Luxury Industry Facing Mounting Risks into 2017


Fflur Roberts | November 21, 2016

According to Euromonitor’s latest data, the global luxury goods industry looks set to continue to expand in 2017, albeit slowly, with disappointing headline growth. As tough global trading environments continue to prevail – social and political unrest in Asia Pacific, economic slowdown in Latin America, and conflict in Eastern Europe will conspire to restrain growth in both key emerging and developed markets.

Indeed, the market continues to face headwinds from major luxury goods markets, such as France and Hong Kong, as well as other large emerging markets, such as Russia and Brazil, while instability in the Middle East continues to cloud the horizon.

Whilst 2017 will not be a stellar year for the global industry overall, we will see some tailwinds, with markets such as India and Mexico in a much stronger position. At the same time, luxury brands and retailers continue to seek ways to harness social media and tap into the psyche of the digital consumer, as connectivity continues to drive new opportunities in digital innovation and growth in the omnichannel continues to reach new frontiers.

Divergence remains a key theme across the luxury markets for the year ahead.

Swings and roundabouts for regional performance

Within the global luxury goods market there are significant regional differences. Asia Pacific appears strong with 5% growth, which is a marked difference to the 2015 numbers, when we saw regional growth of just 1%, reflecting the significant economic slowdown in China.

The developed regions of Western Europe and North America were significantly weaker, with both regions showing a slight downturn in 2016. Indeed, the week Eurozone continues to hold back regional performance and the added concerns over terrorist attacks, especially in cities like Paris and London, as well as the more recent Brexit vote, have also dampened sales.

However, the disappointing data for the developed regions should not obscure the importance of these high-value luxury goods markets. These regions remain amongst the most powerful in the world and together account for over half of all luxury goods sales in 2016.

Further shifts in Asian consumption power from Hong Kong to Japan

There is no denying that the internet has evolved at an unprecedented speed and has played a huge role in driving the luxury market over the last decade. However a new type of channel is emerging as a major driving force and that is the wealthy luxury traveller, be that at a luxury airport or indeed in another country abroad. During the conference, leading players will address the issues of how the world's top luxury retailers are reimagining physical and virtual spaces for these consumers with a key focus on the Asian consumer who has been the main muscle behind this evolving trend.

According to Euromonitor international’s latest research, a growing number of Chinese shoppers continue to head to Japan (and to a lesser extent South Korea) instead of Hong Kong. Indeed, much in line with Euromonitor’s luxury goods research, the latest travel data show that the number of Chinese trips to Hong Kong dropped by 6% in 2015 with a further drop of 5% expected by the end of 2016. However, at the same time there was a massive increase of 107% in the number of trips taken to Japan last year.

China Inbound Trips by World’s Top 5 Source Markets 2014-16

Source: Euromonitor International

Japan and South Korea have indeed enjoyed the strongest demand from China, aided by more relaxed visa programmes over the past two decades, but also owing to their favourable exchange rates when shopping for luxury goods.

Indeed, the comparative weakness of the yen is helping to drive this. Luxury retailers in Tokyo and Osaka (as well as Japan’s duty-free and tax-free shops) are also picking up some of the slack from declining Chinese tourism in the major cities of Western Europe and North America. However, whilst the new sophisticated Chinese middle-class consumers have become increasingly savvy in terms of getting the best price for luxury, they have also become increasingly intrepid in their quest to travel to the best luxury shopping destinations. Whilst in 2015 Euromonitor’s data shows that the number of arrivals in Tokyo and Osaka increased by 35% and 52%, respectively, Fukuoka, which has become one of the latest shopping destinations for the Chinese middle-class thanks to the influx of regular cruise trips from China as well as the rise in shopping malls such as Canal City Mall, housing a number of luxury brands, saw its arrivals increase by 80% in the same year.

On the flip-side of this, despite the British pound reaching  its lowest level in 31 years, the UK has lost some of it shine following Brexit, and uncertainty also shrouds Germany, the US and France thanks to the upcoming elections – the former two being the world’s leading sources of international luxury spend, highlighting just how much is at stake.

In a tourism context, of course China or the Chinese remain hugely important. Its well-heeled consumers might be feeling more cash-strapped of late, but they still travelled to Europe in their droves last year. Euromonitor’s latest travel data show that the number of Chinese tourists arriving in Western Europe reached 7.1 million in 2015 and is set to reach 7.9 million by the end of 2016.

By 2020, Chinese outbound departures (based on 24-hour trips, excluding day trips) are expected to reach the 116 million mark, which is a major milestone, and China will overtake all major sources of demand to become the world’s second highest market in it numbers of departure behind the US. However, the large and steady supply of outbound flows from China will continue to gravitate to Asia Pacific.

Moving forward it will be important for luxury shopping destinations and hotels around the world to tap into Chinese demand, but also to look at other emerging markets with rising disposable incomes, such as India, Indonesia, Mexico, Malaysia, Turkey and Poland.

China has its best year since 2011

China finally saw its luxury goods sales return to positive growth following three consecutive years of negative growth on the back of a slowing economy, the government clampdown on luxury gifting and currency headwinds. The Chinese market has in effect reached a “new normal” in terms of levels of luxury spending.

Indeed, sales saw an increase of 6% on 2015, for the first time since 2011, when the government came down hard on conspicuous consumption. Slower luxury spending in Hong Kong (due to social unrest) has also helped drive up demand on the Chinese mainland and is expected to continue helping to drive China’s growth trajectory. By the end of 2016 luxury goods sales in China is expected to reach a total value of US$76 making the second largest market behind the US.

However, the strength of China’s fine wine, champagne and luxury spirits market, or moreover its sales of Baijiu, was a major contributing factor to its seemingly strong performance this year as well as its favourable position in our global rankings. China’s Baijiu market alone reached USD56 billion in 2016. This means that sales of Baijiu account for 97% of all China’s fine wine, champagne and luxury spirits and a massive 73% of its total personal luxury goods market.

Stripping out the effects of this strongly performing category gives us a much clearer picture of how things are really shaping up though, and would place China in fourth position in the world, just behind France and slightly ahead of the UK. Indeed, a quick look at the chart shows that growth in 2016 was not nearly as strong for China’s key categories (on a year-on-year basis). Indeed, all categories bar wine, champagne and luxury spirits saw negative sales growth in 2016.

Is this significant? The simple answer is, yes.

India is the “true star of Asia” while Russia and Hong Kong the weakest of the leading global markets.

Sales of luxury goods in India grew by 16% (in real US dollar value terms) in 2016 (versus 2015), fuelled by a slowdown in the black market and a commensurate uptick in the formal market. India has been edging its way up the global luxury goods ranking, but remains just outside the top 20 markets in the world by retail value in 2016. Moving forward, however, India is already on track to leapfrog Brazil and the Netherlands in 2017 to become the world’s 19th biggest luxury goods market.

While, despite their strong tradition in luxury goods retail, both Russia and Hong Kong are facing some of their fiercest headwinds of the last ten years. Both markets witnessed yet another decline in sales, for the third consecutive year.

Political and economic instability in Russia held back sales and social unrest in Hong Kong, coupled with slower economic growth in China, led to a sharp drop-off in visitors from China’s mainland. We predict that both markets will experience further declines in luxury goods sales in US dollar terms in 2017 (versus 2016), which will further undermine the global performance of big-name players such as LVMH, Kering, Richemont and Prada.

E-commerce is the fastest-growing segment in terms of distribution channels

Internet sales of luxury goods continue to boom across all regions, and are widely seen as the industry’s key battleground of the next five years. Indeed, global digital sales of luxury goods were up 9% for 2016 and a massive 77% on the last five years since 2011.

The growth of digital commerce is largely supported by the increase of digitally-savvy consumers around the world. The number of internet users has doubled since 2009 to reach 3 billion globally in 2016. Over the next five years, the world will become even more connected with over 4 billion or half of the world’s population with access to the internet.

These consumers are increasingly connecting to the internet through their smartphones. In 2016, 52% of all mobile telephone subscriptions included internet access. This share is expected to grow to 84% by 2021. Moving forward, we believe that it is striking that even in markets where the middle class is squeezed by economic pressures, such as Brazil, people are not giving up their smartphones. However, mobile internet retailing within the luxury goods industry is still only scratching the surface of its value potential. We predict a sharp rise in luxury m-commerce as 2017 develops, fuelled by growth of so-called “shoppable apps” as well as “shoppable ads” and the growth of s-commerce.

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