Porsche vs. Ralph Lauren: The Danger of Diluting Brand Equity

Fortune reports this week on the contrasting situations at two iconic brands: Ralph Lauren and Porsche. At Ralph Lauren, revenues and margins are rising. CEO Patrice Louvet has executed a sustained campaign to "elevate" the brand.  Louvet rightfully came to be concerned that the company's growth strategy came with significant brand equity risks.  He recognized that the company needed to act forcefully to raise willingness to pay.    Fortune's Peter Vanham writes:

Before he arrived in 2017, Ralph Lauren “expanded in places where we probably shouldn’t have, which drove higher levels of promotional activity,” Louvet told me. “It was like the boiled frog phenomenon. I’m sure it was well-intended. Each year, we thought it was just marginal. But after a few years, you realize it’s not going to end well.”

Since then, he said, “we’ve had our eyes wide open on tough choices.” Joining Ralph Lauren after almost three decades at P&G, the native Frenchman took a page from his old employer’s turnaround book. To escape from the price race to the bottom, the company “took a one-year, painful hit” to reset consumer expectations. Then, during COVID, Louvet reset the distribution strategy, and closed two thirds of its wholesale presence.

Meanwhile, Fortune's Christiaan Hetzner reports on the recent challenges at Porsche. Hetzner writes that the Porsche CEO, Oliver Blume, has announced a second major round of cost reductions at the luxury automaker. Hetzner concludes that the company is "drifting deeper and deeper into its biggest crisis in decades."  Blume apparently attributes the troubles to a slowdown in EV demand, a tough price war in China, and the high new tariffs imposed by President Trump.  While these factors clearly have affected Porsche's business, I wonder if the troubles point to a deeper strategic challenge. Over the past two decades, Porsche has expanded beyond being the producer of its iconic super premium sports cars.  Porsche sells sedans and SUVs around the world.  Has that growth begun to impact the brand, and can the company continue to command the high willingness to pay that it generated in the past?  Will Porsche require the type of brand reset executed by Ralph Lauren?  

What Happens When We Compare Ourselves to Generative AI?

Source: https://itsoli.ai/

What happens when we compare ourselves to generative AI?  What conclusions do we reach about our own capabilities? Taly Reich and Jacob Teeny have examined these questions in a new paper titled, "Does Artificial Intelligence Cause Artificial Confidence? Generative AI as an Emerging Social Referent."  The scholars conducted several experiments in which they exposed people to precisely the same work, but told some that it was performed by AI and others that it was completed by human beings.  Interestingly, the  researchers found that people exhibit greater self-confidence (with regard to completing a creative task) when they believe that the work they observed was completed by a generative AI model rather than fellow humans. Teeny offered some explanation in this feature from Kellogg Insight:

"From a practical standpoint, self-confidence is such an important driver of innovation, and past research shows so much of our behavior is driven by the simple perception that we are capable of doing that behavior, whether it’s to undertake a piece of creative work or apply for a dream job... Much of our self-perceptions are based on how we compare ourselves to others. If we’re exposed to people we believe are really good at something, we may think, ‘Oh, I’m not as good at that [task] as I thought I was.’ But if we’re exposed to people who do something poorly or who we believe are less skilled, we think, ‘I’m actually pretty good at that.’”

Of course, simply having more self-confidence does not mean people actually will perform well on a subsequent task.   In one of their studies, Reich and Teeny show that those who had compared themselves to an AI model did no better at a creative task than the individuals who compared themselves to other humans.  

Scarcity, Pricing, and Luxury Goods: The Case of the Birkin Bag

Source: Teen Vogue

Why do we exhibit a strong desire to buy something that is not readily available?  Many people would say that we all fall victim to FOMO at times (Fear of Missing Out).  Psychologists have posited that "reactance theory" helps explain our behavior.  In short, this theory argues that we become very uncomfortable, and perhaps even anxious, when our freedom is constricted.  As a result of that discomfort, people have an even stronger desire to purchase a product.  Of course, consumers also care about status.  Thus, they value products more if many others cannot purchase it.  Having a product that others can't get their hands on turns out to be very enticing.  Thus, luxury goods manufacturers tend to use limited time offerings, special exclusive collections, and other related strategies to entice consumers.  They intentionally create scarcity so as to stimulate demand and enhance willingness to pay on the part of potential customers.  

No company has mastered scarcity better than Hermès.  The company markets the famous Birkin bag, named after British actress Jane Birkin, who inspired Hermès Executive Chairman Jean-Louis Dumas to create the leather bag during a conversation aboard a flight in 1984.  A classic Birkin 25 bag sells for more than $12,000 today.  Could the company raise prices even further?  Given the even higher prices on the resale market, it seems the firm could raise prices. However, as Carol Ryan wrote this week in the Wall Street Journal, Hermès chooses to drive profitability through a different strategy. She writes:

The brand limits how many it produces, so demand far outstrips supply. Hermès could easily jack up the price but has found a smarter way to profit from the Birkin’s popularity that is less likely to alienate loyal clients.  To get a Birkin, shoppers must build a relationship with one of the brand’s sales assistants and wait to be offered a purse. This creates a perception that the biggest spenders get access to Birkins and encourages customers to splurge on other goods to build the equivalent of an “Uber rating” at the Hermès store.

If you would like to learn more about the incredibly successful luxury goods firm Hermès, I highly recommend the episode of the Acquired podcast that tells the company's long and storied history and breaks down its competitive strategy. 

Scarcity does not only apply in the luxury goods market though.  Special limited offerings prove to be an essential part of the "treasure hunt" experience at value-based retailers such as Zara, Costco and Trader Joe's as well.  For these firms, the business model calls for drawing customers in to find those special offerings, but then hoping to sell them many other items while they are in the store.  At a company such as Zara, customers visit more often than the usual apparel retailer, because they know that products won't stay in the stores for a long time.  At Trader Joe's, special seasonal offerings will come and go, causing people to act quickly to grab popular items.