Bank Sarasin's report on the sustainability of the luxury goods industry: Transparency still poor02.05.2012
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.
Ordering copies of the sector report on sustainability of the luxury goods industry
The industry sustainability report "The quest for authenticity – Can luxury brands justify a premium price?" (author: Makiko Ashida) is available in English and German on payment of a copyright fee of CHF 25 or EUR 20 (free to clients and the media) from: firstname.lastname@example.org.
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.
Two French luxury good giants and one British company qualify for Sarasin's sustainable investment universe
In terms of sustainability, many luxury goods companies are not transparent and have poor sustainability ratings. However, the two French luxury goods giants PPR (rating high) and LVMH and Burberry (both rating above average) do qualify for Sarasin's sustainable investment universe:
The PPR Group, which owns numerous luxury brands such as Gucci, Bottega Veneta, and Boucheron, is the most sustainable luxury goods company in Sarasin's investment universe. PPR is one of the few companies to have made a groupwide commitment to the development of environmentally friendly products. The Code of Business Practice of the PPR Group defines standards for sourcing raw materials and sets down minimum requirements for working conditions. Sustainability is one of the factors taken into consideration when assessing management performance. Last but not least, environmental and social audits are performed for Gucci brand's leather suppliers at least twice a year.
LVMH does not score as high a rating as PPR. However, it first communicated a public commitment to the environment before PPR. The environmental department at LVMH was set up in 1992. Compared with its rivals, LVMH is also the most transparent luxury goods company. Every brand discloses where and how products are manufactured. Production is deliberately not shifted offshore, but retained in the brand's country of origin. In 2009 Louis Vuitton, the group's most important brand, set up a joint venture for a leather tannery that exclusively supplies the brand with hides in leathers tan with vegetable products (free from heavy metals).
Burberry is one of the few luxury goods companies to collaborate with multi-stakeholders by joining groups such as Ethical Trading Initiatives and the Leather Working Group. A traceability project for raw materials was launched in 2010 to promote high ethical standards of animal welfare and labour conditions. Burberry has also banned substances and requires suppliers to comply with a range of environmental legislation and certifications.