Luxury industry continues recovery as consumer confidence returns
Bain report predicts ‘solid and healthy’ market growth this year
The global luxury market is expected to grow by a solid 2 to 4 per cent this year in a clear sign that the turnround in performance for the sector that began last year is on a steady and sustainable footing.
Consultant Bain’s spring luxury update predicts that the global personal luxury goods market will grow to €254bn-€259bn this year, as consumer confidence returns in Europe and Chinese customers spend more at home and overseas.
Large luxury houses, such as LVMH, Kering and Hermes, began indicating this trend in their results from the middle of last year. The industry had previously suffered a difficult period as a result of an economic slowdown, a corruption crackdown in China and the impact of terrorism on spending.
“The market is growing again,” said Claudia D’Arpizio, a Bain partner and lead author of the study. “It’s less dependent on gift giving in China and less dependent on tourist flows that were driven by price differentiation and bargain hunting. It’s more solid and it’s healthier.”
Bain estimates that the overall market will expand to €290bn in sales by 2020.
Performance is polarised across geographical regions. In the US the luxury market continues to underperform, hurt by a strong dollar, political uncertainty and problems faced by department stores — a pillar of distribution for luxury brands in North America. Bain expects the region’s luxury sector to shrink by as much as 2 per cent in 2017.
Meanwhile fortunes in Europe, the region where luxury spending was worst hit by terrorist attacks, are improving. Bain forecasts growth of 7 to 9 per cent in luxury sales in Europe, and highlights the bright spots of the UK, where sterling has dropped in the past year following its vote to leave the EU, and Spain, which is perceived as a safe destination.
The increasing tendency for Chinese consumers to buy luxury goods at home is expected to drive growth of 6-8 per cent this year for the mainland China market. Chinese consumers account for one in three luxury purchases globally and will nonetheless remain an important source of overseas tourist flows. Outside mainland China, however, Bain predicts the Asian luxury market will shrink by 2 to 4 per cent because of decreased tourism in Taiwan and Southeast Asia.
“Digital is the channel that is fastest growing,” said Ms D’Arpizio, who added that there was increasing differentiation between winners and losers. Brands that are doing well are typically those that have invested in digital platforms and engaged with a “millennial mindset”. This strategy means shifting part of their advertising budgets to online, using social media to talk directly to the final customers, and using a so-called “omni-channel” approach that combines the best of digital and e-commerce with physical stores.
“Brands need to be customer obsessed and millennial minded,” said Bain partner Federica Levato, co-author of the report. “Buying a luxury good now is not just walking into a store. It has become a journey of engagement through multiple touchpoints well before the point of sale.”
An overall reduction of traffic to physical stores means that “a big topic for the future is the role of the store and the number of stores,” said Ms D’Arpizio. “You probably need fewer stores that are more focused on consumers, experiences and telling the story of the brand.”
She added: “It’s clear from the last 18 months that this market is very reactive to brands’ strategy. In the past the industry behaved too much with a one-size-fits-all approach. Now the brands that are differentiating themselves are far outperforming the market.”
Bain’s report is published in collaboration with Fondazione Altagamma, the trade association for Italian luxury goods manufacturers.