Last week, Bain & Company released the 14th edition of its Luxury Goods Worldwide Market Monitor. Here, we dissect the report in detail to present the six key insights luxury brands need to know.
A keen eye for changes ahead and the ability to adapt business models and pricing structures to match will be crucial for luxury brands to stay afloat in the year ahead, according to the latest report from Bain & Company.
The 14th edition of its Luxury Goods Worldwide Market Monitor, in collaboration with Fondazione Altagamma, has outlined a gradual slow in the growth of luxury markets worldwide, as weakness in China, Russia and other emerging markets takes its toll.
“ The global luxury market surpassed €1 trillion in retail sales value in 2015 ”
While the global luxury market surpassed €1 trillion in retail sales value in 2015, sales of personal luxury goods – which accounted for 80% of the total market – are expected to grow only 1% at constant exchange, to €253 billion.
Compared to 3% growth for the same period last year and a 7% rise in 2013, the prediction marks the deepening of a luxury lull which has been creeping up on the market for some time.
Unsurprisingly, given the year’s events, sales across Asia registered the worst historical performance at constant exchange rates, weighed down by downturns in mainland China and sharp sales decreases in Hong Kong and Macau.
“ The luxury cars category rose 8% year-on-year to more than €400 billion ”
“For the last several years, we’ve referenced ‘luxury’s new normal’ with a deceleration of the personal luxury goods market. Now, we are starting to feel the impact of that slow-down,” explains Claudia D’Arpizio, a Bain partner in Milan and lead author of the study.
Nevertheless, a few winners have emerged from the report, with luxury cars and luxury hospitality in particular leading the way.
Bolstered by a raft of new entry-level cars and the luxury SUV craze, the luxury cars category rose 8% year-on-year to more than €400 billion, as an increasing number of high-end marques decide to dip into these categories to meet consumer demands.
Overall, all segments in the luxury car sector benefitted from the sound trend of the US market, with a positive trend in Western Europe also offsetting the deterioration of the Russian market.
Luxury hotels also turned in a solid performance, up 7%, despite a slight slowdown in organic performance driven by uneven geographic trends.
US luxury chains, however, are on the slowdown, with China also struggling to deliver organic growth, but the sector was given a boost by a surge in European tourism as Chinese consumers head overseas to spend.
“ Luxury cruises rose 4%, aided by favourable age and income evolution ”
Europe also lifted the high quality design market, which saw its second year in a row of solid growth with a 4% increase, boosted by favourable currency movements and the historical role of Italian & German players.
Similarly, luxury cruises rose 4%, aided by favourable age and income evolution, and whilst a reduction in capacity limited 2015 organic growth, the bevy of new additional ships in the pipeline for 2016 signal strong growth to come in the sector, with “slow cruising” emerging as trend and smaller ships to unusual destinations expected to become more popular.
Fine art, which accounts for 70% of the total art market (including decorative arts and antiques), was up by 6%, fuelled by the fast-growing post-war and contemporary art segments, with the US earmarked as the main destination for the ultra-high-end segment.
The yachts and private jets markets, however, remained lacklustre, with both categories -1%, due to a slowdown in the BRICs markets and a reduction in airlines deliveries, respectively.
“ Hectic currencies pushed the personal luxury goods market to €253 billion in 2015 ”
As mentioned above, arguably the most poignant insight from the latest Bain & Co overview of the global luxury markets is that while hectic currencies pushed the personal luxury goods market – including leather accessories, fashion, hard luxury and fragrance & cosmetics – to €253 billion in 2015 (13% growth at current exchange rates), real growth rates slowed significantly to 1-2%. Quite simply, the market is bracing for its weakest year since 2009.
The double-digit positive impact of exchange rates fluctuations was mainly driven by Euro depreciation but the super-dollar, which dampened US tourism, combined with the Chinese stock crisis causing a global stock exchange turmoil and impacting consumer confidence, hampered growth, particularly in the US markets.
The flow-on effect of decreased competition from US due to the strong USD, has nurtured Canada’s improving performance though.
Nevertheless, the US continues to hold sway as the market contributing the largest portion of luxury goods sales worldwide (34%), with Europe a close second (33%), as the Chinese continue to head overseas to make their personal luxury goods purchases, with the weak Euro in particular driving strong growth of inbound tourism.
Across Europe specifically, Germany confirmed its role as the most solid market for both retail and wholesale, locals and tourists, with France and Italy also performing well in retail, but soft on the wholesale in less touristic areas.
Spain rebounded strongly thanks to a tourism high, with the UK solid yet less buoyant. Switzerland struggled, however, and – barring strong watch sales – turned in a weak performance overall due to the strong CHF.
“ Japan has been the consistent champion in real terms with 9% growth in both 2014 and 2015 ”
Eastern Europe remains weak despite the improving situation in Russia, with Moscow pulling the weight of the Russian region, thanks to unexpected Chinese tourism flows.
The Latin American markets are also outperforming, with Mexico maintaining momentum with both locals and tourists, and Brazil enjoying a positive trend due to the repatriation of Brazilian spending for the weakening BRL.
Japan, however, has been the consistent champion in real terms for three years in a row, with the report identifying the country as first foreign destination for Chinese throughout the year and during Golden Week.
“ By sub-category, accessories reigned supreme at 30%, followed by apparel at 24% ”
The 2020 Olympic games is expected to further improve retail infrastructure, thus spurring Japan to further growth in the coming years.
The region saw 9% growth in both 2014 and 2015, thanks to booming Chinese flows and sound local demand, with these tourists representing up to 40% of total sales for most exposed brands.
Luxury Apparel Solid, But Accessories Rule
By sub-category, accessories reigned supreme (30%), followed by apparel (24%), hard luxury (22%) and then beauty purchases at 20%.
Tellingly, accessible luxury made the largest impact in terms of personal luxury goods sales and claimed 38% of the pie, while aspirational luxury segment staked 36%, followed by absolute luxury at 26%.
Full price personal luxury goods, however, were still the most purchased, at 65%, compared to those on markdown – 35%.
Specifically, apparel has seen an overall positive trend for women’s Ready-To-Wear (RTW), with the segment demonstrating a high resilience across markets and categories, and brisk growth emerging from denim and outerwear across the board, combatting uneven results among the men’s segments.
“ Luxury branded jewellery continued to outperform, with a good performance of absolute and high-ticket items ”
Polarized performance in Hard Luxury Accessories are still leading the trend, with jewellery and shoes emerging as the clear market winners, and jewels in particular increasingly perceived as a safe investment in an uncertain economic and financial environment.
Luxury branded jewellery in particular continued to outperform the overall market, with a good performance of absolute and high-ticket items.
Shoes are also confirming a positive trend which started in 2013, outpacing leather goods as a status symbol thanks to sweet-spot price positioning.
“ Watches are still being impacted by Asian uncertainty ”
Despite the growth of accessible luxury, however, it is the absolute luxury tier which is the winner in the shoes sub-category, with the men’s segment continuing on its positive growth trajectory, and women’s showing an increased dynamism.
Watches, however, are still being impacted by Asian uncertainty, with category exposure to Swiss watchmakers impacting the trend with CHF appreciation vs. Euro and consequent price adjustments.
Wholesale purchases dominated the market at 66% vs. 34% for retail purchases, with mono-brand stores (53%) the most popular when pitted against multi-brand (47%).
However, retail is steadily gaining share, despite a slowdown in network expansion (600 directly operated stores opened globally in 2015 vs. 750 in 2014) and growth in like-for-like sales (13% at current exchange rates).
Specifically, retail channels are outpacing wholesale 2:1 at current exchange rates gaining 2pp share, when looking at growth, with overall travel retail and online (especially e- tailers) generally outperforming wholesale formats, and specialty stores gaining relevance in Asia (i.e. China) and US.
It’s the lucrative luxury globe-trotters which have fuelled the performance of airport retail in particular, with the travel retail sector reportedly up 29% in growth rates in current exchange rates (18% in constant exchange rates). The sector now accounts for 6% of the global luxury market.
“ Retail – particularly travel retail – and mono-brand distribution continue to be the winning formats for personal luxury goods ”
Beauty products have scooped the market-leading position at airports, encouraging higher spending also thanks to product innovation, with Asia and Japan still the main engine for growth in airport retail, driven by the increase in number of airports in the region, and Tier 3 cities.
Thus, retail – particularly travel retail – and mono-brand distribution continue to be the winning formats for personal luxury goods, according to the study.
Simultaneously, e-commerce grew to 7% market share in 2015, nearly doubling its penetration since 2012.
“ European and American e-tailers are the strongest performers on the global scale and continue to grow ”
E-tailers are winning most customers over, while brands.com lag behind – barring the largest brands with an established direct online channels – losing share overall with uneven and polarized performance.
European and American e-tailers are the strongest performers on the global scale, however, and continue to grow, by actively responding to customer requests for omnichannel experiences.
Social commerce is also beginning to pick up the pace, with ‘Buy Buttons’ transforming social networks from just pure referral to e-retailers websites, to a direct shopping channel via social platforms.
Globally, Chinese consumers are flocking to mature markets in droves, making up the largest portion of luxury purchases (31%) globally, followed closely by Americans (24%) and Europeans (18%).
Europe is the destination of choice, where an analysis of European tax-free shopping data, conducted in partnership with Global Blue, shows Chinese tax-free purchases increased by 64%, particularly among the accessible and aspirational luxury segments, thanks to a weak Euro.
Americans also increased their tax-free spending in Europe by 67%, aimed largely at the high end of the luxury spectrum. Meanwhile, Russians cut their European spending by 37%, and spending among the Japanese in Europe also withered by 16%.
“ Undoubtedly, Chinese consumers play a primary role in the growth of luxury spending worldwide ”
Specifically looking at personal luxury goods, Chinese shoppers also contributed most of the sales globally for the segment (31%), followed by Americans (24%) and Europeans (18%). Other Asian countries and Japan contributed 10% respectively, with the rest of the world rounding out personal luxury goods consumption by nationality at 8%.
“Undoubtedly, Chinese consumers play a primary role in the growth of luxury spending worldwide,” said Federica Levato, a principal at Bain and co-author of the study.
“For years, we have known that they spend far more abroad than in Mainland China, but what’s changing is that they’re spending little money in historically popular destinations, such as Hong Kong and Macau, and are instead gravitating to new locales, such as Europe, South Korea or Japan, to benefit from currency fluctuations that drive favorable price gaps.”
According to Bain, the number one challenge facing most luxury brands is establishing the right pricing model.
As the rise of e-commerce and global tourism growth creates greater transparency around international price differentials, strategic international pricing will be crucial for luxury brands to maintain an edge in the market and attract and retain increasingly price-conscious luxury consumers looking for international bargains.
Thus, as luxury customers across the globe struggle to reconcile the price of luxury products with their real value, and the question mark over the price of luxury on the international stage grows, seeking a balanced solution should be the biggest concern for luxury players to tackle going forward.
“ The number one challenge facing most luxury brands is establishing the right pricing model ”
Specifically, Bain & Co suggests that luxury brands must assess how to mitigate volatility and how best to deliver at local and global levels.
This includes managing inventory to accommodate fluctuations in tourism and coordinating pricing and mark-downs across markets and channels. Luxury brands also face a host of tough issues such as rethinking their store footprint and the role of their stores in a world of growing digitalisation, as well as figuring out how to delight local customers even as masses of tourists flock to stores in mature markets.
“Relentless price increases over the last decade, aimed at creating a more exclusive position in the market and maximizing touristic flows are now starting to backfire on luxury brands,” said D’Arpizio. “They face the long-term challenge of re-building credibility and trust among consumers, rather than simply making shortsighted, tactical pricing adjustments to benefit from market fluctuations.”
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