Luxury brands innovate to combat global slowdown
At the centre of Milan’s premier luxury shopping district — the Quadrilatero D’Oro, or Golden Grid — is a new opening that highlights how the luxury goods industry is responding to economic pressures.
MonteNapoleone VIP Lounge, in a palazzo between the Céline and Valentino stores, draws on nearly 150 luxury brands to tackle the problem of declining footfall. It offers private fitting services and a concierge able to obtain hard-to-find tickets. “If you want to see every red dress in a size 38 in the Quadrilatero we can bring it to the lounge for you,” says Guglielmo Miani, chief executive of fashion brand Larusmiani and boss of the Quadrilatero industry association.
Five years ago such perks were nice to have. But today, as luxury goods companies face another difficult year, they have become must-haves as brands, stores and luxury centres like Milan, London, New York and Paris fight for shoppers, Mr Miani says.
These are testing times for the luxury goods industry, worth €250bn in 2015, according to a Bain & Company study. Companies’ expectations of solid growth from emerging markets are being undermined and are embarrassing their current strategies for expansion, while developed markets look pallid and hesitant.
The LVMH conglomerate has blamed terror attacks in Paris and Brussels for weighing on sales in Europe, while the strong dollar and weakening consumer sentiment are hurting luxury sales generally in the US. Falling demand in China and Hong Kong is causing brands to rethink their tactics there.
Sales growth of personal luxury goods — from handbags and shoes to prêt-à-porter — slowed to 1-2 per cent in 2015 from 7 per cent in 2013 at constant currency rates, according to Bain.
Thomas Chauvet, luxury analyst at Citi, argues that for a few years companies were “in denial” about the “reset” of the luxury goods industry triggered by the collapse of demand in China from 2013 onwards. Prada was among the brands whose sales began to slow then.
“In 2015 and at the start of 2016, they have realised it is a different story,” says Mr Chauvet. In response, the industry is adjusting to lower expectations with a variety of tactics.
Cost cutting — from ending product lines and closing stores to removing well paid designers — is significant. Though not all moves were solely driven by reducing cost, several top designers have left their brands in the past year: Hedi Slimane from Yves Saint Laurent, Raf Simons from Christian Dior, Alexander Wang from Balenciaga and Alber Elbaz from Lanvin.
Instead, brands are introducing features such as concierge services, pop-up shops and art installations in stores as the lines between shopping and entertainment blur and brands compete with consumer groups.
One of the few remaining areas of bullish growth in luxury is ecommerce, which Bain estimates grew to 7 per cent of market share in 2015, from 1 per cent in 2005, with Chinese etailers making inroads.
“Our sector is in a period of accelerated evolution,” says Armando Branchini, vice-chairman of Italian industry lobby Fondazione Altagamma. He sees three main drivers of that change: “Millennials, digitalisation and the behaviour of Chinese consumers.”
Crucially, while this upheaval wrongfoots the industry, a recent survey from consultants BCG found consumers felt a quarter of luxury brands were losing their exclusivity or were at risk of losing it. Furthermore, around a third of consumers said they were saturated with personal luxury products.
Complicating the outlook are millennials, the sought-after 18-to-34-year olds. BCG defines these as global consumers, highly digital, optimistic, sensitive to sustainability — and sceptical. They are not attracted by the simple façade of the brand, says Antonio Achille, managing director at BCG.
These tensions are pushing the industry to be evermore innovative to keep shoppers interested, says Desirée Bollier, chief executive of Value Retail, which runs 11 outlet villages in Europe and China.
Ms Bollier this month presided over a special event at Value Retail’s Fidenza Village in Italy, a pop-up store called the Creative Spot that will showcase products by Milan’s hottest young designers — at cut prices. “You are adding that layer of experience to what has now become a very banal thing: shopping,” says Ms Bollier.