Bank Sarasin's report on the sustainability of the luxury goods industry: Transparency still poor

Luxury goods companies live from the reputation of their brands: these stand for exclusivity and high quality. However, the authenticity of brands is being undermined as production volumes are ramped up to cater for rising demand. With companies still showing too little awareness of sustainability issues, their reputation is being seriously threatened by lack of premium product quality, dubious sourcing of materials and lack of transparency in supply chains. Bank Sarasin's latest industry sustainability report scrutinises 15 leading luxury goods companies from various subsectors including fashion, watches, jewellery & accessories, and cosmetics and fragrances, and has found that the luxury goods sector has some ground to make up in the area of sustainability.

Brand image is a fundamental component of luxury goods companies' business models. The challenges facing the industry as companies struggle to protect their brand image are greater than ever before. This is because the market has been changed by the advent of the Internet, social media and consumer protection organisations: Compared with the past, consumers are far better informed about the products they purchase. This means that quality problems or deficiencies in production quickly enter the public domain. Apart from the traditional quality controls, it is mainly environmental and social standards in the supply chains that are now playing an increasingly important role in the luxury goods industry. Buyers of premium products, for example, now tend to place far more worth on whether companies respect minimum environmental and social standards. Negative publicity, such as the use of "blood diamonds" or reports on rivers polluted by textile and leather factories, can seriously damage a brand's reputation. Conversely, sustainable business practices not only enable companies to avoid reputation risks, but present an opportunity to build a credible and responsible brand image. It is therefore vital for luxury goods companies to integrate sustainability into the quality management systems of their supply chains.

Credibility should not be put at risk

Brands have a major influence on consumers' purchasing decisions. With many luxury goods, the gap between the public image of luxury brands and their manufacturing reality has recently been widening. But luxury goods companies are putting the credibility of their brands at risk in this way. In the past few decades, many luxury goods companies have followed this path: They have increased production volumes, while at the same time trying to retain an exclusive image. This increase in production volumes and customers' perception of exclusivity, as well as environmental and social aspects in the manufacturing stage, have turned the spotlight on the conditions under which luxury goods are produced. The challenge facing luxury brands is to develop sustainable supply chain management systems, especially so that they are able to trace the origin of the raw materials and products they use. Far more transparency is therefore required. Some companies have seen the signs of the time and are gradually beginning to develop appropriate sustainable initiatives as part of an industry-wide effort.

Sustainability protects enterprise value

A business strategy that avoids reputation risks in social and environmental areas and improves transparency of materials sourcing and supply chains helps to improve and protect the value of a company's brands. Some companies have encouraged traditional manufacturing methods in order to reduce risks associated with rapidly increasing production volumes. What's still missing, however, are strategies that consistently integrate sustainability into everyday business practices. Given the growing consumer demand for "ethical" products, there seems to be substantial potential for luxury goods companies in this area.