Luxury brands must adapt or risk becoming irrelevant. Here, we reveal the latest game-changers luxury players need to keep an eye on.
The market is evolving at an alarming pace and luxury brands are being urged to adapt or risk becoming irrelevant.
Here, we reveal the latest game-changers luxury players need to keep an eye on, as identified by Bain & Company’s Worldwide Luxury Markets Monitor 2015 Spring Update.
The global personal luxury goods market reached €224 billion in revenue (at retail equivalent value) in 2014, up by 3% compared to 2013 and up 4% – without considering currency effects.
That upward trajectory continued in the first quarter of 2015, with the impact of currency fluctuations and their flow-on impact on spending patterns and tourism becoming ever-more prevalent.
Forget the Swiss Franc – the increase in touristic spending over domestic consumption means currency movements all across the globe right now have the power to make or break a market.
Case in point – this quarter, while the US suffered an overall decline in Chinese consumer spending due to negative impact of a strong dollar, a weakening Euro drove strong growth in touristic spending and boosted the nominal performance of the market by 12-13% – inflating a low single-digit positive trend of 2-3% growth at a constant exchange rate.
In a nutshell, currency fluctuations – because they cannot be predicted with absolute certainty – bow to no man (or woman) and are becoming a real challenge for the industry, impacting on price differentials and tourist flows.
That said, the market’s full-year performance is expected to increase 2-4% – at constant currency.
Wealthy holidaymakers hold sway over the market much more than ever before.
Bain & Co points to tourism as the major driver of the global luxury industry’s performance, with touristic spending now accounting for about 50% of all luxury spending.
This gradual shift, from local consumption to touristic spending, has seen the US fall below expectations in 2015 losing the support of increasingly relevant touristic shopping, and put Switzerland in the negative due to CHF appreciation redirecting touristic and local flows to Italy and France.
Other markets, however, have benefited from the touristic spending trend, with Western Europe on a high due as the weak Euro fuels holiday spending in the region; particularly strongly supported by Asian tourism.
Italy is also starting to recover after a good start of the year sustained by tourists, with Milan crowned the number one shopping destination in the country, according to Bain & Co.
Today, Chinese consumers make up more than 30% of global luxury spending and are largely responsible for the aforementioned shift from local consumption to touristic spending.
The latest figures by Bain & Co have reaffirmed the buying power Chinese consumers still wield over the luxury goods sector, with Chinese identified fastest growing nationality for personal luxury goods spending, surpassing 30% of total market in 2015F.
However, while Chinese consumers’ spending is relentlessly growing, their focus remains ever more skewed towards foreign (cheaper) shopping.
Western Europe was strongly supported by Asian tourism, which benefitted from Euro currency devaluation, with Chinese tourism flows guiding Asian market performance, supporting South Korea, Taiwan and Southeast Asia, particularly Thailand.
These gains, however, have materialised at the expense of Greater China, where a higher awareness of price differentials and increased consumer mobility has seen a drop in domestic spending with Chinese nationals continuously “looking for a bargain” in their home market.
Hong Kong and Macau were the worst performers overall, losing Mainland Chinese support due to recent demonstrations, new Hong Kong visa regulations and, in Macau, the crackdown on lavish spending/gambling income reduction.
While Mainland China arrived at its ‘moment of truth’ and all key luxury players struggled to revamp the market, Japan has been reaping the benefits to remain the top luxury performer and the “fastest growing market in real terms”, according to Bain & Co figures.
Yen devaluation has attracted both Chinese and Korean consumers to the country and as a result Japan is well on its way to becoming the number one premier luxury destination for Chinese spenders in particular.
The country recorded +83% Chinese inbound tourists in 2014 and +160% year-on-year in February 2015, with touristic purchases reaching up to 20% share in first months of 2015 vs. 5-10% in 2014.
Overall, Japan is expected to grow 5-7% this year, however, the trend for the moment has not yet spread past its capital city, with Tokyo still capturing most of this new impulse despite new visas regulations attempting to push other entry points in the country.
The boom has led to a growing need for Chinese speaking personnel not easily drawn by the local talent pool, but opens up opportunities for agile and well-equipped luxury players to move in and capitalize on the cusp of this market on the rise.
Where America perhaps once was the land of opportunity, the golden age has now gone and passed, according to Bain’s research.
The US market fell below expectations in 2015 losing the support of increasingly relevant touristic shopping, with the strong dollar partially offset by selected price adjustments fuelling the decrease.
The exodus of Chinese consumers (to Europe and Asia) in particular, has impacted US west coast and Hawaii, Las Vegas, and NYC.
Touristic spending was further reduced this quarter by the negative Latin America and Russian trend, with these declines impacting Miami’s market in particular.
The loss in touristic spend marred otherwise robust (although not yet booming) local consumption, which saw department stores pushing off-price sales and channels. It’s this bullish domestic spend which is expected to push luxury spending in the U.S. to growth of 1-3% this year.
E-commerce, however, outperformed across formats with and overall positive trend of men’s categories.
The global personal luxury goods market by area saw the positive performance of mature markets and the Middle East, although Russian spending decline and oil price drop impacted the locals trend in the latter region in the second half.
Stagnation in Greater China offset by brisk growth in South Korea saw heterogeneous trends in Asia, with Japan again emerging as a winner, achieving record growth in real terms.
In terms of product, however, accessories confirmed global market leadership in absolute and relative terms, taking 29% of the market with growth of +4% from 2013 to 2014.
Shoes confirmed top performing category with the men’s segment outperforming across the board.
Apparel, which staked a 25% share, saw growth of +2% fuelled by high dynamism of womenswear but saw mixed trends in menswear, hit by the negative impact of Mainland China.
Hard luxury by comparison has held steady with its 22% of the market, with watches sales remaining stable at global level, and jewellery outperforming on solid fundamentals – pushing the category to achieve +2% growth.
“ Brands must undergo a fundamental paradigm shift if they want to win in the years to come ”
Despite the Chinese ‘rush to luxury’ and a steady rise in the global personal luxury goods market, price awareness and consciousness among consumers in general has increased significantly, leading to the ascent of the off-price luxury market, which now represents more than 30% of total luxury sales.
Commenting on the market as a whole and the many factors which have progressively reshaped the market over the last 15 years, Claudia D’Arpizio, a Bain partner and lead author of the report, warned that it is now a matter of urgency for luxury players to re-think some key strategic pillars with a long-term mindset.
“Current market dynamics shine a light on how the industry has changed over the last 15 years,” she said.
“Pricing, distribution and customer strategy remain at the top of the agenda for luxury companies, but the old models are being called into question. In this new environment, brands must undergo a fundamental paradigm shift if they want to win in the years to come.”
The hurdles emerging from increased consumer mobility coupled with currency movements in particular should raise questions specifically about how and where to engage with big spenders, and how to balance the push and pull of locals versus tourists in terms of pricing strategy and the smartest blueprint for distribution for luxury brands.
With the Chinese consumer also in the spotlight for the foreseeable future, the question of how best to strategize to maximize China’s long term potential should also be high on the list for those at the helm of luxury empires moving into 2015.
The opportunity is there, there’s no doubt about it – from 200 to 2015, the overall number of luxury consumers has increased from 140 million worldwide to over 350 million – but the changing nature of the market and its consumers means a rockier road to success, and only the most supple and strategic will survive.
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