Brand extensions are always tempting to marketers, and in the case of luxury brands the allure is particularly strong. While the path to luxury brand success may be partly paved with extensions, there are even more examples of brand extension disasters that litter the way. Brand extensions continue to be among the most researched and studied phenomena in marketing. When it comes to luxury brands, however, the factors that lead to successful extension have received far less attention. In this article, we consider the notion of perceived premium degree of the brand as a function of its category, and what we term the degree of adjacency between its product categories. Building on our research, which found that a luxury brand's perceived premium degree has a different impact on profitability depending on whether or not the brand is spread across adjacent product categories, we demonstrate when luxury brand extensions work—and when they fail. Perhaps most importantly, we herein introduce the premium adjacency matrix as a tool for luxury brand managers to consider in formulating extension strategies.
Our study began by identifying the top luxury brands. To do so, we hired a U.S.-based consumer research firm, and asked it to construct and administer a questionnaire to a representative group of consumers that would identify and rank luxury brands against each other. The panel did so for 150 luxury brands, which we then sorted into six broad categories (see Table 1). As expected, the majority of brands (71 out of 150) fell into the Fashion category. Watches and Jewelry were second, with 32 brands. Automotive and Transport (jets and yachts) were third, with 21 brands. The remaining categories consisted of Consumables (wine, liquor, chocolate, tobacco – 15 brands), Audio Equipment (5 brands), and Specialty Retail and Hotels (6 brands).
We calculated premium degree first by using the brand's price elasticity (the less elastic, the greater the premium degree). Secondly, we force-ranked the brands relative to each other based on the questionnaire results.
Adjacency was defined as the ability of a brand to leverage its core competency into a new category where that same competency was essential for the brand to exist and succeed in the new category. This competency was, in turn, defined as the core attribute for the brand's success and the one characteristic it would not compromise in any way.
We determined each brand's core competency/capability using a Delphi method, whereby we assessed the extent to which this core competency was essential for the brand to exist in the new category. The more essential the characteristic, the greater the degree of adjacency. In sum, adjacency was a broad concept that extended beyond the product itself to include skills, management structures, financing arrangements, manufacturing, supply chains, and the like. In order to determine brand success, we conducted focus interviews with 300 executives at the companies that owned the brands (two from each company). Interviews were structured as face-to-face, with follow-up telephone calls and emails as necessary.
We also collected 10 years’ worth of financial data for each of these 150 brands. For listed firms, we used disclosed data. However, most financials do not disclose data at the brand level. To obtain this information, we conducted follow-up interviews, as needed, with the executives. We checked our data two ways: first against third-party industry trade data, and second with models developed by industry analysts. Finally, we verified our results with executives at the companies. All of the 300 executives save 22 confirmed the accuracy of our models. Fortunately, we had at least one executive from each of the 150 brands confirm.
