As the the end of the year looms, Luxury Society Knowledge Partner Euromonitor provides an exclusive preview of times passed, and what lies ahead for luxury markets on a global scale.
Despite Challenging Headwinds Luxury Remains Optimistic
The luxury industry has flourished for the past 10 years, but the good times have started to stall and brands are now facing a possible power shift from East to West. Nevertheless, at the same time, connectivity is driving new opportunities in digital innovation, with the internet and social media reaching new frontiers.
Indeed, our latest data reveal that 2015 was yet another challenging year for the luxury goods industry. In particular, the economic instability, social unrest and armed conflict buffeting formerly fast-growing emerging markets have driven up the strategic importance of the developed markets, not to mention the turmoil on the global foreign-exchange markets since late 2014 creating a global currency war for the industry.
“ The outlook for the luxury goods industry remains optimistic with sales set to reach US$375 billion by 2020 ”
Despite these headwinds, our latest data shows that the outlook for the luxury goods industry remains optimistic, with sales set to reach US$375 billion by 2020, having increased from US$317 billion in 2015. The new data also indicates that developed markets are largely outperforming emerging markets and that there is a clear shift in spend from East to West.
An increase in spending in Western Europe, North America and Japan has offset lacklustre sales in China, Hong Kong and Russia, while income inequality continues to beef up spending by the higher-income segments in smaller Latin American, Southeast Asian and sub-Saharan African countries.
The US Remains By Far The Biggest Luxury Goods Market
With total luxury goods spend at US$78 billion for 2015 and a value share of almost 40% the US remains by far the biggest luxury goods market in the world. The US is set to grow by an additional US$15 billion in the next five years, fuelled by burgeoning demand for affordable (and mid-market) designer apparel, luxury accessories, luxury leather goods and jewellery.
“ In terms of geographical weight, the luxury goods market is highly concentrated ”
In terms of geographical weight, the luxury goods market is highly concentrated, with the world’s top 10 countries fuelling well over two thirds of luxury goods spending in 2015.
In terms of regional weight, while Western Europe, with a value share of 31% in 2015, remains the largest region in value sales, its growth will be dwarfed by the fourth biggest region, Middle East and Africa, where sales are set to increase in excess of 34% in the next five years. Weak growth in the Eurozone continues to hold back regional performance. Similarly, the political instability in Ukraine and Russia is also taking its toll on Eastern Europe.
The outlook for North America remains positive, as the world’s biggest luxury goods market, the US, continues to spend – while, in Latin America, despite the economic slowdown in key emerging luxury goods markets like Brazil, there will be a notable rise in luxury spending thanks to the growing middle class, rising consumer confidence and retail modernisation.
This trend is particularly strong in Mexico, where the middle class has seen significant growth in the past 15 years. As such, in 2015 it totalled 14.6 million households – 47% of the total households in the country – and is set to continue growing.
India Retains Position As The Fastest-Growing Market In Percentage Terms
Spurred on by rising prosperity in the major cities and a power shift from the black market to the formal market, India’s appetite for luxury goods continues to go from strength to strength.
While India still ranks just outside the top 20 markets in the world for luxury goods, its rapid advance in luxury goods sales is unrelenting. India is on course to become a US$4 billion industry by 2020, according to our new forecast data, compared with a total of around US$600 million a decade ago (in 2005).
This will place India in the top 20, overtaking Brazil and Singapore and making it the 18th biggest market worldwide.
“ Russia’s luxury goods sales delivered a disappointing real decline of 5% in 2015 ”
Russia’s Geopolitical Risks Add Further Growing Pains To Luxury Sales
With the backdrop of sanctions and the deterioration of relations with the West, business and consumer confidence in the economy has collapsed to some extent. On the consumer side this (alongside falls in real wages) has contributed to a decline in luxury expenditure; and on the business side a lack of investment and capital outflows. With the risk of an escalation of geopolitical tensions weighing on the economy, however, confidence is likely to remain fragile.
Russia’s luxury goods sales delivered a disappointing real decline of 5% (real RUB terms) in 2015, making it the world’s second worst-performing market after Ukraine.
With economic sanctions fully implemented, the continuous decline in oil prices and the rouble in freefall, Euromonitor International expects the Russian luxury goods market to continue to deliver a poor performance in the short to medium term, with value sales increasing by a CAGR of just 1.7% over the 2015-2020 period.
In 2015 it ranked as the 11th biggest market out of the 32 markets covered by Euromonitor International’s luxury goods research, but with its current trajectory of economic and political decline, it is set to drop to 12th position by 2018.
At the top end of luxury goods, there is less uncertainty because Russia’s super-rich consumers are virtually immune to recession (a quarter of a million households have an annual disposable income of more than US$300,000, according to data from Euromonitor International). The biggest squeeze will be in demand for mid-market brands, which is fuelled primarily by the middle class.
Of course, much like the issue of the possible drop in wealthy Chinese tourist numbers, the weak rouble also means that Russia’s middle class will be travelling abroad less over the year ahead, which could hold further downside implications for big-name global brands, given their importance as contributors to footfall in leading luxury retailers, particularly across Western Europe.
“ The big question is whether Russian luxury goods is on the verge of a more sustained slowdown ”
Once proud to be one of the world’s fastest-growing luxury markets in the world, the big question is whether Russian luxury goods is on the verge of a more sustained slowdown, as real spending power erodes and as the economy sinks into further recession.
Luxury Retailers Reliance On Well-Heeled Tourists In Developed Markets Continue – But For How Much Longer?
Wealthy Chinese tourists in particular have been key drivers of global luxury goods sales for more than a decade.
According to Euromonitor International’s latest travel data, the Chinese made over two million trips to the US in 2014, an increase of almost 12% on 2013 and a massive 286% increase in the last five years since 2009. During the same year they made 1.7 million trips to France, with many of these trips including shopping excursions to prestigious luxury retailers and shopping hotspots.
“ It is estimated that Chinese tourists spent around US$45 billion on luxury goods in foreign countries last year ”
The Chinese are especially important revenue-drivers for luxury department stores such as Harrods in London, Barneys in New York and Galeries Lafayette in Paris, not to mention Lane Crawford and Harvey Nichols in Hong Kong.
It is estimated that Chinese tourists spent around US$45 billion on luxury goods in foreign countries last year. Yes, high import taxes within China are a big incentive for shopping abroad – the same luxury handbag can often cost a third more in Beijing than in Paris, for example. But, holidays also encourage more extravagant spending habits.
While China has been instrumental in driving this trend, the same can be said for the wealthy tourist from Russia and the Middle East shopping for luxury in Western Europe or, indeed, the wealthy Brazilian shopping for luxury in North America.
The tide is turning, however, thanks to currency fluctuations, economic headwinds and political unrest, with the future of the wealthy tourist looking rocky. The implications of a cull on tourist spend could be hugely detrimental for key developed markets such as the US, France, Italy, Spain and Switzerland, where sales of foreign luxury spend is estimated at upwards of 40%.
Is The Honeymoon Period Over For Chinese Luxury Goods?
In 2014 and 2015, mainland China posted its lowest growth in sales of luxury goods since our records began (a real decline of -3% and +1% respectively).
The slowdown in growth also means that China will not overtake Japan to become the world’s second largest luxury goods market in the world in the next five years and is expected to maintain its third position ahead of France and the UK in the short to medium term. Many of the world’s leading luxury brands have felt the backlash of the Chinese Government’s crackdown on lavish spending as well as deeper operational and economic problems across the industry.
“ The Chinese economy is set to continue cooling ”
Much of the positive global luxury sales momentum witnessed in 2014 and 2015 in the developed regions was actually fuelled by wealthy visiting Chinese tourists.
Estimates vary, but the consensus is that in 2015 Chinese consumers accounted for over a quarter of consumption. However, after the Chinese government devalued the renminbi in August 2015, China’s foreign spending power has taken a turn for the worse. Added to that, the Chinese economy is set to continue cooling.
These two challenges combined will almost certainly have an impact on the industry’s geographical sales mix, potentially triggering another shift in global revenue power in 2016.
“ If Chinese consumers cut back on foreign trips, then we could start to see yet another shift in the balance of power ”
The impact of a weakening economy is unlikely to stop wealthy Chinese consumers from travelling to buy their luxury goods, but it might change their destination of choice as well as total in-destination spend. Short-haul destinations such as South Korea and Thailand could reap the benefits.
If Chinese consumers cut back on foreign trips further afield, then we could start to see yet another shift in the balance of power between the regions. Spending in North America, Western Europe and Japan could go down, while spending in China could even go up, thanks to price cuts and more people staying at home.
It is difficult to predict how the situation will develop in the future. What we can say, though, is that, according to our new research, 2015 has turned out to be one of the most strategically critical years ever for the global luxury goods industry.
Growth In Japan Aligns With A Surge In Wealthy Chinese Visitors, But For How Long?
According to our new research, sales of luxury goods in Japan reached YEN 3.1 trillion (US$30.7 billion) in 2014 and are expected to reach YEN 3.2 trillion in 2015, representing an annual real increase of 7% and 3% respectively on 2013 and 2014 figures – a far cry from the double-digit declines witnessed pre-2012.
However, these latest figures for Japan illustrate just how potentially misleading the geographical sales mix currently is for the luxury goods industry. For example, whiles luxury sales in Greater China were down by a real 3% in 2014, they were up 7% in Japan in the same year. The latter ties in with a huge increase in the number of Chinese tourist arrivals to Japan in the same year.
According to our latest travel data, Chinese arrivals increased by 34% in 2014, following a decline of almost 8% on the previous year. A big proportion of those Chinese tourists were enticed to Japan by the weak yen, coupled with the opening of new luxury duty-free stores in the southern port city of Fukuoka. However, since the fall of the Chinese currency much of the attraction of shopping in Japan is likely to weaken as prices become less affordable.
“ According to latest travel data, arrivals from China to Japan are expected to increase ”
The same rationale applies to Europe and North America.
Indeed, according to our latest travel data, arrivals from China to Japan are expected to increase by an annual average of 6% in the next five years, following an average annual increase of 12% in the five years from 2009.
Similarly, arrivals from China to the US were up by 286% in the five years to 2014 and up by 141% to France and the UK over the same time period. However, moving forward, all three countries are expected to see these numbers drop to around 30% over the 2014-2019 review period.
“ Designer apparel & footwear is by far the biggest category and today accounts for almost 39% of all sales ”
Designer Apparel & Footwear
Designer apparel and footwear is by far the biggest category and today accounts for almost 39% of all sales. Its category sales not only lead on a global level but also across each of the seven regions captured in Euromonitor International’s luxury goods research.
However, luxury leather goods are by far the most dynamic in terms of growth. Demand for products such as luxury bags continues to be particularly robust, as they represent a symbol of status and wealth.
Men’s luxury bags have been of particular note, thanks to the rise of the young aspirational middle-class man, but also thanks to an increase in the number of luxury brands fusing fashion and functionality, which has helped the ‘man-bag’ break new ground.
Revenue Shifts For Key Luxury Categories Thanks To Currency Wars & Commodity Prices
The strength of the US dollar and, to a lesser extent, the UK pound, teamed with a surging Swiss franc and debilitated euro in 2014 and 2015, has led to marked consequences for some of the key luxury goods categories. China’s latest currency devaluation could further amplify the situation by creating greater disparities in prices between Asia, North America and Europe.
These external currency pressures continue to force some of the world’s leading luxury brands to revisit their global pricing strategies. In some markets, prices are going up, while, in others, they are going down. It is arguably one of the biggest challenges facing the luxury goods industry today. One such category which has fallen prey to this currency war is luxury jewellery and time pieces.
‘Made in Switzerland’ is, for many, the ultimate guarantee of quality and craftsmanship in luxury watches. The Swiss franc has been surging on foreign exchange markets since the start of 2015, when the Swiss National Bank unexpectedly allowed it to float. Its appreciation is weighing heavily on the Swiss watch industry for two main reasons.
“ Luxury watches are becoming increasingly unaffordable, with sales slowing in many key regions ”
Firstly, almost all the costs related to making Swiss watches are in Swiss francs and, secondly, a larger share of the industry’s consumer base is in markets where the local currency is going in the opposite direction (ie depreciating), for example in China, Japan and Russia.
The result is that luxury watches are becoming increasingly unaffordable, with sales slowing in many key regions. What was once heralded as one of the world’s fastest-growing categories is now dwindling in sales.
Our new research indicates that global sales of luxury watches declined by -0.5% in 2014 and will just reach +1.7% for 2015 (US$ real terms). However, the biggest drop in sales was witnessed in Asia Pacific, where the market decreased by -4.2% and -0.3% in 2014 and 2015, respectively, on the back of issues in China and Hong Kong.
Similarly Eastern Europe also took a hit, where the market decreased by -2.2% in 2015, on the back of the slide in Russia and Ukraine.
“ 2015 started with a bang in terms of wearables, as the Apple Watch was unveiled ”
The Digital Surge & Innovation: Luxury Goods Silver Lining?
Innovation is a buzzword across all FMCG industries at the moment, and luxury goods is by no means a stranger to this. Indeed, 2015 started with a bang in terms of wearables, as the Apple Watch was unveiled.
According to our latest data, global sales of wearables are expected to grow at a phenomenal speed. In terms of luxury, however, there are still very few on the market. To date, the industry has witnessed the launch of the new “smart” Ricky Bag from Ralph Lauren, the unveiling of the Tag Heuer smartwatch, which will be available to buy from November 2015, as well as the latest Hermès-branded Apple watch, which went on sale in October 2015.
At the same time, thanks to the merger of Net-a-Porter and Yoox in August 2015, the stakes have never been higher in luxury goods e-commerce. Indeed, global online sales of luxury goods are booming and are widely seen as one of the industry’s key battlegrounds of the next five years.
World sales of online luxury reached almost US$25 billion for 2015, accounting for just over 7% of all sales.
While, at first glance, this may seem comparatively small, this figure is up from 3% just 10 years ago, representing a massive increase of 134% on 2005 numbers. From virtual stores to live streaming of fashion shows, luxury brands have driven up investment in digital technology, with social media platforms becoming much higher profile.
With such impressive rates of growth, it could only be a matter of time before digital sales catch up with those of physical stores.
“ Sales of online luxury are set to increase by an additional 50% in actual terms over the next 5 years ”
According to our latest data, sales of online luxury are set to increase by an additional 50% in actual terms over the next five years, to account for almost 10% of all luxury sales. Indeed, the number of luxury consumers shopping online is soaring by the month, and affordable luxury goods will be increasingly on their radar.
The over-60s are the fastest-growing demographic for internet connectivity, and will be a key target of online marketing. This is a major uptick for luxury e-commerce: according to our latest income data, while people in their 40s overall will continue to dominate wealth, the 65+ age group will be the wealthiest overall by 2030.
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