19 Nov, 2017
Key Forces Shaping the Luxury Market
In last year’s we looked at ‘luxury's new normal', mid-way through ‘the decade of change', and we discussed the opportunities created by changing consumer behaviors, the blurring of channels to market, increasing international travel, and the emergence of the millennial luxury consumer. This year, we pick up on the key theme of changing shopper behavior and the new luxury consumer, focusing on two of the main trends that are driving change in the market, and exploring some of the implications for luxury brands and retailers.
Consumers in emerging markets continue to drive luxury market growth
Our analysis found that over the last five years consumer spending on luxury goods has remained relatively robust, with only a small proportion (4%) claiming to have cut back on their spending. Growth continues to be driven by consumers in emerging markets. In China, Russia and the United Arab Emirates (UAE), markets that we have categorized as emerging luxury markets, the percentage of consumers claiming to have increased their spending stood at 70%, compared to 53% in the more mature markets (EU, US and Japan)
When we look at spending in the last 12 months we can see a slight slow-down. The percentage of consumers spending more than in the previous year fell to just over half, while the percentage stating that they spent the same amount rose to 43%. However, the proportion that stated they had been cutting back remained the same.
Our analysis of purchases by category shows there is a relatively even spread across the six product sectors considered in the survey (cosmetics and fragrances, watches, jewellery, bags and accessories, shoes and clothes) with one in five consumers making a purchase of luxury jewellery or cosmetics and fragrances. However, there were big differences between consumers in emerging luxury markets and those in the more mature markets, with watches and jewellery favored much more by those in emerging markets, particularly in Russia and the UAE.
Travel/tourism still the great growth opportunity
Almost half of luxury purchases are made by consumers who are travelling, either in a foreign market (31%) or while at the airport (16%). This proportion rises to 60% among consumers from emerging markets, who typically do not have access to the same range of products and brands that can be found in more mature markets. Looking at this buying behavior by generation, we can see that the propensity to buy luxury products in the domestic marketplace rises with age, peaking with the affluent and asset rich baby boomers. Greater affordability is a driver of luxury purchases outside the domestic market for 43% of consumers. Other benefits associated with making luxury purchases abroad are access to a wider range of products (43%) and the ability to buy products that are not available in the domestic market (65%).
Luxury is a genuinely global market; this poses a challenge for both the luxury brands and luxury shoppers, particularly those who travel extensively. Prices, stock levels and ranges differ from market to market and between cities, making it difficult to optimize pricing strategies.
Data from Bench Marque shows that luxury goods companies respond to currency movements in order to maintain their pricing structures between countries. In the weeks following the UK’s EU membership referendum in June 2016, the pound fell by 18% against the US dollar. Brands responded by raising their prices; by March 2017 headline prices in the UK were 5% higher for like-for-like items, and a further effective 5% rise was achieved by replacing existing inventory with higher-priced products. Conversely, when the rouble appreciated during 2016, companies cut the prices of their luxury goods in Russia by over 11%, to remain competitive.
However, there remains significant regional price disparities within the luxury goods market. Bench Marque data reveals that despite increasing internationalization, US dollar-adjusted prices for equivalent items are on average over 50% higher in China than in Italy and France. This presents a clear arbitrage opportunity for travellers from Asia, and maintains the pre-eminence of European brands' home markets as shopping destinations. Although a premium is charged in Asian markets for all brands, pricing strategies vary, and the price difference between China and France varies from just 20% to over 70%, depending on the brand. The highest premium is for watches and jewellery (55% on average) and the lowest is for bags (40% on average).
This suggests that luxury goods companies still have an opportunity to optimize their range and prices for local markets, to meet demand and ensure balanced growth globally. Customer data and analytics can play a key role in allowing brands to maximize sales at the optimum range and price points for each market.
Luxury market trends in 2017:
1. From physical products to digital experiential — the essence of luxury is changing from an emphasis on the physical to a focus on the experiential and how luxury makes you feel. However premium quality remains a ‘must have' and consumers retain a keen eye for craftsmanship and hand-made products.
2. From standardization to personalization — expansion through globalization necessitated a one-size-fits-all approach. However, changing luxury shopper behavior demands a different, more personalized response.
From physical products to digital experiential
Quality continues to be the key driver of luxury purchases across all the markets we surveyed. Wealthy Chinese are the top spenders when it comes to quality: 93% buy luxury products because of their premium quality, and 90% like to buy luxury products which are hand-made. 89% avoid buying luxury products that do not respect ecological sustainability.
Another important issue is how luxury products make consumers feel. This relates to the intangible quality that luxury goods possess. More than half of the consumers in our survey admit to conspicuous consumption or buying luxury products purely for the status that comes with possession of certain objects. Status has now become less about 'what I have' and much more about 'who I am': more ethical, tasteful and discerning. Consumers are also clear that they see the future of luxury as digital. When asked how they see the luxury sector developing in their respective countries, almost half (48%) said that e-commerce and m-commerce will become more widespread, while over a third (37%) feel that luxury products and technology will become more closely linked.
A significant challenge for luxury goods companies is to find ways of incorporating digital technology into their products without losing their heritage or their focus on traditional materials and methods of manufacturing. We have seen some attempts at the ‘premiumisation' of technology, such as the Pierre Hardy-designed Hermès strap option on Apple Watch and attempts at fusion such as the Samsung collaboration with Grisogono
Disruption in the sector is set to continue as the next wave of digital technologies are adopted, such as iterative manufacturing (3D printing), artificial intelligence, robotics and augmented reality/virtual reality. Our survey found that the majority of luxury goods buyers expect the market to be further disrupted. However, there was a difference of opinion about how quickly the disruption would happen, with 22% believing that it would take more than six years.
Another significant challenge for luxury goods companies is how to transition to a more digitally-led distribution model while retaining the all-important element of quality.
Omnichannel distribution will emerge as the dominant model in luxury retail, as it has done already in the mainstream retail market. While e-commerce continues its relentless rise, our research shows that 63% of luxury goods purchases still take place in a physical store, with luxury consumers in mature markets more likely than average to shop in store, although consumers in emerging market are more likely to shop on a mobile device. Millennials are the most digitally-influenced luxury consumers, with 42% of their purchases made either by computer or via mobile devices, which are becoming more popular with all generations. This figure for Millennials compares with 35% for Generation X and 28% for Baby boomers.
From standardisation to personalisation
Multi-brand stores for luxury goods now account for 78% of online purchases, whereas mono-brand stores dominate in the physical environment. This partly reflects the dominance of online specialists (such as Yoox Net-A-Porter) compared to the relative lack of investment online channels by many of the major brands. It also reflects the fact that for much of the past ten years, luxury brands have focused on expanding their physical store networks into new markets and territories. The luxury sector has been through a period of expansion, as companies have grown by extending the reach of their distribution networks and opening new stores in new territories.
During this period of physical expansion the focus has been on consistency and standardisation of experience which in turn has led to generic stores and generic (albeit premium) experiences.
However, consumer expectations from a luxury retail experience are changing. Our consumer survey shows that luxury consumers now want:
- more shopping channels — 39% are asking for home delivery
- more reward for their loyalty — 44% are expecting rewards through gifts
- more personalisation — 45% are asking for personalised products and services
Digital channels are creating a need for large-scale high- quality personalised content. Creating customised online content to engage large numbers of consumers is a highly- demanding challenge, and some luxury goods companies have started to open up a dialogue with consumers and involve them in the marketing process.
Engaging with the new luxury consumer is an opportunity for companies to move the conversation on from price and status, to a deeper connection focused on experiences and the feelings that luxury products can evoke in their purchasers
Read also: Retail Future, Top 10 Lessons for Retailers, 25 Fastest-growing Apparel Retailers in Europe, Retail and Consumer Products Trends, How do consumers shop (Part 1, Part 2), Retail and Consumer Products Trends, Urban World: The Global Consumers to Watch
2018 fashion events: Top Bridal Fashion Shows, Top Specialized Lingerie Trade Shows, A Calendar of Italian Fashion Weeks, Events and Trade Fairs, 2018 Fashion Calendar in UK, The Key Fashion Events in Spain, A Calendar of Fashion Weeks, Events and Trade Fairs in Germany, Nearest Fashion Shows in Paris
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