The global luxury market has plateaued. After years of double digit growth, the market saw an increase of 4% in 2016 according to Bain, though other analysts report a complete flat-line compared to 2015. Even optimists expect a growth not exceeding 2-3% in 2017. Some sectors would be happy even with that – Swiss watch exports fell 9.8 percent in 2016, the steepest drop since 2009.
The causes of this slowdown are not new – they have been undermining the luxury market for many years as growth rates wane from their double digit high six years ago. China is one: its corruption crackdown is now in its fifth year and showing no sign of letting up. Many also point towards geopolitical uncertainty: far fewer wealthy tourists are travelling to Europe on shopping trips in the wake of terrorist attacks in Paris and Brussels. However, while competition is often noted in the increasingly saturated luxury market, many fail to identify competition from non-luxury brands as a serious impediment to growth.
Non-luxury brands have slowly snuck up on the luxury sector, robbing them of HNWI wallet share (HNWIs – high net worth individuals – are the luxury market’s main clientele). Last year Nike overtook Louis Vuitton as the most valuable apparel brand in the world according to a Forbes ranking. And for the first time in 27 years a non-luxury car – Kia –topped J.D. Power’s quality car survey in the US. The electronics sector no longer exists in the luxury domain since Apple and Samsung levelled the playing field between buyers of all incomes.
Shopping habits mirror this trend towards the non-luxury sector: HNWIs visit department stores more often than branded boutiques, surveys have shown, and that’s when they are not buying all their brands from Amazon. When asked their favourite brands, Nike or Apple can crop-up more often than big watch or jewellery names.
There are a myriad of reasons to explain this trend towards non-luxury. Most agree that the luxury sector has been too slow at introducing e-commerce. Now giants like Amazon and Alibaba sell everything on a level playing field without differentiating between what is luxury and what isn’t. Equally plausible is the opinion that many items are better coming from non-luxury brands. Smart phones and sportswear are much better bought from Apple or Under Armour than any alternative that the luxury industry has to offer. (Vertu, the only luxury phone manufacturer has just been sold for the third time after reporting serious losses.)
But one of the core reasons why non-luxury brands have snapped market share away from their real luxury rivals has simply been the reach of their marketing efforts. Nike and Apple do not care who has money and who doesn’t, so long as they’re prepared to spend it on their products. This ties in with their marketing machines, which are designed to target all consumers, everywhere, not just those of a particular segment. In other words, they aim for mass marketing.
Luxury marketers, on the other hand, often plan the exact opposite. Armed with knowledge and data on their consumers – the high or ultra high net worth individual, who is worth over $1m and $30m respectively – they plan their marketing accordingly.
Segmentation is the word of the day. Divide your audience and rule their cash flow is the prevailing assumption in marketing. Targeted adverts delivered via programmatic and social media ad-buying can reach wealthy audiences where they spend their time – on the web. Social media strategies complete with influencers and premium content are deployed at specific times of day and night. Buyers deemed ‘loyal’ are invited to sponsored ‘exclusive’ events, often on the racecourse, polo pitch or trackside.
But this very segmentation has led to luxury’s falling sales figures. Focusing marketing efforts solely at today’s wealth ignores tomorrow’s. As many as 12,396 HNWIs are created every week according to WealthInsight. Between now and 2020 there will be another 1.8 million HNWIs globally joining the ranks of the HNWIs (73,000 in the UK). These individuals may not be worth $100,000 or even $100 today. In fact, statistically, there is a likelihood they could now be striving entrepreneurs struggling to make ends meet.
"Most of these newly created HNWIs will only be familiar with non-luxury brands, having rarely been exposed to luxury. "
Most of these newly created HNWIs will only be familiar with non-luxury brands, having rarely been exposed to luxury. On the other hand, non-luxury has been with the nouveau riche since before they were rich. These new HNWIs will probably see little reason to purchase luxury goods, instead finding comfort in the non-luxury brands they know. This is reversing the age old assumption that higher incomes lead to increased spending, personified by the Duchess of Cambridge’s taste for Zara outfits.
This presents a pressing problem for the marketer: how can a luxury company ensure it’s brand is known by at least some of these 1.8 million individuals by the time they come into significant wealth? Surely not by segmenting and focusing only on today’s 19 million HNWIs. And yet marketing directors understandably don’t want to spend their entire budgets on mass marketing campaigns imitating the likes of Nike or Apple.
A more intelligence led approach to marketing is needed. Consider where the next luxury customer will hear about your brand. Time-poor entrepreneurs will pay little heed to advertising and even less time will be spent on social media, but they will digest media in a way that adheres to their cultural or professional norms. Financiers may pick up the FT or Wall Street Journal and techies may subscribe to Wired, but otherwise media consumption barely differs between income earners. Cunning content marketing can therefore attract target audiences without ostracising swathes of potential consumers.
Consistency is more important than segmentation. A Harvard Business School alumnus is more likely to recognise a watch brand over many years of seeing it advertised in the Harvard Business Review than if it flashed up in his Facebook feed once he came into significant wealth. Moreover, he probably has little interest in ‘engaging’ with the brand over social media or clicking on its pop-up adverts. This latter behaviour is at odds with many ROI measurements employed by marketing directors.
Sponsors of events might consider the sports favoured by HNWIs, which rarely take place on the polo pitch or trackside: WealthInsight’s data shows golf and football to be the most popular sports among HNWIs, both ranking at first place on a global level (sailing and polo were in 11th and 20th place respectively). Of course, within this there are regional differences – Swiss HNWIs prefer skiing for example – though throughout the wealth spectrum, from newly minted millionaires to wizened billionaires, the picture is largely the same. To misquote F Scott Fitzgerald, the rich are not so different from you and me.
"The frontier of the luxury industry is no longer in new markets, but the newly wealthy."
The frontier of the luxury industry is no longer in new markets, but the newly wealthy. The battle for their wallet-share will be played out in digital and print space. Adjusting marketing strategies will not be a quick fix, but rather a long term strategy that brands should invest in for future growth. After-all, what is a luxury brand if not something of heritage and timeless? Probably a non-luxury brand.