Impact of Privatisation without Effective Regulation

Impact of Privatisation without Effective Regulation Discuss the view: Privatisation without effective regulation is unlikely to bring significant benefits to developing countries. Despite its abundance around the world, and the apparent high esteem that governments hold it in, regulation is no longer seen as the panacea it once was. Regulation must not be over used. Put simply, regulation provides benefits but also incurs costs. Regarding the benefits, Garg and Karba, quoted in Jacobs (2006: 5) have said that, â€Å"it is widely acknowledged that sound regulation is the key to good governance and increased regulatory effectiveness in turn means a better government.† At the same time, the European Parliament (2002) has drawn attention to, â€Å"The problems of over-regulation, the doubtful quality of the laws and the economic obstacles that arise in consequence are increasingly the subject of debate.† Whenever regulation is contemplated, it is necessary to assess whether the costs of such regulation are outweighed by the benefits they provide. This is achieved using Regulatory Impact Assessment (RIA), which involves â€Å"a systematic process for assessing the significant impacts (positive and negative) of a regulatory measure† (Jacobs, 2006). This paper looks at the potential benefits and costs that result from regulation of privatised industries in developing countries and whether privatisation without regulation is capable of benefitting a developing economy. The costs of regulation are generally economic, with regulation creating compliance costs for companies, and enforcement costs and added layers of bureaucracy for governments. The benefits may be economic, such as increasing competition in a market, but may also be institutional, increasing a government’s institutional capacity, or social, raising an awareness of the regulated issues among policy makers or the general public which would not otherwise have been present. From a governance perspective, regulation may improve the efficiency and transparency of the government and increase its institutional capacity, but there is also a risk that the added bureaucracy might create new opportunities for corruption and rent seeking. This paper looks therefore, not o nly at the economic costs and benefits of regulation, but also from a governance and social perspective. Furthermore, Bayliss (2002) has pointed out that there has been a shift in emphasis when assessing the effectiveness of economic reforms in developing countries. As she points out, â€Å"Greater attention is now paid to the poverty impact of economic policies in developing countries. Whereas previously the focus was on macroeconomic reforms, effectiveness is now considered in terms of the impact of policies on the poorest.† This can be seen in the recent replacement by the World Bank of Structural Adjustment Programmes (SAPs) with Poverty Reduction Strategies (PRSs), and similarly with the International Monetary Fund’s (IMFs’) change from offering Enhanced Structural Adjustment Facilities (ESAFs) to offering Poverty Reduction and Growth Facilities (PRGFs) in 1999 (Bayliss, 2002: 2). Therefore, when assessing the benefits of regulation of privatisation, this paper will do so from the perspective of poverty reduction where possible, as opposed to merely macroeconomic benefits. Finally, it must also be borne in mind that privatisation is a complicated and often disputed process. Therefore, when this paper will also examine many of the difficulties that privatisation can raise for the development of an economy and will look at the many instances in which privatisation will create challenges for the economy which regulation will not be able to assist with. Regulation: costs and benefits Looking first at regulation of privatisation, the OECD (2001) has pointed out that when conducted correctly, and with effective regulation, including the inclusion of effective RIA measures, â€Å"[regulation] will increase the understanding of the impact of government policies, help unite different interests and approaches to problems, improve public governance transparency and increase the responsibility in public resource management.† Regulatory best practice dictates that regulations should be drafted so as to minimise the burdens they place on the regulated sector while achieving the desired results. However, it has also been pointed out that regulations often have unintended side effects that impact on groups who were not intended to be the targets of the regulation (European Parliament, 2002). Garg and Kabra (2004) have identified four issues that must be considered if regulation is to be effective: firstly all the impacts of proposed regulation, including unintended impacts, must be considered; secondly, the policy objectives of the regulation should be carefully examined to ensure that they do not conflict and to ensure also that all objectives are adequately addressed by the proposed regulations; thirdly, development and implementation of the regulatory framework must be carried out in an inclusive, consultative and transparent manner; and fourthly, the government and the regulator must be accountable. If these four requirements are met, then according to Garg and Kabra (2004), the process of regulation also â€Å"has the potential to be a force for open and democratic government.† However, such regulation, according to Jacobs (2005), are not of benefit to all types of government. He states, â€Å"the prevailing wisdom is that benefits correspond to those of democracies or ‘good government’. [Regulation and RIA] support legal governments which observe the rule of law with proportionate and equitable law. An accountable government is promoted through assessing direct costs and benefits that citizens will incur and selecting policies on the basis of best value for money, taking into account redistribution effects.† Clearly, there are significant benefits to be gained if the right type of government goes about regulation in the correct manner. If the regulations are developed in a consultative manner then they will also help raise awareness of the relevant issues. Effective regulation of core industries, as well as open and accountable RIA procedures are also â€Å"considered as fostering processes conducive to democracies† (Jacobs, 2005). However, if an autocratic or corrupt government were to regulate the industry the same benefits would not be reaped. It is difficult to see how such governments would go about creating a consultative and transparent regulatory regime in any case. This means that they would find it difficult to create a regulatory regime that adequately addressed the myriad different objectives of the regime. It would also mean that there is a high risk that the regulations put in place would have side effects for other, supposedly non-regulated sectors, which would furt her increase the burden of regulation. It is suggested in this paper that regulatory frameworks implemented by immature or non-consultative governments are likely to lack the necessary degree of subtlety that is gained when proper consultative processes are in place, and therefore, the regulations put in place by such regimes may be damaging. To conclude, if regulation is to be of any benefit in the privatisation process, it must be carried out by a responsible and open government, using consultation and adopting regular Regulation Impact Assessments. Otherwise, regulation alone will be of no benefit and will merely add an extra layer of bureaucracy, cost and possibly corruption, into the equation. Also, if regulation is carried out correctly, it will have the side effect of increasing the institutional capacity and expertise of the government. The European Commission (2002), in assessing Slovakia’s regulatory measures stated, â€Å"despite the progress made over the past year, the major need now consists of building up adequate administrative structures and strengthening of administrative capacity to implement the acquis.† Clearly, in order to be of benefit, regulations require certain institutional elements to be put in place by the government. This includes proper oversight of regulators as well as procedures to assess the impact of regulations and the effect they are having on industry. Therefore, it is again suggested that regulations put in place by administrations which lack capacity for effective RIA may also prove damaging to a privatised industry. Even where the government is genuinely democratic and seeks only to improve the performance of the regulated industry for the good of citizens, if it does not have adequate institutional capacity it may find it difficult to pull this off without harming the economy. Privatisation: the challenges for alleviating poverty and the potential for regulation to assist Looking next at the process of privatisation, Bayliss (2002) has pointed out that privatisation has long been one of the favoured methods by which international financial institutions (IFIs) have sought to alleviate poverty in developing countries. However, she states that they were popular when macroeconomic considerations were the main concern of the IFIs and that they have continued into the present days of poverty reduction largely on an assumption that what is good for the macro economy is good for poverty reduction. She states, â€Å"the impact of privatisation on poverty has so far been neglected in World Bank analysis. The distributional impact of privatisation transactions will depend on the nature of the enterprise in question.† Privatisation is generally seen as a benefit both because it raises revenues for the government, while at the same time increasing competition in core and vital sectors of the economy, such as the provision of utilities and transportation. The degree to which a privatisation generates revenue for government depends on the price achieved for the company sold. However, as stated above, benefits today must be assessed according to the poverty alleviating affect, rather than their merely structural effects and from this perspective, the main benefit of a privatisation is far more likely to be the better service that citizens or customers get from the privatised industry. This of course will vary depending on the nature of the industry and the degree to which it is essential to poor people, and also the degree to which the industry has been monopolised by the national company. The privatisation of an essential industry such as water or electricity, previously supplied by a single company, is likely to have a larger impact on poverty reduction than the privatisation of a state owned steel mill for example, especially if there are already private steel mills operating in the sector. If the service offered by the industry to be privatised is actually used by the poor, then the potential benefits to the poor are naturally higher (Bayliss, 2002). Likewise, since much of the improvement in an industry post privatisation comes from increased competition, the market share of the national industry prior to privatisation is also highly relevant. It was the Berg report (Williams, 1981: 186) that first drew IFI attention to privatisation as a means of locking-in economic improvements in Africa. The World Bank had been pursuing a policy of public sector reform, with Africa’s public sector seen as both dominating the private sector and under-performing. However, when improvements in efficiency were made in the public sector, they often proved difficult to maintain as governments would go back on the difficult policies that had led to the improvements. It was concluded in the Berg report that privatising an underperforming public industry would be far more difficult for a government to ‘undo’, so to speak. According to Bayliss and Cramer (2001) â€Å"privatisation acquired its own momentum and became a panacea for all that was wrong with the economies of industrialised and developing countries.† Rebranded today as Private Sector Participation, the World Bank and the IMF still promote privatisation, have made it part of their conditionality arrangements with most states for the release of aid funds, and have increased the capacity of their own divisions dealing with the private sector (Grusky, 2001). Even privatisation of basic services has been made a requirement for IMF and World Bank programmes (Bayliss, 2001a). Privatisation is now a core part of Poverty Reduction Strategy Papers (PRSPs) with the Uganda PRSP stating for example, â€Å"In the long run privatisation will transfer the need for major investment expenditures on to the private sector† (IMF, 2000). The Burkina Faso PRSP states it will begin the, â€Å"privatisation of existing state interests in order to facilitate the entry of new firms, resources, and technology into various segments of the market† (World Bank, 2002). Privatisation strategies are also a requirement for countries to qualify under the Heavily Indebted Poor Countries (HIPC) programme. One result of these conditionalties is that it incentivises governments of poor countries to privatise without taking into account adequately the economic benefits of doing so, especially the impact that privatisation might have on the poorest members of society. Privatisation deals will be pushed through in order to meet IMF and World Bank requirements regardless of the results of economic studies (Bayliss, 2002). One example of this was the hasty privatisation of Cameroon’s sole water utility when only one bidder had time to come forward. It is difficult to see how the best price could be achieved for the utility without proper bidding from multiple competing bidders. However, according to Reuters (2000), the utility was sold to the French MNC, Suez Lyonnaise in order to meet an IMF debt relief deadline regardless of the fact that the best price might not have been achieved. From an examination of statements by the World Bank and wider literature there appears to be five ways in which privatisation can bring significant benefits to developing countries from the point of view of poverty reduction. These five potential benefits will now be critically assessed, with special attention being paid to the degree to which regulation impact on such potential gains. The first general argument in favour of privatisation is that it contributes to economic growth. Economic growth is necessary to reduce poverty. However, Bayliss (2002) and Cook and Uchida (2001) have pointed out that the link between privatisation and economic growth in developing countries is an assumption based on experience in developed economies and has not been substantiated in the literature of the World Bank or the IMF. Furthermore, there is no evidence to suggest that regulation would impact on the degree to which privatisation might impact on economic development. Bayliss (2002) and Cook and Uchida (2001) both reject that privatisation necessarily leads to economic growth. It is also suggested here that economic growth cannot be regulated for. For example, forcing private operators to increase production through regulation, without there being a demand would be unsustainable. Therefore, it must be concluded that the argument that economic growth generated from privatisation has a significant impact on poverty reduction is not shown, either from past experience or from empirical literature. And furthermore, regulation will not have an impact on this fact. Secondly, the World Bank (2001) and others (Adam et al 1992) have argued that privatisation leads to Private Sector Development (PSD) and thus helps in reducing poverty. While PSD has been shown to impact positively on poverty reduction, privatisation has not as yet been linked empirically to PSD (Bayliss, 2002). The World Bank and IMF â€Å"see the mission as being the need to harness the dynamism and efficiency of the private sector to make it operate for the social good† (Bayliss, 2002). It is true that in efficient and competitive markets firms must strive for efficiency and innovation in order to maximise profits and even survive. However, as argued by Bayliss (2000) â€Å"where there is any kind of market power exercised by a single or group of enterprises, the implications for the social good come into question.† The link between privatisation and private sector development made by the World Bank and IMF is an assumption that has not been substantiated and the re asoning of the World Bank here has been harshly criticised in the literature (Bayliss, 2001b). The World Bank claims that privatisation improves the public sector in two ways. Firstly, according to Kikeri et al (1994), privatisation will increase the number of stakeholders who have an interest in the success of the countries private sector. Secondly, Kikeri et al (1992) have pointed out that privatisation is a signal to investors that the government is committed to PSD and thus investment will be encouraged. However, Bayliss (2002) has pointed out that, according to past experience in developing countries, private actors have done more harm than good to the private sector when they are put into monopolistic positions. It is only when effective regulations are put in place and enforced that the private actors have shown any tendency to behave in a manner conducive to PSD. This has led Bayliss (2002) to conclude that â€Å"it is not privatisation that will develop the private sector; rather it is the government, through effective regulation.† She argues that such regulation will develop the private sector regardless of whether or not privatisation takes place, however, it is suggested here that if effective government regulation is in place and is enforced, then the arguments of Kikeri et al (1992) and Kikeri et al (1994) should hold true, and therefore, privatisation with effective regulation will greatly improve PSD. Ramamurti (1996) for example, has shown that privatisation in Latin America, coupled with effective regulation, has been accepted by the markets as a positive signal to investors. It should be noted however that the same benefits have not as yet been demonstrated in Africa. Bayliss (2002) has suggested that â€Å"arguably, government concessions and guarantees are a greater attraction for investors than a commitment to private sector led growth.† However, it is concluded here that a government commitment to PSD, coupled with effectiv e regulation to prevent private sector abuse, should be capable of showing the same benefits in Africa as it has in Latin America if it is sustained by governments. Therefore, in this second category, privatisation can be of benefit to a developing economy, however, this will be true only if proper regulation is established. The third way in which privatisation helps with poverty reduction is by raising government revenues through the sale of the asset. The sale will also free the government from the obligation to invest in the industry, thus providing further fiscal benefits (Campbell-White Bhatia, 1998). The World Bank (2001) state, â€Å"Urban power, water, sanitation and telecommunications require large investments, even if efficiency is improved. But much of this funding can come from the private sector – indeed, privatisation can be a source of revenue for cash-strapped governments.† The idea being that such savings can â€Å"enable [governments] to conserve limited public resources for other priorities, such as education and healthcare† (World Bank, 2000). However, Campbell-White and Bhatia (1998) have shown the very obvious fact that private firms only want to buy profitable enterprises. Their study of privatisations in Africa shows that on aggregate, the industries that had been privatised up until 1998 in Africa had not been a financial drain on governments. It is very difficult to see many cases in which private investors will be willing to purchase loss making enterprises and then make the investments necessary to improve public services for the poorest. This fundamental fact was demonstrated by Biwater President, Richard Fleming, when his company pulled out of a private water project in Zimbabwe which was designed to bring water to some of the country’s poor. It emerged that the water tariff that had been agreed with the Zimbabwean government , and which would have allowed the project to operate at a profit, was too high for the intended customers to afford. Whiting, in an honest and realistic press release to the Zimbabwe Independent of 10 December 1999, stated on behalf of Biwater, â€Å"Investors need to be convinced that they will get reasonable returns†¦ The issues we consider include who the end users are and whether they are able to afford the water tariffs†¦ From a social point of view, these kinds of projects are viable but unfortunately from a private sector point of view they are not.† It is inevitable that if the numbers simply do not add up, then the greatest will and best practices in the world will not enable the private sector to be involved in an industry. It is suggested here that sound regulation will not be able to alter this fact. The Zimbabwe Biwater case illustrates this point. The company and the government had carefully negotiated a project that was fair to everyone and would have been well regulated. Biwater was to build the infrastructure, and make a return by charging customers a tariff which had been agreed with the regulator. The problem was simple economic reality. The intended customers could not afford the tariff that the regulator had set and which the company needed to justify the investment. Government guarantees to investors, such as guaranteeing a certain profit margin, or promising to purchase the output of a project at a guaranteed price, it is suggested, return the financial risk to the government and remove any fiscal benefits that pr ivatisation might have been able to provide. Bayliss and Hall (2000) have identified a number of projects in which national or regional budgets have been crippled because of commitments to purchase products from privatised industries at fixed prices. Therefore, from the point of view of raising revenue for the government, privatisation may be of benefit. However, regardless of how much money a government gets for selling an asset, such gains will only be lasting if the project as a whole is feasible and the private company is able to operate at a profit. Therefore, in this third category of generating revenue for government, it is essential that the project is a success for the private company, the end user and the government, and the only way to ensure this is if effective and consultative regulation has been put into place prior to the initiation of the project. Fourthly, it is argued that privatisation will not only bring in revenue and investment, but also foreign expertise and management practices which will increase efficiency and performance. The argument that private sector management will be better than public sector management may be true in some situations but there are dozens of well known, multi-billion dollar privatisations in which the new management failed and the industry had to come back into public sector responsibility (Bayliss, 2002). For example, when Trinidad contracted out management of the island’s water supply to UK company, Severn Trent in 1996, the company promised, through better expertise and international management best practices, to make water supply on the island break even financially within three years. However, at the end of the three year term, Severn Trent had increased the budget deficit of the utility to $378.5 and handed the industry back to the government, at the end of their contract, in a sta te of financial emergency. Regulation may be of assistance here as it can ensure that private sector management is supervised and that any failings or poor practices by the private industry will be quickly caught by the regulator. This can help avoid situations such as referred to above in which the private company has allowed an industry to deteriorate to such an extent that the government has had to step in to remedy the situation. It is suggested here that if regulation is effective and well drafted, it should decrease the risks that private management will fail drastically in its task. However, if the good management practices of the newly privatised industry are coming from the government regulator rather than from the international expertise that have been imported during privatisation, then it is difficult to see how such private expertise are of any benefit to a country. However, there are numerous cases in which privatisations have improved an industry because of internatio nal private sector expertise and it is suggested here that regulation is simply a safeguard. While it is always hoped that privatisation will lead to the importing of new private management who will be able to improve performance because of their expertise, the risk that they will fail is also insured against by close and effective regulation. In this case therefore, regulation removes or reduces one of the risks of privatisation, that the private management will be incompetent. The fifth and final argument that privatisation helps a local economy is that it will cause a release of aid funds. As stated above, aid funds are often conditional upon privatisation. For example, when Guinea handed management of the capital’s water sector to the private sector it received an extra $67 million for investment in water infrastructure (Bayliss, 2002). Menard, Clarke and Zuluaga (2000) have shown that many privatisations have been pursued solely to receive extra aid and in economic impact assessments, the extra aid is often what tips the scale in favour of privatisation. Nickson (2001) has described how the privatisation of Cartagena’s water system by one mayor was only continued by the incoming mayor because of the aid funds that were tied to the deal. Without the tied in aid funds, the incoming mayor would have strongly opposed the privatisation on a number of economic and social grounds. However, it is pointed out here that the inflow of aid funds is no t an inherent benefit of privatisation and only ensures that privatisation appears to be good for the economy. In fact, tying aid to privatisation makes it very difficult to assess the economic benefits of privatisation at all. It is like trying to assess the economic contribution of an industry that receives large government subsidies. The subsidies mask the true performance of the industry and make it’s economic contribution difficult to ascertain. It is suggested here however that if aid is also conditional on privatisations being regulated, then clearly there is an economic benefit to regulation, simply because it will meet with donor approval and cause the release of further funds. Conclusion To conclude therefore, if regulation is to be of any benefit, it must be conducted by a democratic and transparent government who is willing to address the many costs and benefits of regulation. The government must also conduct RIA to ensure that the regulations themselves do not become a burden on the industry or distort the economics of the privatised sector. That said, in relation to the five ways in which privatisation is said to help an economy, regulation can only impact positively on some of them. With regard to the argument that privatisation contributes to economic growth, it has been shown that regulation is not a useful tool to ensure this occurs. With regard to the argument that privatisation contributes to Private Sector Development, it is concluded here that regulation is necessary and effective. Without such regulation there is a risk that privatised firms will behave in a monopolistic and abusive manner. Therefore for privatisation to improve the public sector, it must be properly regulated. With regard to the argument that privatisation has fiscal benefits for the government, this will only be the case if the privatised industry is carefully regulated so as not to create costs for the government in the event of bad management. However, in this regard, the terms of the privatisation agreement are more important than regulati on. With regard to the argument that privatisation brings in foreign expertise, this is true in many cases but again, in order to reduce the risk that the privatised firms perform poorly, regulation is again necessary. And finally, with regard to the argument that privatisation attracts aid, insofar as aid is conditional on privatisation being regulated, then regulation has a direct benefit of pleasing aid agencies. Therefore, while the benefits of privatisation are still being disputed, with regard to the World Bank’s five asserted benefits of privatisation, four of them are enhanced if effective regulation is in place. Therefore only way in which developing countries can benefit from privatisation is with effective regulation. Bibliography Adam, C., Cavendish, W., Mistry, P.S. (1992) Adjusting Privatisation: Case Bayliss, K Cramer, C (2001) Between the lab and the real world, Chap. 3, pp.52-79 Development Policy in the Twenty-First Century, Fine, Pincus and Lapavitsas (eds.) Routledge Bayliss, K. (2001a) Privatisation of electricity distribution: some economic, social and political perspectives, A PSIRU Report for PSI, April 2001, available online at www.psiru.org/reports/2001-04-E-Distrib.doc Bayliss, K. (2001b) Privatisation and the World Bank: A Flawed Development Tool, Global Focus vol. 13, June 2001 Bayliss, K. (2002) Privatisation and Poverty: The Distribution Impact of Utility Privatisation, Centre on Regulation and Competition, Working Paper 16, January 2002 Bayliss, K. Hall, D., (2000) Independent Power Producers: A Review of the Issues, A PSIRU Report for PSI, available online at http://www.psiru.org/reports/2000-11-E-IPPs.doc Brook Cowen, P.J. (1999) Lessons from Guinea Water Lease, Public Policy for the Private Sector Note No. 78 Campbell-White, O., Bhatia, A., (1998) Privatisation in Africa, IBRD, Washington DC Cook, P. Uchida, Y. (2001) Privatisation and Economic Growth in Developing Countries, Centre on Regulation and Competition, Working Paper No. 1, University of Manchester, October European Commission (2002) Communication from the Commission on Impact Assessment, Brussels, 5 June European Parliament, DG for Research (2002) Working Paper on Development and current practices in the EU member states, on the EU level and in selected third countries, Legal Affairs Series, Luxembourg Garg, A. Karba, M. (2004) Regulatory impact assessment: key to good governance, SAFIR Newsletter, pp. 8-13 Grusky, S (2001) Global Challenge Initiative ‘IMF Forces Water Privatization on Poor Countries, available online at www.wtowatch.org/library/index.cfm IMF, (2000) Poverty Reduction Strategy Paper: Uganda, available online at www.imf.org/external/NP/prsp/2000/Uga/o1/ Jacobs, C. P. (2006) Public Enterprise, Privatisation and Regulation, Regulatory Governance: Research Centre for Regulation and Competition, British Council Development Service, 2006 Kikeri, S., Nellis, J., Shirley, M. (1992) Privatisation: The Lessons of Experience, Washington DC, World Bank IBRD Kikeri, S., Nellis, J., Shirley, M. (1994) Privatisation: Lessons from Market Economics, The World Bank Research Observer, Vol. 9, No. 2, July 1994 Menard, C., Clarke, G., Zuluaga,

On Dillard’s An American Childhood

Dillard’s essay An American Childhood relives a moment in the author’s past which she could not forget as the particular event stirs a certain kind of awareness within her; something that she still carries and that continues to affect her even as an adult. It is the idea of carrying through a challenge or task that she is facing at the moment with fervor and conviction, of forgetting everything for the sake of the goal however little or even stupid it might seem to others.This theme is put into words when the author describes how during the chase he realizes â€Å"†¦an immense discovery, pounding into my hot head with every sliding, joyous step, that this ordinary adult evidently knew what I thought only children who trained at football know: that you have to fling yourself at what you’re doing. You have to point yourself, forget yourself, aim, dive (par. 12). †In narrating his experience, Dillard uses several techniques, the most obvious of which is when she compares a general event from his childhood (that of playing ball) to a specific one (an incident which happened one winter when he was seven years old). The general event is supposed to provide the point of reflection to the specific event so that the reader would understand the extent to which the specific event affected her later in life.The lessons, the author says, which she learned from being chased relentlessly by an adult is very much like the lessons she learned from playing ball: giving one’s all without regard for everything else including the question as to whether the pursuit is worth it or not. The exhilaration of living the moment and pouring all of one’s energy like that moment is already the essence of existence. Facing defeat doesn’t even matter. She thinks that grown-ups do not understand this idea therefore she is surprised when the man makes her see that even grown-ups could think and act like they children, too.Although making the connection between the two separate scenes creates a profound effect upon the reading of the essay, Dillard’s engaging writing style is the most effective technique which makes the piece interesting to read. There are only two scenes (on playing ball as a kid and the chase between the kids and the adult after the former throw a snowball on the latter’s windshield) but the narrative is very detailed from the names of the author’s childhood friends to the color and model of the car which they hit with a snowball.The emotions of every moment are well-described. The short sentences approximate the breathless quality of the chase. Even the quality of a child’s imagination is captured by the author as she muses on the possibility of keeping up the run until Panama. The introductory paragraph is a description about how to play ball, the strategies of playing it best, and the need to give one’s all in every task be it in throwing the ball or guarding the b ases.It is simply descriptive and does not give a clue that the preceding paragraphs would be a narrative of the author’s experience. This might not hook the reader who prefers narrative texts rather than philosophical musings. However, the subject of the paragraph, which is about playing a sport, would attract the general reader who, more usually than not, would be a football or baseball enthusiast and thus would understand the idea of giving one’s all in the heat of a game.The final paragraph simply recaps the preceding paragraphs. The chase has ended, they have been caught by the adult and lectured upon, and therefore, the story being told has already ended. The preceding paragraphs already finished the story. The final paragraph where the author is musing about the experience, simply wraps up everything. The effect, however, instead of being a redundant ending provides a sense of closure upon the reader and reiterates the main idea that the author would like the re ader to grasp.

Standing Tall: Japan’s Resilient Luxury Market

McKinsey Consumer and Shopper Insights June 2012 Standing Tall: Japan’s Resilient Luxury Market Brian Salsberg Naomi Yamakawa Photograph: Abbie Chessler 2 In the immediate aftermath of the tsunami, earthquake and nuclear disaster that hit Japan last year, killing 19,000 people and battering the nation’s already shaky confidence, it was hardly surprising that people didn’t feel like shopping. At the time, the conventional wisdom was that such restraint was likely to last.People would still have to shop for essentials, of course, but the market for things like high-fashion apparel and luxury handbags was surely bound to suffer long-term damage. Such thinking made eminent sense – except it didn’t happen. Fifteen months on, today’s luxury market looks a lot like the luxury market that existed the day before the Great East Japan Earthquake, much as we anticipated in last year’s report. 1 Our findings at the time were necessarily tentative, coming as they did less than three months after the disasters.Today, we can assert this with more confidence. When asked if the disasters had changed their attitudes, for example, fewer than 20 percent of the 1,450 Japanese consumers we interviewed were less interested in shopping for luxury goods than they were before the disasters (Exhibit 1). The Cabinet Office’s Consumer Confidence Survey report from May 15, 2012, shows that consumer confidence has risen strongly since March 2011 (to 40. 3) and is back to up to levels last seen in 2010. Moreover, in a small but telling sample, when we asked 20 Japan-based luxury company CEOs about their sales outlook, every single one said 2012 would be better than 2011, and almost three-quarters said that the disasters of 2011 had no effect (63 percent) or, counter-intuitively, had a positive effect (10 percent) on company performance. Seventy percent of CEOs Exhibit 1: A vast majority of consumers still have strong interest in luxury Wh ich best describes your own attitudes towards shopping for luxury goods since the earthquake and tsunami on March 11?Percent selecting â€Å"Somewhat less interested,† or â€Å"Less interested† on a 5-point scale Less interested 20s n = 224 30s n = 497 40s n = 414 50s+ n = 323 4. 6 5. 8 10. 4 Somewhat less interested 7. 8 14. 6 22. 4 8. 2 12. 8 21. 0 12. 5 15. 7 28. 2 SOURCE: McKinsey Japan Luxury Consumer Survey 2012 were optimistic about the near future and the prospects for Japan’s luxury market (Exhibit 2). Japan’s luxury market rings up between $10-20 billion a year in sales (depending on how the market is defined).That figure is unlikely to grow much, given Japan’s shrinking population, slow economic growth, and cost-conscious consumer attitudes. Strictly from a sales ratio perspective, Japan’s luxury market will continue to wane in importance for most luxury manufacturers. A case in point is LVMH. Just five years ago, Japan accounted for 13 percent of the Exhibit 2: Most executives we surveyed maintain an optimistic view of the future of Japan’s luxury market Which best represents your perspective on the mediumterm future of the luxury goods market in Japan?Percent; n = 20 Somewhat pessimistic 30 35 Optimistic 35 Somewhat optimistic SOURCE: 2012 Luxury CEO survey 1. http://csi. mckinsey. com/Home/Knowledge_by_region/Asia/Japan/japanluxury. aspx 2. Cabinet Office of Japan, http://www. esri. cao. go. jp/en/stat/shouhi/shouhi-e. html 3 â€Å"When it comes to watches, we see customers trading up to higher-end brands and higher-end products. † —Japan president, luxury watch manufacturer company’s global revenue. By 2011, the figure had dropped to 8 percent (and that marked an improvement from 2010).Compare that performance with the rest of Asia, where the company’s sale share rose from 17 percent to 27 percent over the same period. 3 And yet, such figures make it easy to lose sight of one simple reality: Japan remains the world’s third-largest luxury market, after the US and China. more high-end brands than cheaper brands. Not surprisingly, their spending on luxury is not as high as for other age groups, but a higher percentage of them are active in the luxury market (5 percent compared to 2. 3 percent of those age 50 and up).This cohort are more likely to be willing to pay full price and are also more likely to see owning luxury goods as something special. As for men, while they make up a minority of luxury shoppers in Japan, they have stayed more loyal to expensive brands. There are an estimated 3 million men under the age of 34 living alone in Japan. According to government data, average incomes for this group increased by 7 percent Exhibit 3: in 2011, and their spending jumped by 13 percent. Compare this to single women, whose spending grew less than 2 percent, and the average Japanese consumer, whose spending dropped. Young men, it seems, saw the M arch 11 disaster as a good reason to live for the moment, and Japan’s luxury goods market appears to be a beneficiary. Finally, when we look at segmentation by income, Japanese who spend more than a million yen (about $12,000) a year on luxury goods are more than three times as likely to say they are switching to high-end brands than to low-end brands (Exhibit 3). Those who spend less than half as much are reporting the opposite. What we learned Here are some of the most striking insights from McKinsey’s 2012 Luxury Consumer Survey: ?Japan is a market of markets That is, some niches and segments are more promising than others. In terms of products, for example, highend Swiss watches, such as Rolex, Omega, Piaget, and TAG Heuer, have reportedly enjoyed significant growth in the past year. 4 Why? Because luxury consumers seek both emotional and functional benefits. A great watch, they believe, is the kind of item that appreciates in value and can be passed down to the ne xt generation. In terms of behavior, there is opportunity on the sales floor.For reasons that range from a more stable economy to better upselling skills, consumers are trading up in some luxury categories, even as they trade down in others – primarily apparel and similar categories with shorter shelf-lives and greater selections of alternatives. Demographically, younger consumers and men are worthy of particular attention. Twentysomethings are the only group buying Big spenders appear to be â€Å"trading up† to higher-end brands Annual luxury spend (JPY) I am purchasing luxury goods . . . Less often More often Above 1 mil (n = 48) 15 8 I have switched to buying . . More high-end Cheaper brands brands 6 21 0. 5-1 mil (n = 100) 16 5 9 14 Up to 0. 5 mil (n = 953) 22 4 15 5 SOURCE: McKinsey Japan Luxury Consumer Survey 2012 Photograph: Abbie Chessler 3. Wall Street Journal, February 21, 2012. 4. Nikkei Weekly, April 2, 2012. 5. Statistics Bureau of Japan, â€Å"Family In come and Expenditure Survey,† first quarter, 2012. 4 ? Experience is increasingly valued The in-store experience is a key element in enjoying luxury, and it may be particularly important in Japan, whose customers are renowned for their high service standards.Asked what were the key elements that enhanced the buying experience, the top two answers Japanese consumers gave were: 1) The staff was kind, and 2) The staff was knowledgeable. Responses were consistent across categories. Luxury executives tell us that for their best customers, the in-store experience and overall customer relationship are nearly as important as product performance. Luxury brands, by definition, are about high quality and exclusivity; providing an excellent customer experience helps to deliver something extra, and those we spoke with are convinced that doing so is well worth the investment.One executive told us that his company, a luxury automaker, saw tremendous value in closely monitoring the daily cust omer relationship management activities of its sales team and using the information to coach staff, not only on closing a sale, but on upselling various options and features. The value of experience also comes through in what consumers tell us they want. There is clear potential for luxury experiences to become â€Å"the next big thing. † Asked their level of interest in various products, those 30 and up named luxury hotels above all others (it ame in second among those in their 20s). Spas and beauty services also scored highly (Exhibit 4). We also asked one of our favorite questions from previous surveys: â€Å"Imagine you won 300,000 yen (about $3,800) in a lottery today. How would you spend it? † Except for those in their 20s, travel scored highest by a decisive margin (Exhibit 5). ? Digital marketing in Japan has far to go Even the executives we spoke to agreed with this. More than twothirds of them admitted that luxury brands have been â€Å"less successful† Exhibit 4: n capturing the changing behavior of consumers, and just 15 percent called online sales a â€Å"meaningful† part of their business in Japan. At the same time, 90 percent said online marketing and promotion was â€Å"somewhat† or â€Å"very† important. A look at the demographics confirms that digital complacency would be a mistake for most luxury players. For one thing, women are more likely than men Are luxury-branded experiences the next big trend? Very interested Interested Think about the luxury brands you like most. When that brand is associated with the following product or service, what would be your level of interest?Percentage of those who are â€Å"very interested† and â€Å"interested† on a scale of 6; n = 1,458 Total Hotel Perfume Home textiles Cosmetics Furniture Spa and other beauty service Home electronic products 13 10 9 10 8 9 8 26 20 21 19 19 17 17 30 30 29 27 26 25 39 20s 14 16 12 16 9 15 24 23 26 29 25 30 33 38 36 45 40 45 30s 14 11 10 12 9 10 27 21 22 20 20 23 24 32 32 32 29 33 41 40s 15 24 39 50s+ 9 5 6 26 19 19 25 25 35 10 15 25 10 18 29 10 14 23 9 15 24 9 12 21 11 18 29 5 16 21 3 20 4 10 14 22 23 9 15 24 7 17 3 19 SOURCE: McKinsey Japan Luxury Consumer Survey 2012Exhibit 5: Overall, luxury shoppers show an increased appetite for travel Imagine you won 300,000 yen in a lottery today. How would you spend it? Aggregated average by age group; n = 1,458 20s 100% = 244 Luxury goods 26 30s 224 27 40s 497 21 50s+ 414 21 467 22 410 26 257 27 323 22 Travel Hobbies Living expenses Savings Other 27 25 29 32 26 36 37 9 5 20 2 2011 38 12 6 21 2 2012 6 8 32 1 2011 7 7 33 1 2012 9 7 31 3 2011 9 7 30 1 2012 10 8 28 2 2011 11 6 22 4 2012 1 Includes leather goods/bags, shoes, watches/jewelry SOURCE: McKinsey Japan Luxury Consumer Survey 2012 5 We see big tickets becoming even bigger. The level of customization on luxury performance cars has hit a recent high this year: this is where all the money is made. â⠂¬ Ã¢â‚¬â€President, luxury car manufacturer to use digital means on their Consumer Decision Journey;6 this matters because women account for about 75 percent of luxury sales in Japan. For another, almost 16 percent of 20-somethings who had a smartphone or tablet had used it for their last luxury purchase, compared to 5 percent for over-50s; and a full 75 percent of younger consumers had used their device to check prices (Exhibit 6).Capturing the younger consumer is vital, given the looming cloud that is Japan’s relentlessly aging society. As established brands strive to ensure they remain relevant to Japan’s technologically-oriented young people, it is plausible, even likely, that a digital component will be central to those efforts. Likewise social media cannot be ignored. A February 2012 Nikkei survey of Japanese smartphone users showed that about 80 percent of women in ther 20s and 30s, 80 percent of men in their 20s, and 60 percent of men in their 30s and 40s us e social media. 7 ?Old-school rules – by default Because the luxury experience is so important, it stands to reason that both sexes and all ages strongly prefer to do their high-end shopping in person. They still like it best of all in department stores (Exhibit 7). It would be a mistake, however, to conclude that the department store format is thriving. On the contrary: while the sheer number of department stores in prime locations all but guarantees a large audience of shoppers, the tired format has yet to find its place in today’s more dynamic, user-friendly retail landscape.What it all means Based on this research and our experience with many retail clients, we have identified several important implications. ? Own the interplay between digital and in-store touchpoints and embrace social media Just a few years ago, at one of McKinsey’s annual luxury leader dinners in Japan, the consensus in the room was that social media and Exhibit 6: luxury were mutually ex clusive. After all, the thinking went, social media is inclusive by definition, and luxury is exclusive.Today, companies like Burberry are demonstrating just how backward and self-defeating that thinking was. Burberry boasts 12 million Facebook followers, 800,000 Twitter followers, and 12 million views on 250 different YouTube videos. In a statement accompanying Burberry’s results over the sixmonth period to September 30, 2011, Angela Ahrendts, the CEO, Smart phones have become an important tool in purchase process for younger consumers General public Do you own a smartphone or tablet PC? Did you use it for your last luxury purchase?Percent, n = 1,458 Shoppers who used a I used it on my last smartphone or tablet PC on I have smartphone/tablet PC luxury purchase last luxury purchase 20s n = 224 30s n = 497 40s n = 414 50s+ n = 323 12 68 36 53 26 46 20 27 Luxury purchases 23 16 22 12 17 8 19 5 SOURCE: Impress R&D ? Smartphone/mobile use trend survey? , 2012 Luxury CEO dinner re spondent survey Exhibit 7: Department stores continue to play crucial role for the category, but three other channels are also strong Thinking about the past 12 months, what channels did you visit to buy luxury goods? multiple answer) Department Fashion goods n = 296 Leather goods n = 294 Watch/jewelry n = 270 Shoes n = 236 76. 2 58. 1 64. 2 77. 0 Brand shop 35. 5 27. 0 34. 2 39. 2 17. 0 33. 0 Outlet 39. 7 39. 7 Duty Free Shop 35. 4 32. 3 28. 6 29. 7 SOURCE: McKinsey Japan Luxury Consumer Survey 2012 6. The term â€Å"Consumer Decision Journey† refers to the progression from initial consideration, active evaluation, and moment of purchase to post-purchase experience and loyalty, first presented in the McKinsey Quarterly, â€Å"The Consumer Decision Journey,† June 2009. 7.Nikkei Shohi Watcher, â€Å"The ‘Smart’ Set is Mainly Female† (â€Å"Suma-ju† na hitobito shuuyaku wa josei), February 2012, p. 22. 6 attributed the company’s strong r esults to â€Å"continued investment in innovative design, digital marketing, and retail strategies†. Tiffany & Co. has also embraced digital media, with a highly regarded e-commerce site, Facebook presence, and even an iPad app showcasing its famous line of engagement rings. A key to succeeding in social media is to deliver the brand story and heritage consistently across media while tailoring messages to the specific consumer segments that are using each media format.It’s also important to understand the role each medium plays in the Consumer Decision Journey. For example, in cosmetics it can be easier to introduce cosmetic routines (e. g. , how and in what sequence to apply the product) in store, but consumers often seek out additional information and reviews online. For apparel and accessories, customers may go to the store to buy, since they want to be able to touch items and try them on. The initial introduction and attraction often happens outside the store â₠¬â€œ from storefronts, wordof-mouth, or magazines.Winners will be those who can excel at multichannel marketing and sales. ? Make the most of travel retail Japanese consumers love to travel – up to 20 percent of all luxury consumers have shopped abroad in the past 24 months (Exhibit 8). This accounts for the crucial role of dutyfree shops, where a third of luxury consumers have shopped in the last year. Women are particularly prone to stopping by duty-free, with 36 percent of them buying there. As a result of international travel and the Internet, consumers today know what luxury goods cost both inside and outside Japan, and they ay be timing their shopping to take advantage. This is especially poignant for luxury manufacturers – they need to recognize that the consumer relationship with any given brand crosses international borders. That fact has implications for after-sales service, and underscores the importance of maintaining consistency with the face of the brand across both channels and geographies. For a number of years, we have been observing the emergence of â€Å"global tribes†, that is, groupings of consumers who have more in common with their counterparts in other geographies than with their fellow countrymen.Easy access to social media and cheap travel will only deepen this phenomenon. In response, luxury manufacturers will need to do much more than simply accept that today’s consumers are global; they will need to make their brands even more so. ? Manage parallel imports Parallel imports – identical products imported from a foreign country, then sold for much less – cannot be prevented, but can be managed. Some brands are trying to restrict parallel imports by tracking serial numbers to determine where the imports are coming from, and decreasing Exhibit 8: argins for retailers who are caught. Others are putting limits on aftersales services available to parallel imports. Few companies have chosen to move to one global, exchangeadjusted recommended retail price, though that may become a more standard approach. ? Embrace customization and made-to-order luxury Building off a trend popularized by other consumer-goods companies, such as Adidas and Nike in sports footwear, luxury auto manufacturers, and luxury handbag and accessory players are embracing customization.This is consistent with a broader consumer trend in developed markets (the â€Å"My† generation) where niche is replacing mass in many areas and consumers have grown used to customizing everything from their playlists to their iPhone covers. Luxury has always been synonymous with exclusivity, but with so many stores and so many new channels to buy from, we have begun to see a â€Å"commoditization† of exclusivity. In a sense, then, customization is the ultimate in exclusivity. For example, Louis Vuitton recently launched a service in Japan that allows customers to select the leather and then design uniqueJapanes e consumers continue to purchase luxury items abroad 2012 2011 2010 Which of the following places did you make a luxury purchase in last 2 years? Percent of respondents who bought luxury goods in category abroad within last 24 months; multiple answer; 2012 Top 5 Hawaii Korea Europe North America (excluding Hawaii) Hong Kong/Macau SOURCE: McKinsey Japan Luxury Consumer Survey 2011/2012 14 10 12 14 17 17 18 22 21 22 22 25 27 32 19 7 â€Å"We continue to be concerned about the relevance and impact of department stores. We can’t stop experimenting with new concepts. —Japan president, global luxury accessory and apparel player products. Some luxury carmakers tell us their strong revenue growth in Japan has come not because they are selling more cars, but because buyers are loading up on various bells and whistles to create their own personalized, ideal vehicle. Of course, customization comes at a cost to luxury manufacturers, adding complexities to the supply chain and bey ond. It must be reserved primarily for truly high-end products. the number of car-sharers has increased 10-fold, to 170,000, and revenues ould surge to $550 million by 2016, according to estimates from Frost & Sullivan. 9 This shift to value is real and enduring. So, we believe, is the emphasis on discretion. In the wake of the earthquake, the percentage of those who said that showing off luxury goods was in bad taste rose sharply, from 24 percent to 49 percent; this year, it was 51 percent. The quest for value and a desire to avoid the appearance of conspicious consumption are not necessarily antithetical to an appreciation of luxury. These attitudes can co-exist.In fact, that precisely describes the state of the Japanese market: Consumers are ready, willing, and sometimes eager to buy. But they are doing so with rigorous deliberation. Exhibit 9: Brian Salsberg is a principal in McKinsey’s Tokyo office and a leader of the Consumer & Shopper Insights center in Asia. Naomi Yam akawa is a marketing expert in Tokyo. The authors wish to thank Georges Desvaux, Todd Guild, Ryu Iwase, Euljeong Moon, Yuka Morita, and Kohei Sakata for their help. Conclusions Only a little more than a year after the worst crisis to hit Japan since World War II, the Japanese luxury market is stable.Ultimately, it comes down to this: despite deflation and disaster, Japanese consumers continue to want luxury goods and to buy them at a good clip. But – and this has been true since the financial crisis hit in 2008 – they are more cautious about price and more demanding. They do not just want an expensive product to look great and to work beautifully, but to satisfy other needs, whether emotional or even social. Half of luxury car buyers, for instance, say that â€Å"eco-friendliness† is important to them (Exhibit 9). The quest for value, in all its forms, is becoming characteristic up and down the retail chain.As we argued in the McKinsey Quarterly in 2010, many co nsumers have diverted a chunk of their spending away from high-priced prestige. 8 Wal-Mart, Amazon, Costco, Ikea, Daiso, Uniqlo, private-label foods, and the low- to middle-end specialty apparel players are all doing conspicuously well. Then there is carsharing – short-term rentals by the hour. This service barely existed in 2009 (revenues were about $17 million). Today it has become positively mainstream. With many Japanese deterred by the high price of owning and maintaining a car,Photograph: Abbie Chessler What do luxury consumers think of luxury automobiles? 2012 2011 Regarding luxury cars, do you agree/disagree to the below statements? Percent who answered â€Å"strongly agree† and â€Å"agree† within 6 scale; n = 1,458 Luxury cars have characteristics that justify the premium price 20s 30s 40s 50s+ 31 37 33 30 35 33 41 39 9 12 11 11 10 It's worth the money to buy a luxury car for the superb driving experience 13 13 12 Being â€Å"eco-friendly† is as important for luxury cars as design or driving experience 51 47 48 50 56 52 52 44SOURCE: McKinsey Japan Luxury Consumer Survey 2012 About the Japan Luxury Consumer Survey McKinsey conducted this national online survey of 1,450 consumers in April and May 2012, for the fourth year in a row. Focusing on four categories (fashion, leather goods, shoes, and watches/jewelry), we interviewed 250 to 300 luxury consumers (defined as those who have purchased any one of 174 brands in the last two years). We also spoke to 350 â€Å"lapsed† luxury buyers. Two-thirds of the respondents were female. 8. McKinsey Quarterly, â€Å"The new Japanese consumer,† March 2010. ttps://www. mckinseyquarterly. com/The_new_Japanese_consumer_2548 9. Frost & Sullivan, â€Å"Strategic Analysis of the Car-Sharing Market in Japan,† July 2011 8 What McKinsey’s Consumer and Shopper Insights portal has to offer Where do more than 15,000 executives get their daily dose of consumer insights? c si. mckinsey. com. Sign up now. It’s free. ? ? ? ? ? How are China’s hypermarkets different from Western ones? (One clue: those live chickens in the food aisle. ) How is the digital consumer changing? (In six major ways. ) How are Mexican consumers feeling? (Not great. Are global luxury shoppers cutting back? (Not so much. ) Is Poland promising territory for online retailers? (Yes. ) The 21st century has already seen the unimaginable and the improbable. But here is one certainty: The world is about to see the biggest increase in consumption in history. Learn all about it—and be part of the conversation—at csi. mckinsey. com. These are just a few of the questions asked and answered on csi. mckinsey. com. As a global consultancy, McKinsey has the resources, and the desire, to explore the ever-changing, ever-elusive global consumer.To take just one example, we have spoken with more than 60,000 Chinese shoppers to discern what they are thinking, buying and thinking about buying. Here’s another example: Since August 2008, McKinsey has interviewed a representative sample of Americans every six months to track their attitudes and spending. How do the world’s digital consumers spend their online time? We can tell you that, too. While csi. mckinsey. com is a rich forum for McKinsey’s work, we also spotlight the best of others, not only on the site, but on our Facebook and Twitter accounts (@mckinsey_csi).By combining the best of McKinsey and the best of the rest, we add something new to the site almost every day. We believe this makes csi. mckinsey. com the go-to place for those who need the freshest, smartest thinking on why consumers do what they do. What’s next? We want to get our users more involved; we’d also like to diversify how we present our materials. So we hope you will join us as we continue to improve csi. mckinsey. com. Just click the sign-up button on the top right of the site, or emai l us at [email  protected] com. We’ll send you notices of what’s new about twice a month. ttp://csi. mckinsey. com 9 McKinsey Consumer and Shopper Insights You can dowload McKinsey’s previous luxury reports at http://csi. mckinsey. com July 2010 McKinsey Asia Consumer and Retail McKinsey Asia Consumer and Retail Luxury goods in Japan: Momentary sigh or long sayonara? How luxury companies can succeed in a changing market Japan’s luxury consumer: Detecting a pulse? Special Report: McKinsey & Company Japan Luxury Goods Survey 2010 Brian Salsberg Naomi Yamakawa Luxury goods in Japan: Momentary sign or long sayonara? (June 2009) Japan’s luxury consumer: Detecting a pulse? (June 2010) June 2011Consumer and Shopper Insights August 2011 August 2010 CSI Insights Flash June 2010 McKinsey Consumer and Shopper Insights McKinsey Consumer & Shopper Insights Korea’s luxury market: Demanding consumers, but room to grow McKinsey Asia Consumer and Shopper I nsights No seismic shift for luxury in postquake Japan Special Report: Japan Luxury Goods Survey 2011 Understanding China’s Growing Love for Luxury By Aimee Kim and Martine Shin Key themes from the 2011 McKinsey Korea Luxury Consumer Survey Every year since 2006, sales of luxury goods in South Korea have risen at least 12%1, to an estimated $4. billion in 2010. In the first four months of 2011, sales at department stores were up more than 30% compared to 2010. 2 This continues an established trend, as last year’s report on the market showed (see report at csi. mckinsey. com: â€Å"Living it up in luxury. †) Still, insiders are asking whether it can last. For one thing, according to McKinsey’s survey, the percentage of household income that luxury consumers spend on luxury is already higher in South Korea (5%), than in Japan (4%)3—and the Japanese luxury market has been stagnant in recent years.Moreover, the performances of famous brands in Korea ha ve been mixed. For example, LVMH and Ferragamo continued to do well, but others, like Gucci Group and Dior, saw sales drop in real terms in 2010. 4 1 2 3 4 5 6 Thus, while the headline news is that the luxury market is still growing strongly, uncertainty is also mounting. In this year’s report, McKinsey addresses these concerns, which come in the form of three key questions: Can South Korea keep it up? What’s changing?And what do these trends mean for the players in the luxury industry? To answer these questions, for the second year in a row, McKinsey surveyed 1,000 Koreans who had purchased at least 1 million Korean won ($930) in luxury goods in the previous year across four categories —fashion apparel, leather goods, shoes, and watches/jewelry. Among the respondents were 200 â€Å"heavy purchasers†Ã¢â‚¬â€those who had spent at least 10 million Korean won ($9,300). We also interviewed 24 senior executives of luxury-goods companies. Here’s what we found. 5Let’s start with the proposition that not all consumers are created equal; to a startling degree, it is mainly the heavy purchasers who are keeping the Korean luxury market rolling with such force. For example, Lotte department store estimated that the number of â€Å"Most Valuable Customers†Ã¢â‚¬â€those who spend 15 million won ($14,000) or more a year—rose 14. 4% in 2010, compared to 9. 2% for other kinds of luxury consumers. The number of VIP customers at Shinsegae department store —those who spend more than 8 million won ($7,400) —grew 35%, compared to 12% for other consumers. 6 Shopping at the high end also appears to be habit-forming.McKinsey found that heavy purchasers are much more likely to say that they enjoy their goodies â€Å"as much as I always have† vs. non-heavy customers (33% to 12%). This difference in attitude was reflected in their actual spending: The big-spenders indicated that they had spent more on all four luxury categories in the previous 12 months. Non-heavy buyers were pickier: While they spent more on watches and leather, they spent less on South Korea: Living it up in luxury Special Report: 2010 Luxury Goods Survey McKinsey & Company South Korea Brian Salsberg Naomi Yamakawa 1. Can South Korea keep it up?Yes. A number of trends, small and large, are creating a model of sustainable growth for the next three to five years. McKinsey Insights China Euromonitor Ministry of Knowledge Economy McKinsey analysis Financial Supervisory Service The report surveyed at least 200 luxury consumers for each product category; luxury consumers were screened based on purchase history of select luxury brands (ranging from affordable â€Å"masstige† brands to â€Å"super premium† brands) and included 85 luxury fashion apparel brands, 57 luxury leather goods and shoes brands, and 47 luxury watch/jewelry brands.Asia Economy, â€Å"VIP customers have increased at department stores,† August 28, 2010 No seismic shift for luxury in post-quake Japan (June 2011) Understanding China’s growing love for luxury (March 2011) Korea’s luxury market: Demanding consumers,but room to grow (August 2011) South Korea: Living it up in luxury (August 2010)

International Business-Coca Cola - 2506 Words

Coca Cola: International Marketing Mix INTRODUCTION: This scope of this essay is to discuss the international marketing mix of Coca Cola, which is one of the biggest brands in the world. The debate between the global standardization and local adaptation of the marketing mix has been going on for more than four decades without a resolution (Agrawal, 1995) and globalization trends starting in the early 1980’s has further fueled the debate (Jeong, 2000). This has led the global companies to make the critical trade-off decision between economies of scale resulting from standardization and the cultural prerequisite of local adaptation. This essay looks at how one of the most successful brands, Coca Cola manages their marketing mix in a global†¦show more content†¦Theorists (Nikolaos Vlasis, 1997) believe that the difference between standardization and adoption is in degree rather than in kind. Theorists further argue that this difference should be seen as continuum (Melewar Claes, 2004). According to them on the left side are companies with highly decentralized, multi-local operations and products. On the right side are the totally integrated and globally advertised brands and companies. In the middle are companies that increasingly standardize brands or products but still adapt to local differences. MARKETING MIX OF COCA COLA: Coca-Cola is a truly international brand as it operates in more than 200 countries around the globe. The company knows that strong global brand is the key to winning international consumer, but creating effective and strong brands across the barriers of nationality, geography, language and culture is a complicated task. Therefore marketers (Pendergras, 1994) consider international consumers as segmented and thus the needs for each segment have to be satisfied in order to build a strong global brand. 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