Close-Up: Live Issue - Can agencies exploit love of life's finer things?

With Leo Burnett the latest agency to launch a luxury division, can adland adapt to how prestige brands work?

Adland's dubious reputation for conspicuous consumption is strangely at odds with its failure to establish comfortable relationships with the owners of luxury brands.

Agencies may have spawned more than their fair share of self-made millionaires.

Yet few have won the trust, affection and, most importantly, the business of fine fragrance manufacturers, top fashion houses or the great wine labels.

Traditionally, the cultures have been too far apart. Most luxury- goods clients reckon they understand their brands and how to promote them better than any mainstream agency. Their advertising relies heavily on emotion and they have little time for the research-led approach of those they regard as "baked-bean peddlers".

How curious, then, that barely a week has passed this year without one of the agency big battalions proclaiming its intention to launch a luxury division.

First it was M&C Saatchi, then Miles Calcraft Briginshaw Duffy. Now Leo Burnett is joining the fray with the establishment of units in London, New York, Tokyo and Buenos Aires to focus on fashion, beauty and youth products.

On the face of it, these initiatives seem wildly optimistic. For years, luxury brand owners have generally preferred to create their ads in-house, working with a trusted photographer or artistic director. When they do hire an agency, it is usually a small specialist operation. They do not use TV, have no need of a big agency's resources and, if they happen to be a fashion house, will rely mostly on PR rather than above-the-line activity.

Moreover, the modest budgets underpinning most luxury brands make it difficult for agencies to provide the quality of execution demanded.

As one senior manager points out: "If Mario Testino is doing the shoot, the resulting advertising has to work very hard, because he's bloody expensive."

Piers Bracher is the client director of Diamond Advertising and has specialised in the luxury market for 14 years, working with clients such as Lacoste and the jeweller Theo Fennell. He says: "Most advertising is about trying to provide rational reasons to buy. But luxury brands are all about emotion. You can't sell them like supermarket products."

The style commentator Peter York thinks agencies need to offer a different kind of organisation. "These clients aren't working full- throttle towards a strong idea so are dismayed by the way agencies work," he says. "They have a particular idea of their brand values that agencies don't understand."

So why are agencies that have failed to do luxury in the past trying again? Andrew Bennett, Euro RSCG's chief strategy officer, says: "It's part of attempts by agencies to form partnerships with clients that transcend advertising."

Another driver is the urge to transform a sector in which advertising can be bland and formulaic. Joakim Jonason, the international creative director of Germany's Scholz & Friends and well known for his work on the Diesel and H&M brands, says: "So much of it is just a logo and a famous model. People who buy luxury goods are searching for something different."

There is also the fact that luxury isn't what it was. The term can be applied as easily to an expensive tin of Tesco biscuits as it can to one of Roman Abramovich's yachts; some products from the Olay skincare range cost as much as a pot of face- cream from Harrods. In short, a luxury product is anything that makes its purchaser feel good.

"Luxury is becoming mass-market," Shirin Valipour, who heads Label, the JWT lifestyle and fashion division, says. "Having a bit of luxury is seen as part of making the most of your life. Why buy four ordinary handbags when you can get a Dior one for the same price?"

What's more, the global luxury goods market has not only rebounded from the effects of 9/11 and the Sars epidemic in Asia, but is growing fast. The rise of Eastern Europe's nouveaux riches is fuelling demands for Fendi bags, Valentino dresses and Gucci loafers. Zegna, the Italian company making expensive men's clothing, expects 10 per cent of its total sales will be in Russia over the next ten years. In China, Giorgio Armani and Prada are showcasing their wares to a potential market of 160 million consumers.

To an extent, renewed moves by agencies into the luxury brands area is being fuelled by some of their existing clients. Those with beauty or fine fragrance products in their portfolios increasingly recognise the need to have them promoted differently within specialist units. Label's main client is Coty, while the new Leo Burnett division, which launches next month, will work with Procter & Gamble's Max Factor, Clairol and Wella ranges.

Two further developments are also drawing agencies and luxury- brand owners together. Competition within the luxury market is intensifying and widening. Jaguar, now promoting itself less as a carmaker, more as a luxury brand since appointing Euro RSCG to its £53 million global account last year, is a prime example.

"Just look at what has been happening in the fine fragrance sector," Bruce Haines, the Leo Burnett group chief executive, points out. "People used to be fiercely loyal to one brand. Now they chop and change. The habits of the mass market are extending into the prestige area."

Also, many luxury goods manufacturers are no longer niche players with minuscule ad budgets. The French conglomerates PPR and Louis Vuitton Moet-Hennessy between them own brands such as Gucci, Yves St Laurent, Bottega Veneta, Boucheron and Sergio Rossi. Switzerland's Richemont Group makes Cartier watches and Montblanc pens. Capturing one of these brands can give an agency access to a lot of potential extra business.

Nevertheless, the experiences in Paris, the home of style and taste, suggest agencies can deceive themselves into believing that luxury- goods assignments can be easy.

Claus Lindorff is the managing director of Euro RSCG BETC Luxe, which handles global campaigns for brands including Armani, Remy Martin and Piper-Heidsieck Champagne.

"About seven or eight years ago, it seemed as though every agency in the city was launching a luxury division," he recalls. "It was a logical next step for creative directors who wanted to do sexy work.

"Today, very few still exist. Although we have a lot of luxury- goods producers in France, getting their business is difficult because names such as Publicis or Saatchi & Saatchi mean little to them. They aren't interested in how many awards you've won at Cannes."

For their part, agencies launching luxury divisions claim the penny has dropped. They recognise the need to show humility to clients whose communication needs are far from conventional.

M&C Saatchi's venture will reflect this by having Suki Larson, a luxury goods specialist previously at McKinsey, as its chief executive. She will report to Jane Boardman, who heads the group's Talk PR operation. Nor will the division carry the M&C Saatchi name.

"We think there's an attitude in adland which says luxury goods manufacturers don't understand advertising and marketing," Moray MacLennan, the M&C Saatchi UK group chairman, says. "Meanwhile, these companies are many times larger and more successful than their agencies."

MCBD's fledgling Brand Couture operation also mirrored the prevailing thinking by drafting in Kirsten McNally and Jessica Binns, from the communications agency Exposure, to run it.

"The clients we handle are likely to be more interested in help with events, brand experiences, strategic thinking and getting editorial endorsement," McNally says. "These things are much more important to them than advertising."

THE LAP OF LUXURY

- PPR, the French conglomerate, saw the operating profit of its luxury division grow by 76 per cent in the first half of last year. This was driven by the popularity of its Gucci brand and the growth in sales of Bottega Veneta bags.

- Giorgio Armani plans to have 22 outlets in China before the end of the year. Prada, with 22 outlets, is building a flagship store in Shanghai.

- Harvey Nichols, the luxury store chain given iconic status by Patsy and Edina in Absolutely Fabulous, is opening a string of boutiques across the UK.

- Masstige is the new buzzword, reflecting the desire of mass-market consumers for the aspirational elements of prestige brands.

- More of the world's richest people now live in Moscow than in New York. The Russian luxury goods market is growing by 20 per cent per year.

- The luxury sector in the US is growing by 15 per cent a year and could reach $1 trillion by the end of the decade.