The Diderot Effect

 

In an essay titled “Regrets on Parting with my Old Dressing Gown”, the eighteenth-century French philosopher Denis Diderot tells of being presented with a beautiful scarlet dressing gown. The author’s joy quickly turns to dissatisfaction as, compared to his new garment, his old possessions seem tawdry and inelegant. This sets of a shopping spree, which sees him replacing his old armchair, buy an expensive new writing table, cover his walls in expensive prints, and so on. "I was absolute master of my old dressing gown", Diderot writes, "but I have become a slave to my new one.”  The Diderot Effect, a term coined by the anthropologist Grant McCracken in 1988, thus refers to a behavioral pattern whereby buying a new possession leads to the acquisition of more and better things.

The Luxury Goods industry, encompassing Fashion & Accessories, Watches & Jewelry, Champagne & Spirits, Fragrances, high-end Cars, and Travel & Hospitality, appears to be uniquely positioned to capitalize on this phenomenon. Firstly, because these, mostly European, brands have successfully instilled the belief among consumers that their products are of better quality and more durable than those of mid-market manufacturers. Secondly, because they have built a social and emotional attachment among their customer base, whereby owning their products becomes a badge of economic and social success.

Both of these attributes are visible in China, the world’s largest market for Luxury Goods. In the past decades, Chinese consumers, distrustful towards local production, have embraced goods produced outside the country, especially in Western Europe. Meanwhile, acquiring luxury brands has become the method of choice to signal upward mobility and status in a rapidly changing society. A slowing Chinese economy, declines in property values and a dwindling stock market, ought to lead to a slowdown in luxury spending. However, the experience of Japan in the 1990’s suggests this logic may not hold. Japanese luxury consumption boomed AFTER the twin collapse of the Japanese property bubble and the Nikkei, amidst decades of deflation. Between 1989 and 2004, it was the largest luxury market in the world, accounting for as much as half(!) of Louis Vuitton’s sales as late as 2003. According to LVMH, today China’s addressable market is just 25 million people, a group that is still growing even amidst a slowing economy. Of these, they reach only 5 million people at present.

Both in and outside of China, two societal trends amplify the growth of the luxury goods industry. The first is the Pareto Law, which has seen more money accruing into fewer hands as the global economy grows, while also lifting up the group immediately underneath. The second is the influence of Technology, whereby on social media platforms like TikTok and Instagram, especially for young people, image is everything. Meanwhile, looking at the industry bottom-up, we see how the main players can benefit even  If there is a slowdown. First, because during slowdowns, the strongest brands always gain market share, as consumers go back to what they know best. Second, because their strong cashflow and balance sheets allow these companies to continue to spend on creating meaningful experiences, where smaller companies may have to cut costs, and lose traction. And third, because multiple contraction may create M&A opportunities.

Coming back to the Diderot Effect, especially luxury conglomerates like LVMH appear to be able to exploit this behavioral pattern. Its presence across different industry verticals allows it to create customer experiences that enhance sales synergies between various brands. In a recent meeting in Paris, the company mentioned one such event, for its top tier clients: a Moët vintage champagne tasting on the Orient Express, hosted by Dior brand ambassador Nathalie Portman. 

Though it is not immune to the economic cycle, even after the spectacular growth of the last decade, the luxury goods industry is likely to be less cyclical than people think. Unless the structure of the global economy and society itself change, it taps into a powerful strain of psychology which sees luxury goods consumers stuck on a “hedonic threadmill”, with no limit on the number of experiences that can be created. However, while this may make them feel good short-term, they should heed Denis Diderot’s words: “Beware of the contamination of sudden wealth. The poor man may take his ease without thinking of appearances, but the rich man is always under a strain".