Luxury Goods Industry Accelerating, Expected to Grow 5% in 2017
Sales are forecast to reach 1.16 trillion euros this year, driven by Millennials and Chinese consumers.
MILAN — The global luxury goods industry is growing at a faster pace than forecast, mainly thanks to Millennials and Chinese shoppers.
After the uncertainties and geopolitical crisis experienced in 2016, the luxury goods industry is expected to rack up revenues of 1.16 trillion euros this year, a 5 percent increase at constant exchange, according to the Altagamma Worldwide Market Monitor 2017 and a study by Bain & Co. presented in Milan on Wednesday.
The personal luxury sector is also seen growing 5 percent to 262 billion euros. This compares with a 3 to 4 percent estimated growth earlier this year.
For 2018, this sector is also expected to grow at an average 5 percent clip, lifted by a newfound consumer confidence in local European, Asian and American consumers, as well as by traveling Chinese shoppers.
Claudia D’Arpizio, partner at Bain & Co., said she expected the industry to continue at an estimated 4 to 5 percent annual growth rate in the next three years, with the market for personal luxury goods reaching between 295 billion euros and 305 billion euros by 2020. “This is subject to the strategies put in place by the brands,” she explained. The growth is seen as driven by a rising Chinese middle class and the recovery of mature-market consumers.
D’Arpizio said the industry had reacted to the changes in consumers found its focus again. “The growth is very healthy now. This is the new normal after a reboot in 2015 and 2016. We didn’t expect this growth and it was not foreseeable. This proves that if you surprise the consumers, they are there.”
Experience is key for luxury goods consumers, as is a curated offer, delivering content and engaging customers, she added. Traditional market segmentation is losing relevance and brands need to interpret customers’ aspirations while staying true to their own DNA, she observed.
“We started to see stronger momentum in the first half of the year, and this has continued in recent months allowing the market for personal luxury goods to really regain its luster,” said D’Arpizio. “The growth in this market is more robust, driven by increases in volumes rather than prices and a rediscovered balance between tourist purchases and reignited local consumption.”
Almost all nationalities and geographies are growing. Year-over-year, in 2017 sales in Europe are expected to be up 6 percent, reaching 87 billion euros. Tourist flows have continued to support the market in the U.K., Spain and France, and locally in Germany.
Local spending by increasingly fashion-savvy Chinese customers has boosted sales in China by 15 percent to a market size of 20 billion euros. Buying abroad has also increased with the share of global personal luxury purchases by Chinese nationals reaching 32 percent in 2017.
The rest of Asia, excluding Mainland China and Japan, is up 6 percent to 36 billion euros, showing a recovery in Hong Kong and Macau.
A currency-driven boost in the second half of the year and increasing Chinese spending is lifting sales in Japan by 4 percent to 22 billion euros. D’Arpizio said Millennial customers are posing a challenge there as they “are more difficult to win over.”
The Americas continue to be “crucial,” and, despite the struggles department stores are facing, the region is expected to grow 2 percent to 84 billion euros. “Department stores are tied to Baby Boomers, they don’t have the pulse on the situation,” contended D’Arpizio. Canada and Mexico are among the bright spots in the area.
Except for Dubai, the Middle East is “restrained,” and is expected to inch up 1 percent.
By categories, shoes and jewelry are each seen growing 10 percent to 18 billion euros and 17 billion euros, respectively. Bags are up 7 percent to 48 billion euros, followed by beauty, up 4 percent to 54 billion euros and apparel, up 3 percent to 61 billion euros. Watches are also up 3 percent to 37 billion euros.
“Winning brands are tailoring their strategies to specific categories and luxury brands are reinterpreting streetwear in an attempt to appeal to younger customers, with T-shirts, sneakers and down jackets among the standouts,” said D’Arpizio.
The retail channel is up 8 percent in 2017, while wholesale is up 3 percent. Online sales are expected to climb 24 percent to 23 billion euros, reaching a market value as big as that of Japan. The U.S. represents close to half of online sales, but growth was particularly strong in Europe and Asia. Accessories remain the top category sold online, ahead of apparel. Bain estimates that online sales for personal luxury goods will make up 25 percent of the market by 2025.
Armando Branchini, vice chairman of Altagamma, presented the association’s Consensus 2018 study. At constant currency, apparel is expected to grow 4 percent next year. Jewelry, watches, pens and lighters are seen up 5 percent; leather shoes and accessories are forecast to climb 7 percent and fragrances and cosmetics 4 percent.
Geographically, Europe and North America are each expected to grow 4 percent, while Latin America is forecast to rise 3 percent. Japan last year was flat, but next year is forecast to expand 5 percent. Asia is expected to be the fastest-growing market, with a 10 percent gain. The Middle East is seen as growing 2 percent and the rest of the world, 2 percent. Branchini credited the companies’ “changed strategies, centralizing the product” for the gains. “Creativity has returned as the decisive strategic lever, with products that bravely express the value proposition of each brand,” he said.
In 2018, earnings before interest, taxes, depreciation and amortization are expected to grow 10 percent.
Tax-free shopping has grown 11 percent in the European Union in the first nine months of 2017, compared with a 4 percent decrease in the same period last year, said Pier Francesco Nervini, chief operating officer, North and Central Europe & Global Accounts Global Blue. The Russians have returned to Italy (up 27 percent) and the Chinese are the first nationality in terms of tax-free shoppers (29 percent of total). Nervini also noted that the terrorist attack in Spain had “zero impact” on luxury goods spending — it was “absorbed quickly,” he marveled — while the market was more uncertain following the independent poll.
During an interview, former Luxottica ceo Andrea Guerra, who is now executive chairman of Eataly, said “after the revolutions of globalization and technology, now it’s down to the [brands’] responsibility, the relations with stakeholders, how one behaves.” Concurring with D’Arpizio, he said “the only thing that moves consumers is the experience and emotions. We must be incredibly skilled to surprise the consumers.”
Asked to discuss his experience as ceo of Balmain, which he joined in April, Massimo Piombini said “he found a company with great visibility thanks to social media, but disproportionate compared with its size.” He underscored that one goal was “to transform the audience in business opportunities.” He said that, “to get closer to the life of consumers with more authentic messages,” he was looking at creating content with partners, and engaging customers through entertainment and experiences. Next month, he is expected to travel to Silicon Valley and meet with companies ranging from Amazon and Google to Netflix to “ask for support” on this project.
He praised Balmain’s creative director Olivier Rousteing for being “incredibly mature. He understands when visibility can be beneficial and when it’s not. He has made the figure of the creative director inclusive and he tells his own stories. He is very serious, fun and rational. He is the most important asset of the company. We don’t want to limit his visibility but on the contrary leverage it.” Piombini revealed that, since the month of July, the same producers of the documentary “The Last Emperor” on Valentino Garavani, have been following and filming Rousteing. The resulting movie on his life, called “The Wonder Boy,” is expected to bow in 2019 at the Cannes Film Festival.