you live a good life like a saint and die, that must be
what they make you to drink in paradise’’ (p. 151). It
Do

would be a marketer’s dream to extend the Château

* Corresponding author.
Margaux brand. It could perhaps be broadened to
E-mail addresses: mereddy@deloitte.co.za (M. Reddy),
nst@sun.ac.za (N. Terblanche), lpitt@sfu.ca (L. Pitt), less rare, more readily available early drinking wines.
mparent@sfu.ca (M. Parent). Or, partnerships with wineries in other countries

0007-6813/$ — see front matter # 2008 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2008.11.001

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 188
could be formed. It might even be extended to other
beverages, or to a range of gourmet food products.
It could even encompass hospitality offerings or a
selection of durable luxury goods.
So far, though, Château Margaux has resisted the
temptation to extend the legendary brand to any-
thing other than great wines–—and only three, at that
(Deighton et al., 2006). In contrast, first growth
competitors such as Château Haut-Brion and
Château Mouton-Rothschild have extended their
brands in a number of ways. Haut-Brion markets a
wine called Clarendelle at around $20 a bottle.
Mouton-Rothschild, through alliance with Mondavi
in California, produces and markets Opus One for
about $250 a bottle; partnered with Viña Concha y
Toro in Chile, it produces and markets Almaviva for
around $75 a bottle. While these are premium priced
yo
wines, they never reach the heady price levels of first
growths; for example, a 2000 Château Margaux will
sell for approximately $900 per bottle. Mouton-
Rothschild also mass markets red and white wines,
at a price point less than $20 per bottle, under the
Mouton Cadet label. Even the legendary Château
Pétrus has a brand of merlot associated with it which
sells for under $20 a bottle.
op
While estimates of its size vary from forecaster
to forecaster based on their assessment of seg-
ments and customer behavior, and also on the
classification schema used, the simple truth is that
the international market for luxury brands is im-
mense (Allen, 2007; Cohen, 2007). Its size has been
further accelerated in recent years as the number
tC
of affluent consumers in countries such as China
and India increase, as those nations exhibit stellar
economic growth. In the developed world, the rich
are indeed getting richer. Rising stock prices, in-
creased disposable incomes, consumer confidence,
and a double-digit upsurge in international travel
have proven to be a boon to luxury brands. Unfor-
No
tunately, all of this has not made the management
of luxury brands any easier. What Nueno and
Quelch (1998) pointed out a decade ago is just
as true today: Growth in luxury brands has raised
the competitive wagers that need to be made.
Managers of luxury brands can be led into tempta-
tion by growing consumer affluence, making it
difficult to resist the pull that could be so easily
acquiesced to by endless brand extensions.
So, is it possible to answer the most important
Do
questions facing luxury brand managers? Might it be
possible to predict which brand extension alterna-
tives might be successful, and which might not? Is it
feasible to foresee which extension strategies will
be profitable, and which will not? Based on our
research and experience, we believe the answer
is yes.
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M. Reddy et al.
2. Extensions can work, but just how
t
far can a luxury brand travel?
os
Brand extensions are one of the most heavily-re-
searched and influential areas in marketing (Czellar,
2003). The considerable attention given by market-
ing scholars to issues regarding brand extensions,
and their findings in general, support the conclu-
sions of our research and the recommendations that
rP
we will make here; for instance, Völckner and Sat-
tler (2006) found that fit between the parent brand
and an extension product is the most important
driver of brand extension success. From a luxury
branding perspective, however, much of the extant
research does have particular limitations. First, the
majority of brand extension research has focused on
non-luxury brands. For example, while Keller and
Sood’s (2003) research found brands to be far less
vulnerable to the vagaries of extension than gener-
ally feared, the brand environments considered
were those of beverages and health and beauty aids.
Second, in many of the studies considering the
impact of brand extensions, the main dependent
variable has been the impact on quality perceptions
of the parent brand. Keller and Sood (2003) found
that these were unaffected when the proposed
extension was in a dissimilar product category.
While this is mildly reassuring, in the case of luxury
brands we contend that there is probably a more
fundamental and compelling outcome criterion:
profitability.
Third, the settings for much of the research on
brand extensions are far removed from the real
context of luxury brands. For example, noting that
the most successful extensions involve brands that
are associated with benefits that are valued in the
extension category, Meyvis and Janiszewski (2004)
proposed that brand extension success also depends
on the accessibility of benefit associations. Accessi-
bility, in turn, depends on the amount of interfer-
ence from competing brand associations (e.g.,
category associations). They argue that broad
brands (i.e., brands offering a portfolio of diverse
products) will tend to have more accessible benefit
associations than narrow brands (i.e., brands offer-
ing a portfolio of similar products). It is therefore
easier for broad brands to extend than narrow
brands, even when the narrow brands are more
similar to the extension category. While these find-
ings make welcome sense, and are heartening, this
research was not carried out in a luxury brands
context or with the target customers of luxury
brands.
Similarly, contrasting the commonly advanced
rationale for the proliferation of brand extensions
that a firm’s motivation was to leverage the equity
 How far can luxury brands travel? Avoiding the pitfalls of luxury brand extension
in established brands, Balachander and Ghose (2003)
investigated whether extensions would favorably af-
fect the image of the parent brand and thereby
influence its choice. They established the existence
of a positive reciprocal spillover effect emanating
from the advertising of a brand extension. However,
the research used scanner panel data (of consumer
brands) and the researchers point out that their
findings were earlier contradicted by those of Sulli-
van (1990), who considered a luxury brand (Jaguar)
more like those discussed in this article.
Research such as that conducted under the PIMS
studies has long demonstrated a positive link be-
tween a brand’s profitability and its relative market
share (Buzzell, 2004; Buzzell & Gale, 1987; Szyman-
ski, Bharadwaj, & Varadarajan, 1993). An equally
important finding from this line of research was that
yo
relative product quality had a significant impact on
profitability, either because of quality manage-
ment’s effect on lowering costs or the fact that
customers were willing to pay more for premium
quality, or–—synergistically–—both (Anderson, For-
nell, & Lehmann, 1994; Jacobson & Aaker, 1987).
In a similar way, CEOs of luxury brands might expect
to grow their profitability by increasing the
op
perceived premium degree of the brand as a func-
tion of its category. In simple terms, the premium
degree of a brand is the extent to which customers
perceive it to offer more quality than comparable
offerings, and are willing to pay a premium price
(Reddy & Terblanche, 2005; for an alternative anal-
ysis, see Anthony & Christensen, 2003). A familiar
tC
example of this is Harley-Davidson motorcycles. The
brand commands a premium price and extreme
Figure 1. Luxury brand profitability: The effect of adjacency
No
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189
brand loyalty, despite the fact that in terms of
t
technical product performance and features it is
easily surpassed by the majority of its Japanese and
os
European competitors (Helyar, 2002). In the luxury
brands arena, there is evidence that marks like
Tiffany, Bose, Rolex, and Louis Vuitton all showed
increased profitability as the consumer perception
of the brand increased. We wanted to test, more
broadly, the applicability of the degree premium
rP
phenomenon in the case of luxury brands: would
degree premium fully explain brand profitability? In
order to do this, we studied 150 luxury brands (see
Table 1), conducted interviews with 300 executives
(two from each company), and analyzed a decade’s
worth of financial data for each of these luxury
brands (see Appendix for details).
3. When premium degree works
Our research yielded surprising results. Of the 150
luxury brands we studied, the link between custom-
ers’ perceived premium degree of the brand and
increasing profitability simply wasn’t there, as illus-
trated in Figure 1A. Furthermore, our analysis
showed this pattern–—or, indeed, lack thereof–—
was not confined to select product categories; it
seemed to be a general phenomenon. While some
brands like Bose (the leader in high quality audio
systems) achieved margins far superior to their
traditionally commoditized category, other luxury
brands in premium categories did not.
Perceived premium degree turned out to be a
necessary but not sufficient driver of a luxury
 190 M. Reddy et al.

Table 1. Brands studied

t
Alessi R French Connection F Moët et Chandon C

os
Alexander McQueen F Gianfranco Lotti F Montblanc W
Anthon Berg C Gilan W Movado W
Aquascutum F Givenchy F Muji R
Armani F Godiva C NAD S
Aston Martin A Gucci F Nina Ricci F
B&O S Guerlain F Omega W
Balenciaga F Harrods R Orient-Express Hotels R

rP
Baume et Mercier W Harry Rosen F Oscar de la Renta F
Bedat & Co. W Hennessey C Paco Rabanne F
Belvedere C Hermès F Pal Zileri F
Bentley A Hugo Boss F Panerai W
Berluti F Issey Miyake F Patek Philippe W
BMW A Jaeger-LeCoultre W Paul Smith F
Bollinger C Jaguar A Perrier C
Bose S Jean Paul Gaultier F Piaget W
Bottega Veneta F Jimmy Choo F Porsche A

yo
Boucheron W John Bartlett F Prada F
Breguet W Johnnie Walker Blue C Princess Yachts A
Breitling W Josie Natori F Rado W
Bugatti A juwelry W Raffles R
Bulgari F Kenneth Cole F Ralph Lauren F
Burberry F Kenzo F Richard James Savile Row F
Canali F Kiton F Rolex W
Cartier W Krug C Rolls Royce A
Cerruti F Kurt Geiger F Salvatore Ferragamo F
op
Chanel F La Perla F Sergio Rossi F
Château d’Yquem C Lacoste F Stella McCartney F
Chloe F Lamborghini A Swarovski W
Christian Dior F Lancome F Tag Heuer W
Cranchi A Lear A Tannoy S
Cristal C Lexus A The Four Seasons R
Dassault Falcon A Liberty of London F Thomas Pink F
tC

Davidoff C Lindt & Sprüngli F Tiffany W

De Beers W Lladró W Tissot W
Diane von Furstenberg F Loewe F Tods F
Dolce and Gabbana F Longines W Tom Ford F
Dom Perignon C Loris Azzaro F Turnbull & Asser F
Donna Karan F Louis Vuitton F Vacheron Constantin W
Dries van Noten F Manolo Blahnik F Valentino F
Ducati A Marantz S Van Cleef & Arpels W
Dunhill F Marc Jacobs F Versace F
No

Eos Airlines A Marcel Rochas F Vertu W

Ermenegildo Zegna F Maserati A Veuve Clicquot C
Escada F Maurice Lacroix W Viktor & Rolf F
Evian C Maxwells F Vivienne Westwood F
Fabergé W Maybach A Wally Yachts A
Fendi F Mercedes-Benz A Waterman W
Ferrari A Michel Herbelin W YSL F
Ferretti Yachts A Miu Miu F Zenith W
Legend: A - Automotive, Transportation; R - Retail (specialty); C - Consumables; S - Audio Equipment; F - Fashion; W - Watches,
Jewelry
Do

brand’s success. We examined a small number of the
brands in Figure 1A at the extreme ends of the
spectrum, and observed that the mix of products
in the portfolios of the most profitable brands (the
top right-hand side of the spectrum) demonstrated
far more logical consistency than did the less-prof-
itable brands. In simple terms, these more-profit-
able products under a brand umbrella had more in
common with each other. The products in the brand
portfolios represented in the bottom-left of the

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 How far can luxury brands travel? Avoiding the pitfalls of luxury brand extension
Figure were not as cohesive. For example, a cohe-
sive brand portfolio might consist of products such
as leather shoes, belts, bags, and wallets: all small
leather goods. A less cohesive portfolio would con-
sist, for example, of leather shoes, baseball caps,
cotton shirts, and pens: items that are all worn on
the person, but without the logical consistency
displayed by the former portfolio. We termed this
cohesion ‘‘brand adjacency.’’
We found that a luxury brand’s profitability (as
measured by gross margins) is driven by its per-
ceived premium degree and its degree of adjacency.
A luxury brand’s profitability will rise as the per-
ceived premium degree increases only if the brand is
extended along adjacent product categories. If a
premium luxury brand extends itself into a non-
adjacent product category, there will be a general
yo
decline in profits, irrespective of the strength of the
brand in its core category. This is demonstrated in
Figure 1B.
4. Brand adjacency
We define brand adjacency as the extent to which a
op
particular brand extension is consistent with the
values embodied by the core brand. The more sym-
bolically consistent the extension, the greater the
degree of adjacency. For example, Louis Vuitton and
Cartier respectively have gross margins in excess of
70%. When considered against their peers, these
brands are also rated at the highest end of
tC
the premium scale. What’s more, these brands have
extended their names into product categories that
are closely adjacent to their core products. In the
case of Cartier, the brand was extended from jew-
elry to watches, perfumes, and accessories. Louis
Vuitton went from handbags to clothing, jewelry,
perfumes, and accessories. Considering each brand
No
extension, the equity of the brand in its core cate-
gory carried through into the new category because
all the new categories were very close to the
core category in terms of key values and perceived
attributes.
The once-venerable Pierre Cardin brand was
among 21 early elite members of the Chambre
Syndicale de la Couture Parisienne, the trade asso-
ciation for haute couture brands. To boost flagging
revenues in the 1960s, the company licensed its
Do
name to perfumes and cosmetics which were man-
ufactured by transnationals such as Unilever,
L’Oréal, and Estée Lauder. The approach was ini-
tially very successful, which encouraged manage-
ment to extend licenses across a vast range of
product categories, seemingly in an indiscriminate
fashion. By 1988 more than 800 licenses had been
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191
issued across 94 countries, generating a turnover of
t
approximately $1 billion. The first Pierre Cardin
brand extensions, into the perfumes and cosmetics
os
categories, were successful since the premium de-
gree of the brand transferred itself into the new
categories without losing image. Rather than attri-
bute this to proper fit between the product catego-
ries, the owners of Pierre Cardin saw it as a
testimony to the strength of their brand. Believing
rP
this to be true, margins dropped markedly after the
Pierre Cardin name began appearing on unrelated
items–—everything from cigarettes to baseball caps.
There was even a table wine launched under the
Pierre Cardin label, which sold dismally (Ries &
Trout, 1982). In the end, the adjacency of the
extensions–—or, their consistency–—is what made
the difference.
5. A growing affluenza
While the market for luxury brands is one of growth,
there is no reason to believe that it is limitless, and
certainly no cause to assume that lines can be
extended indefinitely or brands extended as broadly
as marketers’ fancies take them. Evidence also
suggests that the luxury brands market will be more,
not less, competitive (Allen, 2007; Cohen, 2007). On
the one hand, the size and growth of the primary
target market is still fairly limited. On the other,
while one might expect growth to come from in-
creases in middle income markets, luxury brand
marketers are faced here by what has been termed
the mainstreaming of affluence phenomenon: con-
sumers expect more than what they deserve. If a
product does not feature a luxury look and feel, it
will not pass muster (Smith, 2003). Under such
conditions, when every product is expected to meet
this standard, nothing can command a premium
price just because it provides a luxury look and feel.
The point is this: luxury brands cannot simply rely on
heritage to retain their cachet. As such, managers of
luxury brands need to consider growing by either
expanding into adjacent product categories or by
moving into new markets. The latter option will lead
to incrementally limited growth if key markets have
already been entered, despite the fact that there is
growth in markets such as India, China, and the
United States. The adjacent category option is
therefore a strategy that merits serious consider-
ation.
Developing the most profitable strategy for a
luxury brand entails more than spending millions
of dollars creating the best marketing strategy; it is
not enough to merely consider the brand’s equity in
the market. Our analysis, as described, suggests
 192
that both premium degree and brand adjacency
need to be simultaneously contemplated: First, to
what degree is a particular luxury brand considered
premium by the market, relative to its peers? Sec-
ond, to what degree can brand extensions be made
along adjacent product categories?
6. The premium adjacency matrix
To aid in our analysis, we developed a two-dimen-
sional matrix whereby any luxury brand may be
mapped onto one of four quadrants. Each quadrant
will have different implications for a luxury brand’s
potential, and how it can and should be managed.
This is illustrated in Figure 2.
Inevitably, a portfolio of luxury brands will occu-
yo
py more than one quadrant. It is therefore impor-
tant for managers to understand the implication for
managing individual luxury brands in these portfoli-
os. Since brand dilution and the subsequent profit
erosion exhibits a lag effect, it is also important for
managers to carefully consider the longer-term im-
pacts of their decisions. Given the quadrant a luxury
brand occupies, managers might ask themselves:
op
‘‘What can I do to avoid a painful lesson like Pierre
Cardin’s?’’ A luxury brand manager can use this
matrix to consider future expansion opportunities,
and to avoid disasters.
6.1. Star brand
tC
We call a luxury brand that is considered premium
to its peer group, and extended along adjacent
product categories, a star brand. Our research
shows that star brands typically have gross margins
in excess of 70% while generating strong revenue
growth. For any CEO on the watch of a star
brand, the mantra must be ‘‘creativity, quality,
No
Figure 2. Luxury brands: The premium adjacency grid*
Do
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M. Reddy et al.
and exclusivity.’’ Customers of star brands pay a
t
steep premium to acquire a good or service from a
brand that is of the highest quality, which incorpo-
os
rates the latest design or production trends, and
which has an aura of exclusivity; the brand is aspi-
rational.
Louis Vuitton is a good example of a star brand.
The brand has maintained gross margins in excess of
70% and average sales growth over 10% for many
rP
years, peaking at 16% in 2004. While rivals have
struggled through economic slowdowns and the vi-
cissitudes of the international business environ-
ment, Louis Vuitton has ceaselessly focused on
quality, distribution, and marketing. To maintain a
firm control on quality, 11 of Vuitton’s 13 production
sites are in France, which is one of the most expen-
sive labor markets in the world. Moreover, these
sites are continuously upgraded to manage costs and
quality. Each step of the production sequence is
meticulously mapped by trained craftspeople and
engineers; teams of crafts workers are trained
months–—sometimes a year–—before a product will
be launched.
This intense focus on quality and cost reduction in
operations makes sense, considering the costs of
managing the customer interface. Louis Vuitton
spends approximately 12% of revenues on advertis-
ing versus an average of 6.3% by its major competi-
tor, Gucci. Distribution is under a tight rein via
company-controlled stores. Louis Vuitton also uses
product primers to manage the paradox of main-
taining exclusivity while satisfying consumer de-
mand for its special collections. For example, the
Murakami line and Marc Jacobs Graffiti line of hand-
bags were only released in limited batches. These
limited collections act as primers in that the waiting
list extends for months, which encourages the typi-
cal consumer to buy a standard Louis Vuitton hand-
bag representing a scaled-down version of the
 How far can luxury brands travel? Avoiding the pitfalls of luxury brand extension
limited edition design. This has allowed the brand to
maintain exclusivity while still posting strong
growth, driven by sales of the adapted standard
lines: an average of 30% of sales originates from
new lines. Louis Vuitton’s joint venture with dia-
mond giant De Beers is an example of brand exten-
sion into an adjacent category, inasmuch as luxury
apparel items and luxury jewelry are discretionary
purchases and allow for a display of affluence. Louis
Vuitton would benefit from moving into the branded
diamond jewelry market with a premium partner,
without over-exposing itself in an industry in which
it has limited experience.
Another example of a star brand is Cartier. Once
dubbed the ‘‘king of jewelers,’’ the brand was
founded in 1847 and built its reputation by outfitting
European royalty. In the jewelry category–—which
yo
accounts for half of Cartier’s business–—the firm
tended to lose momentum in the late ‘90s and early
2000s, with no new lines being launched. During this
time, complacency, lack of innovation, and limited
investment in original designs caused a decline of
10% in sales from new products. Cartier responded
by launching novel lines of women’s watches and
jewelry. This re-focus on innovation and quality
op
led to new product launches, accounting for approx-
imately 27% of new sales by the turn of the century.
The brand has shrewdly raised profit margins by
expanding into adjacent categories and not by the
indiscriminate granting of licenses.
A third example of a star brand is Hermès. With
price points of $8,800 for crocodile skin handbags
tC
and $400 for cotton poplin shirts, Hermès has limit-
ed competition from a pricing perspective. The
brand has built its reputation through not only a
relentless focus on quality, but also marketing to a
well-understood core client base. Quality has been
maintained by integrating a large proportion of its
production and retail operations: Hermès has even
No
been willing to take over key suppliers just to ensure
superior quality of inputs for the end product. Ap-
proximately 75% of the products sold are manufac-
tured in-house, and of the 23 production sites in
Europe, 21 are located in France. Unlike Louis Vuit-
ton, however, which has a broader target market,
Hermès has a more established market and, hence,
significantly lower customer interfacing costs. Ap-
proximately 6% of sales are spent on advertising, and
the company even goes so far as to buy back select-
Do
ed franchises to maintain quality. This dedicated
focus on quality, creativity, and marketing has seen
new business sales increase overall sales by an
average 25% annually.
In our opinion, only 10 luxury brands in the
world can lay claim to the title of star brand.
Here, unlike in the case of most consumer
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193
products categories, profitability is not driven
t
by market share. While it might be tempting for
managers of star brands to trade down and target
os
the mass market of middle- to lower-income con-
sumers that crave their brands, this should be
approached with caution. They would be well
advised to think carefully before deciding to lower
price points in order to exploit this market. Sig-
nificant profits can still be generated by expanding
rP
into adjacent categories or new markets. Simply
lowering prices in order to gain market share
might erode a brand’s long-term earning poten-
tial, and ultimately destroy profits.
6.2. Aspiring star brand
Characteristically, an aspiring star brand is
one which is high on premium in its core product
category, but not as strong in other categories;
moreover, they typically have gross margins be-
tween 50% and 70%. Managers of aspiring star brands
usually have two strategic choices: Invest resources
to develop the brand in non-adjacent categories, or
exit non-adjacent categories to focus on the core
category and only then expand into adjacent cate-
gories.
Porsche, the specialist sports car manufacturer,
is a good example of an aspiring star brand. Having
made the decision to move into the fast-growing
and traditionally profitable SUV category, Porsche
launched its Cayenne model in 2002. The company
posted a 9.39% increase in operating revenue until
2006, but gross margins only increased by 3.65%
over the same 4-year period following the Cay-
enne’s launch. Rather than exit the category, Por-
sche responded by introducing an ultra-premium
SUV which retails for around $100,000. SUV sales
now account for 58% of the company’s total sales,
and profits are at their highest levels in many years.
Porsche has clearly elected to invest resources to
develop the brand into non-adjacent categories,
since at first glance, there appears to be limited
adjacency between the luxury sports car and SUV
categories. Porsche nevertheless managed to trans-
fer its symbolic characteristics onto the segment
rather than its functional characteristics, and sub-
sequently raised the strength of its brand in the
category.
The aspiring star quadrant is transitory, and
really a way-station. Aspiring luxury brands move
through this quadrant as they become more profit-
able or less profitable. When considering brands in
this quadrant, managers need to reassess their
strategy and ensure that in the long-term the
brand is given sufficient resources to reach the star
quadrant.
 194
6.3. Waning luxury brand
When a luxury brand is perceived to be of lower
premium than its peers, yet extended along adja-
cent product categories, we refer to it as a waning
luxury brand. Luxury brands in this quadrant usually
have gross margins of between 30% and 50%. Over
half the brands we studied fell into this category,
which may be disconcerting to luxury brand man-
agers, given our observation that the luxury brand
market internationally seems set to grow. This ob-
servation emphasizes two fundamental require-
ments for astute luxury brand management: first,
that market growth alone will never drive brand
profitability; and second, that indiscriminate brand
extension can severely affect brand profitability.
The automobile industry provides several good
yo
examples of waning luxury brands. Consider Mer-
cedes-Benz, which has consistently been regarded
as a luxury automotive brand with numerous models
in its portfolio. The Mercedes brand has been ex-
tended into adjacent product categories which re-
flect its focus on comfort and luxury–—the latest being
SUVs, which now account for 12% of the company’s
sales. However, Mercedes’ profitability has suffered
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at the hand of an expansion strategy that negatively
impacted product quality and, hence, the perceived
premium degree of the brand. Both of Mercedes’
main competitors, BMW and Audi, have moved into
adjacent categories, where they have also improved
their design and quality ratings. While these two
auto makers have consistently moved up the J.D.
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Power & Associates ranking (www.jdpower.com/
autos), Mercedes-Benz has slipped. Lapses in quality
have hurt Mercedes’ profits, as evidenced by the
expensive 2005 product recall of 1.3 million vehicles
to fix an electronics problem in luxury E, SL, and CLS
Coupe models. To emphasize the enormity of this
situation, consider that the size of the recall ex-
No
ceeded Mercedes’ annual output.
A waning luxury brand which improved its image
is Bottega Veneta. In the 1970s, this leather goods
house was famous for its woven bags and the slogan,
‘‘When your initials are enough.’’ The brand was
subsequently extended into adjacent categories
such as clothing, whereby it unfortunately produced
items of poor quality and image (e.g., black catsuits
with ‘‘BV’’ in neon lettering). Following this down-
turn, Hermès designer Tomas Maier was lured away
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to introduce a line of high-fashion Bottega Veneta
clothing and handbags; as a result, Bottega’s gross
margin rose by 12%.
Can a brand successfully exist in this quadrant?
When managers of waning luxury brands decide to
pursue revenue growth over profitability, these
brands usually post strong initial growth. Over time,
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infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.
M. Reddy et al.
however, the brand starts to erode and profits begin
t
to decrease. In this age of increasing shareholder
expectations, it is rare for management to consis-
os
tently condone revenue growth at the expense of
profitability. Increased expansion costs and lower
profitability create a vicious cycle wherein not
enough funds are available to build the brand,
and brand erosion cannot be halted. Managers of
waning luxury brands therefore need to employ
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what we call an island-hopping strategy. This term
is derived from a practice first employed by the U.S.
Navy in the Pacific Theater of World War II; general-
ly, it refers to crossing an ocean via a series of
shorter journeys between islands, as opposed to a
single direct stretch to the end destination (Weigley,
1973). In a luxury branding situation, managers
should extend the brand to one adjacent category
(e.g., from a line of wallets to a line of briefcases) at
a time and deploy the required investment to build
the brand until it is as strong in this category as it is
in the core category. They should not move on to the
next category until this has been achieved. Initially,
this will ensure sufficient capital is available to grow
the brand, and later that the category generates
profits to fund itself, thereby freeing capital for
expansion into other adjacent categories–—or, in
Navy terms, hopping to the next island.
6.4. Dying stars
When a luxury brand is extended along non-adja-
cent product categories and is perceived as sig-
nificantly less premium than its peer group, we
refer to it as a dying star. Luxury brands in this
quadrant typically have gross margins of less than
30%. Brands in this quadrant could either be star
brands which have since lost their luster, or brands
on their way up which have not yet succeeded, or
will not.
Managers of dying stars have two strategic op-
tions. The first is to make the necessary invest-
ments to reinvigorate the brand, boost it, and turn
it into a star brand. Obviously, this will depend on
the funds available. Given that the average gross
margin is still between 20% and 30%, this might be
possible in some cases. Gucci is one example.
Executives at Gucci diluted the brand’s luxury
cachet in the 1980s by broadly licensing it to ev-
erything from sunglasses, to apparel, to cigarette
lighters, much like Yves Saint Laurent (YSL) did
earlier. With concomitant drops in sales and per-
ceptions of the brand as luxury, management took
back control of the brand, restricted extensions,
and imposed stringent quality control on all prod-
ucts. As a result, the brand has since rejuvenated
and regained its cachet.
 How far can luxury brands travel? Avoiding the pitfalls of luxury brand extension
Choosing a turnaround strategy like Gucci’s will
result in a significant initial drop in sales as distri-
bution, licensing, and product categories are
streamlined. Costs will simultaneously increase as
the investment in innovation, design, quality, and
production increases. The second alternative is to
go down-market and reposition the brand as a pre-
mium, not luxury, brand. This might be the only
alternative when sufficient funds to reinvigorate are
not available, or when the gross margins being
enjoyed do not merit further investment.
It would be wise to review the difference be-
tween these two strategies. Opting to take the
brand to star status will require reducing distribu-
tion and heightening exclusivity. Quality is increased
irrespective of the cost, even if this entails moving
to expensive manufacturing centers such as France.
yo
Licensing is restricted and the brand is positioned
alongside carefully selected celebrities using metic-
ulously chosen media campaigns. Luxury brands
usually have a strong, long-lived heritage, and this
legacy is a key asset in repositioning the flagging
brand.
On the other hand, electing to make the brand a
premium brand will require increasing distribution
op
and reducing exclusivity to increase sales. Quality is
important, but since the brand is at a lower price
point, the product is positioned for more frequent
purchases to drive revenue growth. Manufacturing
does not require craftsworker skills and is usually
done in the lowest cost location. Advertising deliv-
ers the largest exposure at the lowest cost. Premium
tC
brands can quickly increase sales without the asset
of a strong heritage.
Managers need to judiciously consider the last
differentiator before selecting their strategy for this
quadrant. Brands with a long and established heri-
tage have a greater chance of making it to star
status. Brands without the birthright would need
No
to acquire this characteristic before reaching star
status; this takes time, since a small group of cus-
tomers need to learn to trust the brand.
7. The best medicine
The case of the von Furstenberg brand and its evolu-
tion serves well as a final reminder of the principles
we expound in this article, and puts forth a set of
Do
prescriptions for luxury brand managers. During the
2002 ‘‘7th on Yale’’ lecture series, Diane von Fursten-
berg regaled the audience with her story, one of
triumphs and tribulations faced by a princess who
founded a luxury brand in New York. Given her candor,
energy, experience, and shining personality, one
would be remiss in forgetting that she, too, learned
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infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.
195
a painful lesson that no luxury brand manager would
t
want to experience first-hand. In 1972, at the age
of 26, von Furstenberg designed the dress that
os
shaped a generation. By 1976, she had sold over 5
million of the all-purpose daywear-to-disco frock,
and was hailed by Newsweek as ‘‘the most market-
able female in fashion since Coco Chanel’’ (Francke,
Whitman, & Gilbert, 1976, p. 52).
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 Prescription 1: Never forget that a luxury brand
has history, tradition, and–—above all–—a ‘‘story’’
that resonates with its target customers. Brand
extensions which deny this narrative are perilous.
By this time, a single mother of two and an A-List
VIP at Studio 54, von Furstenberg continued her
success with a line of beauty products and fragran-
ces. Based on this triumph, the von Furstenberg
name was splashed across such diverse product
categories as luggage, eyewear, jeans, and books,
to name but a few. The strategy initially worked, as
the von Furstenberg name generated higher margins
onto every product to which it was introduced,
irrespective of the category. Profits and revenues
were up. A few years into this period of heady
growth, however, these non-adjacent brand exten-
sions diluted the core brand, and the company saw a
plunge in revenue and profit. The situation reached
a critical point when the design and cosmetics
houses were sold off to pay looming debt. How could
such a luxurious and royally-anointed brand have
failed?
 Prescription 2: Luxury brand managers should not
be anesthetized by initial successes. Markets may
be wooed but not ultimately seduced by non-
adjacent brand extensions, perhaps for curios-
ity’s sake without any real long-term commitment
to products that do not make sense to them.
Von Furstenberg erred by emphasizing the mechani-
cal aspects of the non-adjacent products the firm
branded (such as the shapes and finishes of its
eyeglasses frames), rather than accentuating their
symbolic worth as related to the original brand.
While the brand originally enjoyed a high perceived
premium degree, this was eventually eroded by
its extension into non-adjacent product categories.
The general decline in gross margins–—despite the
strength of the brand in its core category–—turned it
first into a waning, and then into a dying, star.
 Prescription 3: Luxury brand managers must re-
member that, more than anything else, brands
are symbols (Stern, 2006). When managers want
to extend luxury brands into non-adjacent cate-
 196
gories, they should first consider whether the
brands have appropriate symbolic muscle to tra-
verse categories. They should also consider
whether the symbolism can be consistently pro-
moted in the new categories. Using our premium
adjacency matrix, they can avoid extending into
categories that are not sufficiently adjacent.
8. The lap of luxury
Luxury brands excite and entertain us. When Coco
Chanel uttered her famous line, ‘‘Luxury must be
comfortable, otherwise it is not luxury’’ (Barry,
1964, p. 31), she had the consumer in mind, not
the management of luxury brands. Yet the line is as
apposite to the management of luxury brands as it
is to the dictates of consumer wellbeing. Luxury
yo
brands are most comfortable in a portfolio
that makes sense, where the perceived premium
degree fits closely with adjacent extended cate-
gories.
Appendix: The study
op
Our study began by identifying the top luxury
brands. To do so, we hired a U.S.-based consumer
research firm, and asked it to construct and admin-
ister a questionnaire to a representative group of
consumers that would identify and rank luxury
brands against each other. The panel did so for
150 luxury brands, which we then sorted into six
tC
broad categories (see Table 1). As expected, the
majority of brands (71 out of 150) fell into the
Fashion category. Watches and Jewelry were sec-
ond, with 32 brands. Automotive and Transport (jets
and yachts) were third, with 21 brands. The remain-
ing categories consisted of Consumables (wine, li-
quor, chocolate, tobacco — 15 brands), Audio
No
Equipment (5 brands), and Specialty Retail and
Hotels (6 brands).
We calculated premium degree first by using the
brand’s price elasticity (the less elastic, the greater
the premium degree). Secondly, we force-ranked
the brands relative to each other based on the
questionnaire results.
Adjacency was defined as the ability of a brand
to leverage its core competency into a new cate-
gory where that same competency was essential
Do
for the brand to exist and succeed in the new
category. This competency was, in turn, defined as
the core attribute for the brand’s success and the
one characteristic it would not compromise in any
way.
We determined each brand’s core competency/
capability using a Delphi method, whereby we as-
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infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.
M. Reddy et al.
sessed the extent to which this core competency
t
was essential for the brand to exist in the new
category. The more essential the characteristic,
os
the greater the degree of adjacency. In sum, adja-
cency was a broad concept that extended beyond
the product itself to include skills, management
structures, financing arrangements, manufacturing,
supply chains, and the like. In order to determine
brand success, we conducted focus interviews with
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300 executives at the companies that owned the
brands (two from each company). Interviews were
structured as face-to-face, with follow-up tele-
phone calls and emails as necessary.
We also collected 10 years’ worth of financial
data for each of these 150 brands. For listed firms,
we used disclosed data. However, most financials do
not disclose data at the brand level. To obtain this
information, we conducted follow-up interviews, as
needed, with the executives. We checked our data
two ways: first against third-party industry trade
data, and second with models developed by industry
analysts. Finally, we verified our results with exec-
utives at the companies. All of the 300 executives
save 22 confirmed the accuracy of our models.
Fortunately, we had at least one executive from
each of the 150 brands confirm.
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