Brexit and the luxury brands of Britain

(A version of this article appeared in LiveMint on November the 17th, 2016.)

British Prime Minister Theresa May’s visit to India and trade talks with her Indian counterpart take me back to the midsummer’s day in 2016. We in Britain woke up to find that the Leave campaign, colloquially called Brexit, had won the referendum. The pound plummeted and for a while, the stock markets were in chaos. Markets stabilised but the pound continued a downward trend, beating historic lows.

Britain luxury brands are known for their heritage, design, craftsmanship, and quirky individuality which together shape a luxury narrative matched by no other country’s. London too is a choice destination for the experience of buying both British and non-British luxury brands.

The weakened pound was good news for tourists visiting the UK. The month of Ramazan, which traditionally brings wealthy visitors from the Middle East to London, followed. Flight bookings from Europe as well as Asia reportedly rose after the referendum. Premium and luxury hotels benefited from a rise in reservations and stays by overseas guests too. All this made London the hottest and cheapest luxury shopping destination this summer. Much shopping took place as is evident from UBS’s analysis of tax refund receipts. Tax refunds, which are typically sought on big ticket goods, rose by 36% in August.

So far the Brexit vote looks good for luxury shoppers from outside the UK. The picture for luxury brands is more complicated.

The iconic British brand Burberry has seen a 30% rise in sales in its British stores in the last six months. Facing headwinds otherwise, Burberry has also cut prices in its Hong Kong stores, taking advantage of the weaker pound as the brand notably incurs 40% of its costs in Britain.

It is a mixed picture for luxury watches, which are often presented as investment pieces, hence seen as considered purchases not impulse buys affected by currency fluctuations. Many coveted luxury watch brands are imported into the UK and the weaker pound has made the imported goods more expensive. Prices for brands such as Cartier and Mont Blanc, owned by the Richemont Group, have been increased while Hublot, Omega and Tag Heuer, owned by LVMH and Swatch Group, are holding on. The latter category of brands is taking the impact on its margins. For now.

The British luxury watch maker Bremont however is quids-in despite 30% of its costs being imports of Swiss watch parts, which are now more expensive. A weaker pound has helped the firm deal with falling sales in Asia and come out stronger.

To complete the picture and London being a hub for creative entrepreneurs, I spoke with proprietors of several upcoming luxury brands. My conversations revealed a mixed picture. Many small luxury brands source parts, finished products or packaging abroad while serving mainly local British customers. After the referendum, the bill of materials is decidedly more expensive by 10-30% depending on where they import from. As small businesses and nascent brands, however, they cannot always pass on the costs as price increases to the customer. Some however are slowly edging up prices of some products while keeping other prices steady. Overall this does not bode well for smaller, upcoming British luxury brands. Tighter margins will hamper their growth, and in many cases, their ability to survive.

It is also important to remember that despite the outcome of the referendum, Britain is, at the time of writing, still operating in the single European market with free movement of people. This makes it easier for people from Euro countries to travel to and shop in the UK. Any change in the ease of travel will affect Europeans travelling to and shopping in the UK just based on a weaker pound.

Luxury marques already under pressure, such as British car maker Aston Martin, expect a short term lift from the weakened pound but that may only last till Britain quits the single market. The automotive supply chain is global, and that will continue to affect the brand’s margins and profitability especially if Britain loses single market privileges and is not able to strike similarly attractive deals with the many countries where Aston Martin sells.

Some luxury brands are already thinking long term. For instance, Bremont is collaborating with the Advanced Manufacturing Research Centre in Sheffield to reduce its reliance on imported parts. Aston Martin too has made recent investments in product development and a new plant in the UK although its reliance on imported parts will continue for a while. But absent any clarity on the nature of trade deals Britain may be able to make, the return on these investments remains uncertain.

The pound recorded a brief recovery on November the 3rd, 2016 after the High Court ruled that the government will need parliament’s approval to trigger Article 50 which is essential for the official start of negotiations with the European Union. The judgment has temporarily buoyed the Remain voters. The uncertainty is further compounded by the government choosing to appeal the decision in the Supreme Court.

Luxury brands, like many others, will just have to sit tight and watch. After all, what is a couple of years in the grand schema of luxury brands that have lasted or intend to last for centuries?

Slicing up the equity pie

This article is the fifth in the Startup Series on FirstPost’s Tech2 section and first appeared on Nov the 2nd, 2016.

Cofounder conflict over equity sharing can often cause a startup to be aborted before launch or otherwise fail quickly, as many of us who work with founders in very early stages know well. Some founders do not want to share equity. It is fine as long as they understand what is needed to grow the startup and can buy that talent in. Early stage ventures often cannot afford to pay people market rates, nor can they risk core talent walking away easily. Giving equity to cofounders, who bring key talent, helps address these concerns.

Founders often ask, “how much equity should I give my cofounder for the amount of work she will be putting in?”. My brisk answer to this “how long is a piece of string?” question is: “it is what you negotiate and what all cofounders are happy with”. Inevitably it leads to a further question whether there is a formula to make this negotiation easy and the answer to that is “No”.

Founder experiences show that a long term and successful cofounder relationship is predicated not so much on the slices of the equity pie but on the sense of perceived fairness in the arrangement, including in the course of the relationship.

To facilitate the equity sharing discussion, I start by advising potential cofounders to develop their vision for the venture together. Creating a shared vision and defining broad strategic goals then help them understand better the contribution expected of each of the cofounders in shaping the startup. More importantly, they develop some appreciation of how much weight each cofounder is pulling, and how their roles and contributions may evolve over the life cycle of the startup. At this point, I often see relatively inexperienced founders starting to relax and then I remind them to consider probable contingencies.

Roles and responsibilities aren’t cast in stone. Scope creep can and does happen. What happens, for instance, when the person, who was in charge of customer development and marketing, ends up leading on user experience design, developing the product roadmap, and owning all revenue generation and operations, because they appear to stack together naturally? How would the cofounders deal if she wants to return to the drawing board and renegotiate the slicing of the equity pie?

People and their priorities change over time. What happens if the chief technical architect develops the core product and then wishes to leave for a job with more income security and predictable hours because her family is growing, but wishes to retain her equity in the business? How would the remaining cofounders deal with that negotiation while also ensuring that the future of the core product is not jeopardised?

What about unforeseeable things? What if the business runs out of money before lining up the next round of funding? What if, in the virtual team, one of the cofounders becomes unresponsive while holding the business to ransom? What if a cofounder becomes unwell or dies unexpectedly, bringing her partner or family into the picture in the way nobody has quite imagined? These are a fraction of the scenarios that I have seen played out in cofounded startups where the cofounders were caught unawares.

Envisioning these possible scenarios is a squirm inducing exercise for most founders. But it also makes clear that the relationship the founders are about to enter is an evolving entity with uncertainties and potential conflicts in the future, not an immutable one. Cofounders also start to realise that fairness as accepted by all sides matters.

They also realise that above all, at all times, a focus on the business is crucial. It is not beyond possibility that a cofounder decides that not only will she leave the startup she will also ensure the startup does not survive after her. It is uncomfortable to think of such a scenario but it must be considered in advance.

How do we ensure fairness then, if things are going to chop and change, and people are going to behave unpredictably, even maliciously?

Here let’s draw upon some common sense. While resolving a cake dispute, a parent friend of mine uses a trick. She lets one child slice the cake, and the other children pick the slices first. The resulting dynamic is fascinating and instructive. Stretched to a cofounder negotiation, one of the tests of fairness would be, if you were doing all that any given cofounder is doing, would you be happy with the share she is getting?

It is also important to understand that fairness must be perceived and seen as fairness by all parties. And that perfect fairness is an asymptotic goal, albeit one worth working towards.

In a later column, we shall discuss embedding these negotiations into formal agreements and what it means for the startup.

Autonomous cars and luxury marques

Aston Martin, James Bond’s car of choice (except when he went through a BMW phase), showcased a powerboat at Monaco Yacht Show this year. Writing in the Financial Times, Philip Delves Broughton laments that Bond’s legacy is being junked by this luxury marque and outlines the dangers of brands diversifying into unrelated categories, especially those far away from the brand’s core, while also acknowledging the financial pressures that may have brought about the powerboat.

Those are great arguments; indeed they are in line with the “we have heritage” argument that keeps many a luxury brand in that strange place where they are simultaneously desirable and at the risk of going out of business very fast. Those are also arguments that arise from a steady state style of thinking applied to the stark challenges faced by luxury businesses.

The challenge is altogether different. Existential, in fact.

As autonomous vehicles get on roads outside the Bay Area, indeed here in the UK not far from the Aston Martin Headquarters, the existential crisis facing luxury marques in cars is too urgent to ignore. They overwhelmingly pitch their cars as being about the pleasure of owning and driving a car as beautiful such as the Vanquish (I have my preferences but please feel free to imagine the marque that makes you go weak at the knees here!). There is a primal connection between the man and the (stunning) machine that is at the heart of the purchases of such cars.

With autonomous cars around the corner, the makers of such luxury cars may go out of business altogether.

What will be their offering, their raison d’être?

What deepest desires in our hearts will they be appealing to, with their beautiful — but self driving — cars?

Yes, I hear you cycling through Kübler-Ross. I am doing it too so you are not alone.

Meanwhile, let’s not pretend that the Aston Martin AM37 powerboat is only about the financial bottomline. There are existential choppy waters ahead. Aston Martin has found one way to navigate them. Unlike Bond, makers and purveyors of such luxury vehicles may not live to die another day. They have to think fast to remain relevant and in business at all. More previously unthinkable business models may be forthcoming from luxury car makers.

Mr Broughton meanwhile can perhaps take solace in the possibility of the next boat chase on the Thames featuring an Aston Martin! Bond’s heritage may be alive and well. For the time being.

Motivation as a design assumption

Holacracy. MOOCs. Food labels.

Holacracy isn’t working. MOOCs have low completion rates, and an estimated 90% drop-out rate. Food labels to help consumers make informed choices show mixed effectiveness and decidedly no downward impact on public health concerns re obesity.

Other than not working as well as optimistically assumed in their wake, they have one more thing in common.

Their design assumes that people have self-motivation in heaps, and when faced with choices, they draw upon that self-motivation to make the best decisions for themselves.

From organisations, to education, to nutrition and health, the assumption of the “highly motivated and self-interested individual” does not stack up.

The reality is different from the design assumptions made.

As Buffer found out from its year-long no-managers experiment, people were expected to direct and motivate themselves, the lack of managers soon became overwhelming, and an implicit hierarchy emerged nonetheless.

Similarly MOOCs assume that a highly motivated and self-driven student is the only kind around. A self-motivated student will benefit from auto-didactic methods disproportionately more than a peer who isn’t so driven. As a teacher, I can attest to these phenomena too: students have variable levels of motivation, cognition and learning capacity; they may or may not understand the sequentiality of learning certain modules i.e. prior art in a field, which, of course, is more essential in some fields than in others; they may not understand some content and that can be demotivating in itself; they may not have the time or dedication to complete assigned readings; and last but not the least, they will always have have questions and if not, a facilitator teacher can make them question their tightly-held beliefs in a setting that makes them think.

In other words, willpower depletion, by the many demands made on us by life, is a real phenomenon.

The design problem that technology entrepreneurs keep dreaming of does not have to bring about “disruption”. It is more complicated than that.

The design problem is to keep people with varying motivations involved, and progressing.

If at all we achieve step change or “disruption”, the design challenge is to do so the existing tools of facilitation and enabling, along with new tools of technology and emergent social contexts, to address the same problems of variable motivation, cognition, and commitment to learning.

A designer assuming a bottomless pit of self-motivation in its audience sooner than later discovers the ordinariness of the human condition.

Influencer marketing and the luxury marque

Eight years ago, I was pondering the meaning of “authority” on the web. Fast forward to 2016 and the language has moved on. It is no longer about authority but about influence. Brands, including some luxury brands, are engaging in “influencer marketing”.

The web is awash with “advice” for luxury brands on the criteria for choosing the right influencers; these include relevance, reach, engagement, previous brand endorsements, and that old chestnut called authority.

But should luxury brands engage in influencer marketing at all?

I have no doubt there are some, who were influenced into buying a Breitling because of John Travolta, a bonafide and accomplished pilot and a 2007 inductee into the Living Legends of Aviation. Travolta was the face of Breitling until in 2012, Breitling shocked many by picking David Beckham. Beckham is a famous former ace footballer but now mostly a celebrity model, who reportedly turned down Calvin Klein but later appeared in Giorgio Armani and H&M ads — for underwear.

How are Breitling’s brand values aligning with this new choice of influencer? What aspirational quality or relatable values is the brand projecting with David Beckham? Notwithstanding his sporting prowess, Beckham is a peculiar and unimaginative choice of influencer for a brand that, since 1884, has been known for engineering innovation driven watches.

IMG_3407During the AW16 shows in Milan, Gucci’s Alessandro Michele officially invited — and collaborated with — Trevor Andrew whose love for Gucci had made his “Gucci Ghost” persona well known and gained him a huge following on Instagram (31K at the time of writing). Andrew bought his first Gucci watch at age 17 with the money he earned snowboarding. Gucci wasn’t giving him money to talk Gucci all this while (for the various shades of disclosure between bloggers and luxury brands, read this). He is no ordinary influencer for Gucci to engage with. He has his own creative lens on things, including to his music — he is a man of many talents — with a rip-mix-burn approach he puts to practise and that resonates with web users. Web culture has indeed moved on from the early binarity of creator v consumer, to co-creation and hacking.

Does Andrew resonate with Gucci’s brand values? They are, after all, rooted in the Italian and Florentine heritage and craftsmanship. Where does Andrew fit in? Perhaps with Gucci’s fashion leadership and success with authenticity? Andrew is authentic, creative, successful with his own style of craftsmanship. There is synergy perhaps, and Gucci put its money where its mouth is by producing a collaborative collection with Andrew.

Both brands Andrew and Gucci have influence over their audiences.

But in the collaboration, who influenced whom? It is hard to tell. It is more like a circle of virtuous mutual influence! This kind of serendipity, overlaid with a strategic twist is not available to all luxury brands.

Luxury brands are currently torn between many dualities. The democratic nature of the web, versus the exclusive, aspirational image of a luxury brand. The reality of who is spending the money now, versus the need to build relationships with the potential customers of the future. Even the heritage claim becomes difficult to ride on, when the brands are addressing markets with their own heritage vastly more expansive and richer than the luxury marque’s own.

Amid all this, the question — should a luxury brand engage in influencer marketing at all?

My considered answer to that is No.

A luxury marque is, at its core, a Veblen good. Influencer marketing — including the lazy marketer’s option of celebrity endorsement, never mind their tenuous relationship with sales — on the other hand is an attempt to get in on the bandwagon effect (economists call it “interpersonal effects on utility”). Influencer marketing, given all the variables in the mix including the influencer’s own “brand” and its values, is cognitive dissonance-inducing in the luxury brand discourse.

“But, but what about the young generation and our engagement with them?,” some might ask.

The clue might lie in a 600 year old brand that somehow survived and thrived.

With the old fashioned idea of always being the keeper and regaler of the brand story, the craftsmanship story, the collection story. Even the influencers it has worked with in recent times are now collaboratively embedded in its glorious historicity.

When it comes to influencer marketing, true luxury marques need to remember just this:

Don’t borrow someone else’s influence. Be the influence.