03 Oct, 2017
Luxury Goods Worldwide Market Trends
The global luxury market comprises 10 segments, including personal luxury goods, luxury cars, luxury hospitality, luxury cruises, designer furniture, fine food, fine wines and spirits, yachts, private jets and fine art. The overall market grew at 4% in 2016, to an estimated €1 .08 trillion in retail sales value. Luxury consumption shifted away from goods and toward experiences such as travel and gastronomy, which grew faster than luxury goods by at least 5 percentage points. The best-performing categories were luxury cars, luxury hospitality, fine wines and spirits, and fine food.
- Luxury cars remained the top-performing segment (growing 8%), particularly in the very high end of the market, within which sales were strong in China.
- Luxury hospitality (up 4%), luxury cruises (up 5%) and fine restaurants all benefited from growth in luxury travel.
- The beauty, fine wines and spirits, and fine food segments all grew, reflecting a redirection of luxury spending away from goods and toward personal pampering and experiences.
- The private jet market contracted, and yacht sales stagnated; unlike luxury cars, neither segment has been able to benefit from growing demand in China.
The personal luxury goods category—the «core of the core» of luxury—was essentially flat (in constant exchange rates), with total sales of €249 billion. After relatively strong growth over the past two decades—excluding the financial crisis—the current period of flat growth represents a new normal for the luxury goods industry. Growth for the past three years has gradually decelerated below 3% at best, in constant exchange rates.
Much of the nominal growth last year came from currency effects alone rather than true organic sales growth. In 2016 the currencies of several major countries depreciated significantly against the euro, including the British pound (down 10%, in large part due to Brexit); the Russian ruble (down 11%); the Brazilian real (down 7%); and the Chinese yuan (down 6%).
In addition to the shift toward purchasing luxury experiences, a few other luxury trends were particularly noticeable in 2016: increased casualization, the rise of discount and online, and a revitalization of local consumption.
Slower growth of personal luxury goods sales worldwide
The Americas and Asia (excluding Japan)—two major luxury markets—both contracted by 3% in 2016. Europe declined 1%, primarily due to a decline in tourism, and potentially would have performed worse were it not for strong sales in the UK (driven by a depreciated British pound). In China, consumers started buying again in their home market, but that was not enough to offset a dip in purchases by Chinese travelers abroad. A key factor in this shift is tighter customs controls to limit foreign shopping in an effort to fight the «grey market» of unauthorized sales and stimulate domestic consumption.
As a result, China’s overall share of global luxury goods purchases declined slightly from 31% to 30%. Longer term, China remains an engine of growth for luxury goods as the country’s middle class continues to grow in size and purchasing power. The behavior of Chinese consumers epitomizes a larger global trend: the re-localization of luxury. In 2016, the growth of local luxury purchases exceeded that of tourist purchases by 5 percentage points, the first time that has happened since 2001.
Wholesale channels dominate, but retail continues to rise Wholesale remains the largest channel for personal luxury goods, accounting for roughly two-thirds of all sales. Yet the retail channel is growing steadily as department stores face structural challenges and companies increasingly seek to control the experience they deliver to customers. Sales in the off-price channel continued growing by double digits in 2016 (albeit at a slower rate than the 23% per annum that the category has experienced since 2013), to now reach 11% of the personal luxury goods market. Overall, across all channels, discounted sales comprise 37% of the personal luxury goods market, but luxury brands are becoming more disciplined and strategic in how they handle off-price sales. Online sales also continued to grow rapidly, reaching an 8% share of the global industry. That makes digital sales the third-largest global market in the world for personal luxury goods, after the US and Japan. Over the next several years, digital will continue to take market share from physical stores.
Casual goods in demand
Another pronounced trend is the shift in preference among consumers for casual products, especially in categories such as apparel. Luxury denim and sneakers are each now €3 billion markets, while down jackets and back- packs are €2 billion each. Conversely, sales in the hard luxury category, which includes jewelry and watches, declined 5%, primarily driven by the continued difficulties of the watch category (down 8% vs. 2015 at current exchange rates).
Strategy becomes paramount
In the new normal, we expect a compound annual growth rate (CAGR) of 3% to 4% for the luxury goods market through 2020, to approximately €280 billion. That is significantly slower than the rapid expansion from the mid-1990s to the late 2000s, when the majority of companies were able to post double-digit growth because of favorable market conditions and few organizations worried about operating costs. Even after the financial crisis, extremely strong growth in sales to Chinese consumers allowed many companies to post rapid growth and attractive profit margins.
By contrast, the current luxury goods market—and that of the foreseeable future—will feature clear winners and losers, and strategy will become paramount. Rather than simply riding favorable tailwinds, management teams will need an explicit strategy for how they can outperform the competition. They will need to allocate resources accordingly, and they will need to watch operating costs and overall productivity much more closely. Those measures may be a departure for how many luxury goods companies have been run in the past. Yet there is no realistic alternative. Over the next several years, the difference between strong executive teams and laggards will become apparent.
Individual segments performance
Over the long term, accessories have dominated in terms of both market share and growth rate (up 10% p .a. from 2010 to 2015). However, the category’s performance decelerated from 2015 to 2016, to 1% growth. Within accessories, the two largest segments—handbags (€44 billion in retail sales value in 2016) and shoes (€16 billion in 2016)—grew moderately at 2%.
From 2015 to 2016, the beauty category showed brisker growth at 4%, led by makeup and fragrances. The strongest markets were Asia and the Americas.
In the accessories category, leather goods and shoes showed a clear shift in favor of entry-priced goods such as backpacks and sneakers. In apparel, there is a growing dichotomy between large specialists and smaller, more dynamic lifestyle brands. Casual apparel is gaining traction, leading to growth in areas such as luxury denim, down jackets and active wear.
The watch market continued to struggle (down 8% from 2015 to 2016), especially for higher-end products in Asia.
Outlook for the future
The luxury goods market shows a marked shift in 2016 and has settled into a new normal characterized by slower growth. In this environment, companies no longer ride favorable market conditions to profitable growth. Increasingly, this market will be characterized by winners and losers. From 1994 to 2007, 87% of personal luxury goods companies were able to grow, and half posted growth rates in excess of 10%. From 2015 to 2016, by contrast, we forecast that fewer than half of all companies will grow, and just 14% will show double-digit growth.
We expect the market to grow at 1% to 2% in 2017 and a 3% to 4% CAGR through 2017 to 2020, to approximately €280 billion (at constant exchange rates). The rising Chinese middle class should continue to spur growth in luxury goods purchases, along with a recovery of consumer confidence in mature markets (including larger contributions from Generations X and Y). Markdowns will remain a sizable component of the market, but companies will handle them in a healthier and more strategic manner, reducing sales cannibalization. No category or segment champion will dominate, but digital will remain the clear leader among distribution formats. As the environment becomes more demanding, companies will need to rethink their strategies to win. Management agendas should include themes such as revitalizing domestic demand, adapting to volatile tourism flows, engaging customers more effectively, tailoring assortments to local preferences, determining the right role for stores in an increasingly omnichannel environment and increasing productivity.
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