Consumers are now choosier, creating a market of winners and losers
There has rarely been a better time to be a luxury brand—as long as you are a cool one.
After the malaise and soul-searching of 2016, when sales of expensive handbags and watches fell for the first time since the 2009 financial crisis, consumers are splashing out again. Last year sales across the industry rebounded 6 % in constant currency terms. This year growth will be even stronger at between 6 % and 8 %, according to the latest edition of a closely watched industry report by consultancy Bain, published June 7.
Chinese consumers are in the driver’s seat. Bain expects sales in mainland China to grow by an astonishing 20 % to 22 % in 2018. Given that the Chinese already account for roughly a third of all luxury spending, this gives them an overwhelming share of the industry’s growth. Sales are also buoyant following tax cuts and record stock prices in the U.S.—the industry’s second-most important market—but nothing like on the Chinese scale.
This over-dependence on China comes with a perennial risk: a repeat of 2013-2014, when the Chinese authorities clamped down on corrupt gift-giving, or 2016, when Chinese consumer confidence and spending power was hit by the renminbi devaluation. People buy luxury goods—which by definition they do not need—when they feel wealthy, a feeling that has much to do with high asset prices. Any move to dampen China’s runaway urban property markets could hit the luxury industry very hard.
Yet the new boom has also brought a new risk: Falling out of fashion. Luxury brands have historically tried to present themselves as timeless. But the extraordinary success of a trendily revamped Gucci over the past two years—and lackluster sales for brands like Tod’s and Ferragamo —has shown that luxury and fashion are now more intertwined.
Consumers are younger, choosier and more engaged with the stories brands tell than they used to be, says Claudia D’Arpizio, author of the Bain report. Luxury now is less about status and more about identity, including in China. Two years ago Heard on the Street called the “end of China’s bling dynasty.” Luxury sales have returned, but the old tastes haven’t. This is a market of winners and losers.
Fortunately for investors, the core brands of the big listed groups, LVMH Moët Hennessy Louis Vuitton and Kering , which owns Gucci, both remain in vogue. The problem for investors is that these companies have become fashionable on the stock market, too. Kering stock is up 27% this year alone, its earnings multiple at its highest since 2001.
This bullishness is understandable: Sales are very strong, and these companies have the resources and social-media savvy to keep with the fashion cycle. Investors should probably wait, though, until the world is a bit less enthusiastic about China before buying LVMH or Kering. Judging by history, it may not be too long before the next wobble offers a cheaper way in.
Global personal luxury goods market expected to grow by 6-8 % to EUR 276-281 billion in 2018, driven by strong rebound in China
Here is the official full Press Release: Bain & Company’s spring luxury update highlights four trends shaping the personal luxury goods market in 2018 and beyond
The luxury market is on a tear halfway through 2018. A positive trend across all regions is set to drive this market higher by 6-8 % (at constant exchange rates) this year to reach EUR 276-281 billion. “China” and “millennial state of mind” remain the buzzwords in an industry that could reach EUR 390 billion globally in sales by 2025. These are the key findings from Bain & Company, the world’s leading advisor to the global luxury goods industry, in the “Bain & Company Luxury Study 2018 Spring Update” released today in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers’ industry foundation.
“2018 is off to a strong start,” said Claudia D’Arpizio, a Bain & Company partner and lead author of the study. “Currency fluctuations will have an impact, but we expect the healthy trend to continue across all regions and customer segments. Chinese consumers continue to stand out as a growth-driver for the industry, and are more fashion-savvy and digitally advanced than ever before, accelerating the shift of the industry to the millennial state of mind.”
Regional dynamics in the luxury market
In the Americas, the U.S. luxury market benefitted from a weaker dollar during the crucial holiday season. Tourists from Asia and Europe boosted key cities while local consumers were drawn to luxury again. Canada is growing while performance in Latin America is mixed. The region as a whole is expected to grow between 3 to 5 percent (at constant exchange rates) in 2018.
Europe was negatively impacted by a stronger euro, which had an impact on purchases by tourists. Some countries benefited from stronger consumption (Russia, France, Switzerland) while UK and Germany experienced a slowdown. Bain & Company forecasts growth of 2-4 % (at constant exchange rates) for the region.
Mainland China is expected to account for the lion’s share of growth in 2018. We forecast this market to grow by 20-22 % (at constant exchange rates). Brands are learning how to cater to local consumers, often young and heavily influenced by social media.
Purchases by tourists boosted spending in Japan, especially Tokyo and Osaka, though it was partially redirected towards experiences. Local influencers and social media are also key decision influences for younger local customers. Bain & Company forecasts growth of 6-8 % (at constant exchange rates).
Across the rest of Asia, Hong Kong and Macau continue on their recovery trajectory. South Korea benefits from visitors from China, but political tensions in the region could have a crucial impact on 2018 growth trends. Bain & Company believes this region could grow by 9-11 % (at constant exchange rates).
The rest of the world is expected to be flat or see only slight growth of 2 percent (at constant exchange rates). Dubai remains stable and supported by international tourists, while Australia is set to benefit from a larger store footprint.
Four Trends Shaping Personal Luxury Goods in 2018
Bain & Company’s research identifies four trends that will drive the luxury market in 2018 and beyond:
- Chinese customers in first place: Chinese consumers will be a key nationality driving the growth of the luxury market. Buyers of luxury in China are young, increasingly fashion-savvy and well aware of the price-value equation.
- Click, Click, Click: Online continues to gain ground as boundaries blur with traditional physical channels. Social media continues to influence purchases especially for younger consumers.
- Casual and streetwear: Streetwear categories experienced standout growth in 2017, driven by casualization of workplace attire and younger buyers of luxury goods. This segment remains a key lever to attract new customers.
- Consolidating new normal: Volume is driving market growth, not just price increases. Exchange rate fluctuations are redistributing spend among regions but not impacting global growth.
Growth expected to pick up and drive industry to new heights
Looking ahead to 2025, Bain & Company expects growth to pick up to 4-5 % per year (at constant exchange rates) increasing the market size to EUR 366-390 billion.
“Luxury brands should view themselves as the masters of their own destiny,” said Bain & Company partner and report co-author Federica Levato. “Customers are responding to targeted strategies, and top performing brands are already winning over the customers of tomorrow.”
Bain & Company is the management consulting firm that the world’s business leaders come to when they want results. Bain advises clients on strategy, operations, information technology, organization, private equity, digital transformation and strategy, and mergers and acquisition, developing practical insights that clients act on and transferring skills that make change stick. The firm aligns its incentives with clients by linking its fees to their results. Bain clients have outperformed the stock market 4 to 1. Founded in 1973, Bain has 55 offices in 36 countries, and its deep expertise and client roster cross every industry and economic sector.