Global uncertainty on too many fronts is keeping the luxury market in standby mode at the moment. Even the sector’s big spenders are worrying about terrorism, the oil market, the US presidential election, Brexit, and this currency going up or that one going down.
So it all adds up to tough time for the sector. Well, ‘tough’ may be putting it too strongly. According to a Bain/Altagamma report, sales are going to hold steady for 2016 at a mere €249bn/$273bn for those luxury goods we can simply walk into stores and buy (if we’ve got the money) like bags, boots and $500 jeans.
Add in other luxury goods like art, yachts, private jets, interior designers, cars that do 0-60 in four seconds and restaurants where you have to book six months in advance and you have a market worth a cool €1trn.
But no growth is no growth, whether you’re a 99p store or LVMH. So, in the face of a stagnating market, what is the luxury world doing?
Bain partner Claudia D’Arpizio said: “Brands are refocusing on the local customer base and working to develop products that are more affordable and more inclusive to meet their needs.”
Now we’ve been here before, of course. Once upon a time luxury brands churned out quite a lot of cr… I mean lower-priced goods that were designed to pull in the less affluent among us but after the last recession (or was it the one before that?) many of the firms involved decided that we wannabe luxury customers weren’t worth the effort and focused on the truly affluent with ultra luxury products at eye-watering prices.
But it’s not that easy any more and companies are having to think differently.
“The luxury market has reached a maturation point. Brands can no longer rely on low-hanging fruit. Instead, they really need to implement differentiating strategies to succeed going forward,” said D’Arpizio added. “We are already starting to see clear polarisation when it comes to performance with winners and losers emerging across product categories and segments.”
Thank goodness for digital
One thing the sector is doing is focusing (finally) on digital. Bain said e-commerce leads among luxury shopping channels as a growth strategy.
The report puts it like this: “Around the world, retail, which continued to gain share as recently as last year, drastically slowed with the first footprints of rationalisation in the market. E-commerce is the leading channel in terms of growth, reaching 7% penetration in 2016, which makes it the third largest luxury ‘market’ globally after the US and Japan and a key driver in luxury’s digital revolution.”
Digital continues be a democratising force on the global luxury market. Previously high barriers to entry have all but been destroyed, enabling emerging brands to compete directly with more established players.
“Naturally, an influx of new market entrants is concerning to incumbents, who are worried about losing market share,” said Bain’s Federica Levato. “But, we anticipate big opportunities for the brands that are willing to think and act more like their up-and-coming counterparts.”
Discounting, luxury’s secret weapon?
Discounting is also key, which may be a bit contradictory for a sector that claims to hate markdowns. But when those markdowns are under brands’ control, they don’t seem too unhappy.
Today, discounted luxury goods represent more than 35% of the personal luxury goods market, versus full-price and off-price stores comprise more than 30% of the market. These numbers are expected to increase as consumers continue to push for value for money. Luxury brands that can strategically, rather than tactically, manage the outlet channel while reducing discounts in stores will reap the rewards, Bain said.
Accessorisation and Polarisation are also prevailing market trends. Soft accessories and jewellery continue to be consistent outperformers, surpassed only by beauty, despite variable trends from brand to brand.
And what exactly does polarisation mean? The ongoing polarisation trend is the outperformance of the Absolute luxury and Accessible luxury segments. Unlike in previous years, where brand performance was largely even among the major players, the current era more clearly reveals brands with a strong lead and those that are falling behind in these sectors.
And finally, what about the Chinese consumer? Mainland China is increasingly outperforming the market as Chinese consumption at home increases. However, the rise in local spending doesn’t offset decreased purchases among Chinese tourists, especially in Europe.
For the first time in history, Chinese consumers have decreased their contribution to the total luxury market from 31% in 2015 to 30% in 2016. Local factors such as price differentials, lower levels of service, and overall incomparable shopping experiences are driving down volumes and average ticket sales at home compared to Chinese consumers’ purchases overseas.
But over the longer-term, Chinese luxury spending and the country’s contribution to total personal luxury goods consumption are expected to trend upward, due in large part to a growing middle class with more disposable income to spend on luxury purchases. Phew!
Looking ahead, D’Arpizio anticipates the personal luxury market will reach €280bn-€285bn by 2020 (compound annual growth rate of 3%-4%, beginning in 2017), but cautions that it won’t be an easy road.