Luxury: Ethics at the heart of value creation

Brands are expected to adopt new practices and integrate ethics into their business models.

26/03/2019

Times have changed in the world of luxury. For nearly twenty years, environmental concerns and ethically influenced consumer habits have increasingly transformed an industry which is valued at close to EUR 250 billion worldwide. For major brands, social and environmental responsibility has become a strategic priority.

For a new generation of innovative entrepreneurs, ethical goals are a potent motivator and an effective answer to the challenges of economic development. Sustainable growth has become essential, and industry members that lead by example tend to create a balance between expertise, culture transmission, human rights, local development and the preservation of natural resources.

As a significant player in auditing and consulting for the luxury industry, mazars has conducted an international study to measure the impact of this new approach to the entire value creation chain and to show how ethical concerns have become both a key challenge and a lever for growth.

Four Major Phases in the History of Luxury

While the phenomenon isn’t unique to the luxury sector, it is sharply felt there: since the 2008 financial crisis, ethics have become a fundamental motivation for a growing number of businesses. It is no longer enough to dabble in philanthropy or to peddle an image of being socially and environmentally responsible. Companies are expected to go above and beyond by adopting new practices and integrating values at the heart of their business models.

This is confirmed by Sylvie Bénard, Environmental Director at LVMH: ‘Our model rests on the trust of our clients and the exceptional quality of our products. Beyond ethics, setting an example is therefore first and foremost a business challenge’.

Between 1950 and 1970, the luxury industry’s growth relied exclusively on the quality and longevity of its products. Over the course of the following two decades, the manufacturers’ desire to make their products available to the highest number of people possible led to a vast increase in production volume – which in turn led to the rise of counterfeiting. During the 90s, the first large international conferences on the environment paved the way for the emergence of ecological and social concerns, and their growing convergence with economic issues.

Value creation became underpinned by the promotion of a local, artisanal production model featuring a true partnership-based view of relationships with subcontractors. This approach not only aims to limit negative externalities(2) anymore (the impact on the environment, for example) but has also developed into a more ‘proactive’ stance, with the emergence of business models based on strong ethical requirements. Growing brands get involved with local development projects and become engaged citizens themselves. In other words, they want their value creation processes to serve a higher purpose; and in doing so, they embody the transition from the concept of corporate social responsibility to that of creating shared value(3).

Raw materials: transparency and innovation

This ‘activist’ ambition encompasses all stages of the value creation chain, from the procurement of raw materials to distribution and sales. Leather, fur, plant fibres, gems, and precious metals are the raw materials most used by the luxury industry. It is estimated that between 1999 and 2001, leather goods, gloves, shoes, and clothing used some 5.7 million tonnes of raw leather that came from a population of around 1,500 million cattle.

In the case of fur, 56 million animals are used each year, and around 85% of them come from specialised farms. Thirty million tonnes of plant fibres are produced annually, primarily for use by the textile industry. Diamonds have become a safe investment, and their international market is estimated at EUR 33 million, with demand set to double by 2020.

Alongside these traditional materials, a growing number of young brands are using new and innovative materials that are more environmentally friendly. These include British labels Shrimps, Stella McCartney, and Beyond Skin, all of which use only faux leather and fur. Another rapidly growing practice is upcycling, which involves reusing waste to create high-quality products. Yves Saint-Laurent’s ‘New Vintage’ collection was created using recycled fabrics from previous seasons, while Hermès’ ‘Petit h’ is a collection of accessories and toys made using scraps from the brand’s workshop. Both have contributed to the promotion of a circular economy.

A Double Challenge of Protecting and Promoting Territories

In addition to these innovative approaches, luxury brands are also involved in the use of organic and biodegradable leather, fur and plant fibres, hence eliminating potentially toxic chemical products. This ethical sourcing of materials has been spurred in particular by the Greenpeace 2012 report on hazardous chemicals used in the production of fashion items.

The international NGO was back again in 2015, releasing a list of businesses that had taken no steps away from the use of toxic materials since 2012. Due to consumers’ increasing awareness, several brands are now using organic fabrics for their collections, and have obtained the Global Organic Textile Standard (GOTS) label that certifies the percentage of fibres derived from organic agriculture(5). Furthermore, the demand for quality materials by brands has sometimes helped to protect endangered animals. ‘The agreements passed in Peru between some vicuna breeders and designer Loro Piana have contributed to the protection of the species while providing the designer with a raw material of exceptional quality’, says Bénard.

In addition to limiting negative externalities, these approaches amount to a real strategic choice. By ensuring the health of consumers, brands offer themselves new opportunities for value creation. President of the Chamber of Italian Fashion Carlo Capasa explains: ‘In our industry, there is no future without sustainable development […] 13% of buyers have criteria on sustainable development. This may seem low, but it is a lot if we consider that two years ago the figure was 2%.’

The luxury industry’s key players have developed real commercial ecosystems in regions that are often symbolic of their brand identities. They now contribute to the creation of an ‘intangible collective heritage’ based on the perpetuation of artisanal skills and the development of networks of stakeholders that ensure the origins of products, quality of manufacturing, and control of impacts. This results in initiatives that aim at saving resources and minimising their carbon footprint, via eco-packaging for example.

In a more ‘positive’ way, it also aims at promoting local skills and artisans. In 2006, the Entreprises du Patrimoine Vivant (Living Heritage Companies) label was created in France to promote companies that have ‘(…) an economic heritage, composed of a particularly rare or ancestral skill, based on the mastery of traditional techniques or high technical skills and that is ascribed to a territory’.

Moreover, recent years have seen the birth of a ‘New Luxury’ that gives brands a highly efficient vehicle for local development. For example, Norlha Textiles works exclusively with yak hair from the Tibetan plateau.

The Challenge of Human Resources and Craftsmanship

Businesses in developing countries tend to focus on wages and working conditions, while in wealthier areas, they seek to preserve local knowledge and craftsmanship, and create a higher value for artisanal skills generally. Added costs generated by local, non-industrial and hand-made production are compensated for by the additional value created by the production process and story. Fendi, Hermès, and Chanel have for instance all launched initiatives to highlight their brands’ intangible heritage that stems from their local roots.

Via its Paraffection subsidiary, founded in 1985, Chanel buys out and salvages local French craft-based businesses which feature a wealth of specialised expertise. ‘It is not to be charitable’ says Chanel CEO Bruno Pavlosky, ‘the programme is about supporting exceptional craftsmanship skills that in the end bring value to us.’ In order to protect and promote these local and specific skills, the major challenges are education and training. ‘At LVMH, we’ve set up apprenticeship programmes at the group level and within many of our brands,’ says Benard. These programmes also contribute to the advancement of communities, particularly in countries where they can both help save traditions and offer a valuable job when opportunities offered by a ‘classic’ education are minimal.

An increasing number of brands have also joined the fight against discrimination and have come to the aid of communities located around sites of production. The long-term goal is often to facilitate access to work for the most disadvantaged people. In India, the ‘My Paper Bags’ collection by Myomy Do Goods is produced by artisans belonging to the lowest castes.

Consume Less, but More Ethically

In addition to quality, the consumers of luxury products have now added transparency and sustainability to their list of requirements. Being better informed, they tend to favour both quality and long-term investment. This new paradigm requires brands to show an ethical and sustainable commitment, which highlights the question of traceability. ‘Leading luxury brands have developed audits that they perform themselves or entrust to independent contractors,’ explains Bénard. Jewellery is an example of an industry in which traceability has become a key issue in terms of image. The ‘Kimberley Process’ was launched to address the concerns of public opinion surrounding the provenance of raw diamonds; its member countries now account for 99% of worldwide production.

‘OUR MODEL RESTS ON THE TRUST OF OUR CLIENTS AND ON THE EXCEPTIONAL QUALITY OF OUR PRODUCTS. BEYOND ETHICS, SETTING AN EXAMPLE IS THEREFORE FIRST AND FOREMOST A BUSINESS CHALLENGE’.

SYLVIE BÉNARD, LVMH

What are the Incentives for Ethical Value Creation?

There are two aspects to the incentives for implementing new practices and new, more ethical and responsible standards – on one hand, there is the development of regulation at local and international levels, including charters and labels, and on the other, there are the businesses’ initiatives.

If regulation creates minimum standards, they’re seldom specific. In the luxury industry, two areas are affected – jewellery with the above mentioned Kimberley Process, and fur, for which the constraints are regional and very heterogeneous. Fur farms are entirely forbidden in the whole United Kingdom and six out of nine federal states in Austria. They have been rendered economically unviable in Switzerland, but they remain largely unregulated in Canada, China, and many other countries.

Meanwhile, labels, which the industry itself created, allow brands to demonstrate their engagement over many well-defined criteria that they can then communicate to their customers. Some of them are today recognised labels such as the ‘Responsible Jewellery Council’ (RJC) label, which was created in 2005 by an alliance of prestigious companies such as Richemont, Cartier, De Beers, and Tiffany, to promote ethics, human rights and environmental protection across the whole jewellery value chain.

Another one is the ‘Cosmetic Valley’ charter that attests to an eco-friendly approach in the perfume and cosmetic industry. Others remain more regional or confidential. For brands, steps have been taken to define and implement best practices. To go beyond greenwashing, a superficial facade of environmental concern which consumers typically see right through, patronage has been developed, through partnerships with NGOs and the creation of foundations (Foundation Louis Vuitton and Kering Foundation to improve women’s lives for example). Even though it generates concrete results, patronage is however not directly linked with actual business activity.

The promotion and communication of best practices are driven by the need to build strong relationships with stakeholders, who can choose the brands with whom they will engage according to ethical and sustainable criteria. Finnish auction house Saga Furs has been working since 2005 towards the improvement of welfare for animals being raised for the fur industry, starting with educating brands, and working with them to create new standards that go beyond current regulation.

The programme went on to Include Visiting Farms and Educating

them on these requirements; only the breeders complying with the required standards can remain fur suppliers to the brands that partnered with Saga Furs. Similarly, thanks to its notoriety and endorsements from celebrities such as Vivienne Westwood and Beyonce, the online sales platform NJAL (Not Just a Label) can now influence brands and lead them to adopt ethical and sustainable practices.

Society therefore has a significant influence, but brands themselves are also able to adapt their governance to these new requirements, deploying CSR management resources as well as steering and reporting systems. ‘Businesses still need to enhance their skill level in dealing with environmental matters’ asserts Benard. ‘That is why we created our ‘Academy of the Environment’ designed for marketing, nance and purchasing managers.
The idea is to give them the necessary scientific knowledge and the ability to integrate environmental issues into their strategic thinking’.

Three Distinct Approaches

Some players have already decided to integrate a green, global accounting to assess the environmental impact of their activities from the production of raw materials to logistics to the sale of products to clients. Kering was at the forefront of this movement, giving equal importance to its financial statements and its ‘Environmental Profit & Loss Account.’ These ethical challenges are not the only ones that must be addressed by the luxury industry, which faces other dominant trends such as the general slowdown of growth in the luxury market, its hyper-segmentation, and also, perhaps in a counter-intuitive way, digitalisation, with six out of every ten sales already being influenced by digital media.

An analysis of the links between ethics and value creation in the luxury world reveals three types of business ecosystems:

Independent brands that have adopted a risk management strategy. Their approach is often reactive, and they engage in ethical and environmental criteria to respond to the requirements of their stakeholders, rather than on their own.
Large groups, for which the image issue is critical, and which have started to transform their business models. Often subject to increasingly demanding regulation, including the publication of non-financial indicators, they understand that ethics can be strategically leveraged to create value. They have the resources necessary to define their standards and ensure control. In addition, their size allows them to impose standards across their whole value chain.
Activist entrepreneurs who have placed ethics at the heart of their model. They are built around best practices and therefore do not need to rebuild or adapt their value chain. Supported by NGOs, they also benefit from sales platforms such as NJAL which present their products to the global market. They are the pioneers of ‘slow fashion’ and might foreshadow the future model for the luxury industry. Their success will demonstrate that ethics and sustainable development are not only able to be leveraged for value creation; they’re a prerequisite.

To get the full picture on the current dynamics in the luxury industry and how companies are using ethics to build value, download our full study here.

(1) Estimate as of 20/10/2016 for the personal luxury goods market. ’The Global Personal Luxury Goods Market Holds Steady At €249 billion Amid Geopolitical Uncertainty‘. http://www.bain.com/about/press/ press-releases/spring-luxury-update-2016.aspx
(2) In the economics theory, a negative externality is a cost that
is suffered by a third party as a result of an economic transaction.
In a transaction, the producer and consumer are the rst and second parties, and third parties include any individual, organisation, property owner, or resource that is indirectly affected. http://www.economicsonline.co.uk/Market_failures/Externalities.html
(3) ‘About shared value’ in Creating Shared Value – Mazars Group Yearbook 2015, p.5. http://annualreport.mazars.com/yearbook2015
(4) http://www.greenpeace.org/international/en/publications/ Campaign-reports/Toxics-reports/Big-Fashion-Stitch-Up/
(5) http://www.global-standard.org/certi cation.html
(6) in ‘Luxury: ethics and value creation’, a Mazars study. http://www.mazars.com/luxury2017
(7) http://www.patrimoine-vivant.com/en
(8) The Kimberley Process (KP) is a joint governments, industry and civil society initiative to stem the ow of con ict diamonds – rough diamonds used by rebel movements to nance wars against legitimate governments. https://www.kimberleyprocess.com/
(9) http://www.cosmetic-valley.com/actualite/developpement-durable/ charte-pour-une-cosmetic-valley-eco-responsable.html
(10) ‘Digital or Die: The Choice for Luxury Brands’. https://www. bcgperspectives.com/content/articles/technology-digital-consumer- insight-digital-or-die-choice-for-luxury-brands