19 Nov, 2017
World of Luxury
The economic environment for luxury brands continues to be challenging, with slow growth in major developed economies, high levels of debt in emerging markets, deflation or low inflation in rich countries, a protectionist backlash against globalization, troubled credit markets in a number of countries, and worsening demographics in many. Yet despite the economic headwinds, the sector is resilient and consumers are still making luxury purchases, especially in emerging markets.
The US is the leading luxury goods market, and with the slowdown in sales in China, it is expected to remain so for the next few years. An important influence affecting several markets over the past year has been China and the Chinese luxury consumer. A backdrop of uncertainty — the new US government, Brexit and terrorist attacks in several European cities — has deterred many potential Chinese buyers from travelling to key shopping destinations in the US and Europe.
The Eurozone economy is growing at a moderate pace. Yet despite the aggressive monetary policy of the European Central Bank, investment remains weak and unemployment high. Although the European luxury goods market has moved on from the most difficult years, national economies are recovering at different rates, with countries in southern Europe still suffering from chronic unemployment and low consumer confidence. Overall market growth is slow but steady, with both domestic shoppers and wealthy tourists cautious about spending. Against a backdrop of further uncertainty, with safety concerns after terrorist attacks in several European cities, many potential overseas shoppers are being deterred from travelling to key shopping destinations in Europe. For now, Europe’s luxury sector is likely to remain on a modest growth trajectory.
The Russian economy has been in recession, still suffering from the effects of economic sanctions among other factors, and sales of luxury goods slowed down as middle class consumers tightened their belts. As their purchasing power decreased, a significant number of them have sought out lower-priced products. Looking ahead, the local currency is showing signs of stabilization and moderate growth is expected in the market. However if the political and business environment worsens, sales from even the most affluent consumer segment will be adversely affected.
The ‘Brexit' decision led to a sharp decline in the value of the pound due to an expectation that Brexit might reduce inbound investment into the UK and initiate an economic slowdown. Some of these fears may not have materialised, but at the time of this report it is still unclear what type of Brexit deal will be agreed, or even whether the UK and the EU can successfully come to a mutually acceptable separation. This uncertainty will remain for some time to come.
In the months following the Brexit vote, luxury prices rose by as much as 10%-15% to adjust to sterling devaluation — and UK luxury companies continue to assess how to adjust their business models in other areas (notably in sourcing, supply chain and talent) in the face of the fall-out from Brexit. Wealthy tourists from the Middle East, China, the US and Russia continue to drive a significant proportion of demand in the UK luxury goods market, which is therefore exposed to the risk of economic and political developments in these countries. However, inbound tourist numbers, and consequently luxury goods spending, has been even stronger than usual (notably by Chinese visitors) as the UK became the most affordable luxury market in the world in which to shop.
Both mainland China and Hong Kong continue to experience a slowdown in luxury goods spending, with economic uncertainty dampening consumer confidence. The Hong Kong market is still affected by the strained relations with the mainland, with many wealthy Chinese tourists staying away and choosing to travel to other Asian cities for their shopping.
In mainland China, the slowing economy has resulted in lower spending, and the central government’s crackdown on luxury gifts in the corporate sector continues to have an impact. Nevertheless demand remains steady among the country’s expanding middle class, with their increasing disposable incomes, as they continue to buy better quality products and showcase their social status. In addition, as in other emerging markets, prices of luxury goods in China are being adjusted downwards to bring them in line with global markets. This is encouraging more Chinese consumers to purchase luxury brands in their domestic market.
Rest of Asia
Strict measures by the Indian government in 2016, such as demonetization, an excise duty on gold and diamond jewellery, and the tax on luxury goods to curb ‘black money', have significantly affected luxury good sales in the country. However, India remains the bright spot between Asian and BRIC countries, and demand for luxury goods is expected to remain strong. The long-term economic prospects and demographics are very favorable: a rapidly rising urban middle class with increasing disposable incomes is expected to drive sales of luxury goods. But India still has many challenges to overcome before it becomes a major market for luxury brands. Facilitating market entry for new brands would help drive growth and ease some of the current challenges brands face.
Despite the economic difficulties in Japan, the luxury sector experienced moderate growth in 2016, due to a steady supply of affluent consumers who continued to spend and also to a boost from increasing tourist numbers ahead of the 2020 Tokyo Olympic Games. Part of the economic problem is demographics — even after several years of an unusually easy monetary policy, the economy is barely growing. On a per worker basis, Japan’s economy has actually been growing at the same pace as the US, yet the number of workers is declining, and this is contributing to slow growth. The strong yen and China’s slowing economy remain key constraints on exports. However consumer confidence is rising, and the sector is likely to continue its moderate rate of growth.
Although the global economic downturn and local political instability have affected several industries in South Korea, luxury goods have prospered, with consumers showing increasingly sophisticated tastes. And as the market matures further, we are likely to see healthy growth in the coming year. The country continued to benefit from an inflow
of Chinese tourists, who have shifted their purchasing preferences towards higher value products such as jewellery and watches. With sales of luxury goods in neighbouring China and Japan coming under political pressure, South Korea continues to be the most popular luxury shopping destination in Asia.
The market in the Middle East continues to represent a big opportunity for luxury brands: luxury malls in Abu Dhabi and Dubai have helped to promote these cities as desirable shopping destinations. Well-established big-name brands have performed well in the region, and tourism is a major driver of sales in Dubai. However, the market saw a significant slowdown in 2016, caused by the low oil prices, higher gold prices and an increase in the cost of living. Another factor was the currency effect: the dirham is pegged to the US dollar, and this effectively made the price of luxury goods higher for tourists from Europe, whose currencies have devalued against the dollar. In addition, higher relative costs meant that local residents found it more attractive to make their luxury purchases while travelling abroad in Europe. The region is likely to feel the impact of political unrest as well as global economic uncertainty, but further growth is nevertheless expected as Dubai and Abu Dhabi continue to be attractive shopping destinations.
The rate of growth in the world’s largest luxury goods market slowed in 2016, hampered by a strong US dollar and a slowdown in trade from foreign tourists, in particular from China. However the high value of the dollar has been beneficial for the domestic market, helping to keep down the prices of imported goods, and thereby boosting consumer purchasing power. However although the improved jobs market and rising pay have supported local consumption, US consumers are starting to cut back on discretionary spending on clothing and other personal accessories, in the light of uncertainty about where the government’s policies are heading. In the coming year growth in the market is likely to continue, although the rate of growth could be affected if the dollar continues to appreciate. Finally, there is a risk of protectionist measures that would boost import prices, something that would probably curtail the growth in luxury goods spending.
Mexico is the largest luxury goods market in Latin America, followed by Brazil. Over the past year, it has benefited from relatively attractive prices for luxury goods in the domestic market compared to purchasing them overseas. However it is now under pressure following the devaluation of the Mexican peso, which has been hitting historical lows against the US dollar. The tactic adopted by luxury brands in the past has been to absorb the exchange rate differences, but this is not sustainable in the long term, and many companies will have to pass on the higher prices to consumers. Economic growth is expected to slow down in 2017, with deteriorating business confidence and tighter financial conditions having an impact on consumer spending. In addition, the new US government’s attitudes towards immigration and the North American Free Trade Agreement (NAFTA) could pose serious problems for the Mexican economy. Despite this backdrop of economic and political uncertainty, the outlook for luxury goods is optimistic, driven by Mexico’s fast-growing middle class who value quality at the right price, and by the upper- middle class who are seeking ever-more luxurious lifestyles to differentiate themselves.
With a weak economy and widespread government corruption, the dire state of affairs in Brazil is having a dampening effect on the luxury market, and consumers are becoming more conservative with their purchases. The gift sales market, which is a key part of luxury sales in the country, is seeing consumers trade down to ‘affordable luxury' when buying presents, due to weakening purchasing power and a wish to avoid seeming ostentatious in the light of the current economic climate and wider social concerns. Many Brazilian consumers, who in the past did their luxury shopping abroad, are now doing more of their shopping at home as they are travelling less. Also, prices of luxury brands in Brazil have started to adjust to bring them more into line with global prices, making the savings from overseas purchases less worthwhile. Brazil continues to be an important market for luxury goods as it is home to a large number of wealthy people, and as the market is not yet mature, there is still a lot of potential for growth.
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
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
More information about some 2018 trade fairs: Top Drink & Beverage Trade Shows around the World, BaselWorld Cuts Number of Exhibitors by Half, Top International Footwear Trade Shows, Top International Children and Maternity Trade Shows, The Best Gem and Jewelry Trade Shows, Biggest International Boat & Yacht Shows, Must-Visit in 2018 International Cosmetic Shows, Top International Golf Trade Shows
Our suggestions: 20 Must-Read Books
Some strategies of raising capital: Bringing Your Company Public, Exploring Alternative Capital-Raising Strategies, Refinancing and Minority Equity as Partial Exit Strategies, 5 Alternatives To IPOs, How to Raise Capital For a Company in Financial Troubles, 7 Private Equity Strategies, Why Successful Business Owners Sell Out, The Six Types of Successful Acquisitions, Race to Become a Global Player, Refinancing and Minority Equity as Partial Exit Strategies, Guide To Equity Release Or «Cash-Out»
12 Oct, 2018
The popularity of products from Apple Inc. could hurt jewelers this holiday season, according to some analysts. Apple recently rolled out three new smartphones and a new Apple Watch, and those items...
01 Oct, 2018
Business partnerships are a little bit like marriages. A lot of them don’t work out and some end badly! Give your small business partnership the best chance for success by following these tips....