Thursday, January 20, 2022

Luxury Brands and Ethics: Expectations and Reality

(This is the fourth in a series of articles about the Luxury Market. The previous three may be found on my blog at Are the Roaring 20’s Back?, Meet the HENRYs and Gen Z. The previous three covered the nature of the luxury market and its target customers. One clear point that emerged from those articles is that the luxury customer demands a certain level of social responsibility and ethics from their brands. This article explores the picture of ethics among luxury brands and the customer’s expectation profile. )

In a Forbes article from January of last year entitled, “Luxury Turns From Conspicuous to Conscientious in 2021: Challenges and Opportunities Ahead,” the author explores the role ethics will play in the customer’s purchases and loyalty.

The author, Pamela Danziger, states that, regarding expectations, 

“Once luxury consumers emerge, they will dig deeper into the meaning and purpose of brands that they choose to connect with, looking for brand values that match their own. 

It means more than just brands taking a stand on the environment, sustainability and socially-responsible business practices, along with support of cultural values like gender, race, sexual orientation and income equality.” 

That said, luxury brands are starting from behind in terms of customer expectations regarding social responsibility and ethics. Danziger further states:

“As good as these ideals sound and important as they are, there is an inherent disconnect for an industry that at its roots is made for the ‘haves’ to suddenly be concerned about the ‘have nots.’” 

A 2019 scholarly article in the Journal of Cleaner Production by Elsevier goes deeper into this situation by conducting a study of luxury customers based on hypotheses that sing the same tune. They state that luxury brands are perceived to be less ethical than “sincere” brands and carry a “sophistication liability.” 

However, regarding luxury brands’ social responsibility efforts, they state that “companies invest more in CSR activities to improve consumers' perception regarding brand ethicality and attain their support.”  But, if consumers suspect this, they dislike this practice and will not reward the brands with their purchases or loyalty.

So, are luxury brands like Kering and LVMH being treated unfairly, the victim of an inaccurate social perception? What is the truth about their CSR activities? 

First let’s take a look at what they might say. Here is quote regarding human trafficking, debt bondage, forced labor from their 2021 Human Rights Policy:

“Forced labor, human trafficking, debt bondage and other forms of slavery are strongly prohibited in our supply chain and are considered breaches for which we have zero tolerance. The unlawful practice of forced or compulsory labor constitutes an element that would nullify any business relationship between Kering and its Houses and a business partner.

In particular, we expect that our business partners do not retain workers’ identity documents, do not withhold wages, prohibit recruitment fees paid by workers themselves and do not impose restrictions on workers’ freedom of movement. 

Vulnerable groups, such as international or internal migrants or illiterate workers, are particularly exposed to these risks and require special attention.” 

The report clearly outlines some of the most critical human rights issues in the supply chain: Forced labor, labor bondage and recruitment fees, abuse of vulnerable groups. While the report claims to advise follow up on the status of these policies, in my view it clearly puts the responsibility on the supplier in this and other sections by repeated use of phrases like “we expect.” Do they carefully investigate these issues before doing business? After engagement, do they monitor the social compliance of the supplier? Or is it to easy to excuse the supplier’s bad behavior by saying “we told you what we expected?” How about, instead, saying that “we will thoroughly vet our supply chain and not do business with any resource who either engages in or probably engages in these practices?”

It seems that Luxury Brands don’t follow up on their words, and don’t make it a priority to vet and monitor their supply chains. The 2021 Apparel and Footwear Report by KnowTheChain provides clear evidence of this.  

The report establishes two indices of apparel companies’ human rights efforts in the workplace. The first is a “benchmark score” on a scale of 0 to 100 which documents known efforts by the company to become involved in and remedy the key issues; the second is a “worker-centric” score which are “the indicators that focus on due diligence processes based on worker participation and on concrete outcomes for workers.”

The results of their work are particularly disturbing, but they take the time to point out that luxury brands as a group are not at the top of the list; in fact, they may be at the bottom. They state in particular:

“Luxury apparel companies score particularly low, at 31/100. Italian luxury fashion house Prada’s score has worsened over time, scoring a mere 5/100, while peers such as the French luxury goods company Kering (41/100) and the German brand Hugo Boss (49/100) have improved significantly since 2016. Also among the bottom five companies in the benchmark is US-based Tapestry (16/100), the owner of Coach and Kate Spade. No luxury company disclosed a process for responding to allegations and only two disclosed outcomes of remedy for workers in their supply chains, including reimbursement of recruitment fees.” 

Combining the two indices, the report lists the total scores of the companies it studied. The top of the heap is populated by brands that are not luxury brands by any stretch. The top four are Lululemon at 89, Adidas at 86, PVH at 74, and the Gap at 70.

The best showing for a luxury brand is Burberry at 53, followed by Hugo Boss at 49. Going down the list, Kering is at 41, Hermes is 24, LVMH is 19, and Prada is a 5. 

As a group, luxury brands average 31 against a 43 for Footwear and 47 for Apparel Retail. 

Further, they make the point that companies in general with market cap >$50 billion were particularly deficient in supply chain transparency, citing the fact that “LVMH and Hermes disclosed little to no information on the locations of their supply chains.” 

So where will luxury customers turn to satisfy their aspirations and prosocial goals? My view is that the winners in the future will turn to a different breed of luxury brands, startups and those whose social goals are part of their DNA.

A January 2021 report entitled “The 26 Most Sustainable and Ethical Luxury Brands” points out companies that are a different breed of cat. They were founded to market artisanal, environmentally-friendly luxury products and that is the core of their business model. Some examples are: 

So Good to Wear, which designs cashmere garments made by a fair-trade factory in Nepal. “Its knitters are well-trained, well-compensated and work under fair and safe labor conditions.” 

Another that practices transparency in their supply chains is Maggie Marilyn, who 

“prides itself on being transparent and shares on its website details of all its makers, suppliers, and where possible, farmers.” 

Granted that these brands are small, infinitesimal compared the LVMH of the world. So what good does their presence serve to solve the huge problem that exists and which is not being addressed by the giants? Two answers: 1. As they grow, their DNA will not pivot to where the others are; and 2. The more of these ants start to prosper and gain the attention of customers, the more the big brands will have to take note. Nothing, repeat, nothing, will get the attention the big luxury brands except the realization that their customers are going elsewhere.

Understood that may take some time to happen, or it may not—that is an unknown unknown; but if we believe it will-and I do—it becomes a known unknown. Not if, but when.

What really will push the timeline along is if some global brand gets the point and starts really making some efforts that will get the attention of its competitors. The same Ecocult report praises Gucci (Kering) and says, “The brand is committed to environmental benchmarks and guarantees that it will make 95% of its raw material traceable. Gucci is also committed to the sustainability objectives set out by the parent company Kering, which states several sustainability strategies including reducing its environmental footprint and choosing responsible and well-managed supply sources. “ And the best part is it offers some advice: “If you’re looking for a recognizable luxury logo that is more ethical than the rest, then Gucci would be the way to go.”  

There is an incredible amount of work to be done before anyone can claim that luxury brands as a group are ethical and that their impact on their supply chains is positive in terms of human rights. But, in the meanwhile, Danziger in her Forbes report offers one piece of advice which I think is a critical marketing point: We started this journey with the realization that consumers have a built-in negative attitude toward ethics in the luxury world. So, if your logo and brand on display in a garment, handbag, or shoes screams greed and irresponsibility, why not tone it down? 

She says, “True luxury whispers. It doesn’t scream.” 

That is really good advice. Let’s see who follows it.

(Not done yet. Lots more to write about luxury. Watch this space for my next piece)

©Michael Serwetz 2022


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