The luxury retail market continues to be a lucrative sector for investment. Despite some challenges in recent years, from the Yellow Vest protests in Paris, to declines in stock prices, and concerns over matters such as the Chinese government’s hefty import duty charges. Nonetheless, the sector has bounced back, and growth is still expected to continue.
With a rise in the wealth of HNWIs reported in 2018, following year-on-year increases for six years straight, and the number of millionaires on the up, the sector can be safe in the knowledge of a strong customer base. However, companies should expect to face an increasingly competitive environment, and a greater demand to keep up with changing trends and tastes in the sector, driven by rising demand from a younger consumer base, namely millennials and Generation X’s. Market data shows that the 18 to 35 years age bracket in China, Europe and the US contributed a staggering 85% rate of growth to the luxury market in 2017 and are expected to account for a total of 45% of all sales by 2025.
Significant growth prospects in emerging markets, particularly in China
In the US, the leading luxury goods market globally, total sales reached $192 billion in 2018 and are expected to increase to $197 billion by 2020. Though purchases from tourists were in decline in the face of a strong dollar, an increase in domestic buyer spending continues to drive growth. Europe lagged behind other markets as strong currency performance similarly limited the spending power of tourists. Domestic purchases, however, made up the stakes, pushing retail sales up 3% to reach €84 billion, with France holding the highest share of sales in the overall luxury market.
In 2018, China’s global share of luxury spending rose to 33%, up from 32% the previous year, while in mainland China, increased demand saw a 20% growth, amounting to a total of €23 billion. A significant driving force behind global luxury sales growth, Chinese millennials are said to allocate about 20 per cent of their discretionary income to purchasing luxury goods. China is expected to account for 46% of the global market by 2025. China aside, overall performance demonstrated the growing importance of the emerging markets of Asia, in addition to the Middle East, South America and Africa.
The remaining BRIC countries, Russia, Brazil and India, have been touted as specific markets offering promising opportunities for luxury brands. In India, HNWIs grew 55% between 2007 and 2015 and the country ranked third in the world for its number of billionaires. Despite this, the luxury market is not yet fully developed, with numerous brands yet to set up locally. In the case of Russia, as with markets elsewhere, a younger consumer base is driving sales. Luxury brands, however, have failed to fully penetrate this market base, often relying on international rather than local insights to support their sales and marketing efforts. Overall, the market is expected to grow 3% annually until 2023. In the case of Brazil, performance is less certain, having been plagued by political uncertainty in recent years, steep import duties, and overall challenging fiscal conditions. Nonetheless, the size of the market and expanding middle class with a large appetite for international brands continue to drive interest in the market. Sales coming from emerging markets have forced brands to increasingly consider differences in consumer tastes acknowledging cultural and size preferences among their growing consumer base, such as the more modest fashion tastes of Muslim customers. Fresh modest fashion startups such as The Modist and Modanisa are catering to this new trend.
Luxury cars continue to dominate the luxury retail market
In terms of segments fueling the growth, personal luxury goods reached an all-time high of €260 billion, climbing 6% in 2018. The second-hand market accounted for an increasing share, reaching €22 billion in sales primarily driven by sales in Europe and online. Luxury cars continue to be the number one category accounting for a market value of €495 billion, with SUVs specifically being in high-demand, alongside limited-edition hand-built as well as classic cars. Emerging markets are posting positive growth in this segment, with the Chinese market expected to grow 3-5% until 2020, and the Middle East accounting for the highest number of luxury cars per capita. In the cosmetics sector too, consumer spending is being driven by emerging markets, including China, Russia and the UAE. Globally, luxury cosmetics accounted for 13.9% of revenue from global luxury goods in 2016.
Recalibration of strategies toward shifting consumer preferences is a perquisite for success
One thing all markets have in common when it comes to luxury retail is the increasing number of sales coming from online retail. Today it represents 10% of all luxury sales, a total market value of €27 billion, having grown 22% in 2018 alone. The US leads with 44% of total sales, with Asia posting positive growth, slightly ahead of Europe.  The number one segment is accessories, just ahead of apparel, with beauty and “hard luxury” (jewellery and watches) both growing. Driven by the expectations of a more digitally savvy consumer, brands have had to shift their traditional sales and marketing strategies in response. As the conventional brick-and-mortar stores fall in number in the face of rising online sales, the luxury sector must be at the forefront of innovative digital services to engage their customers. Those able to stay at the forefront will be those implementing disruptive tools that provide an all-around improved and more engaging consumer experience. Current trends in these technologies include AI and VR, allowing customers to ‘try’ before they buy, and omnichannel strategies able to deliver seamless consumer experiences across multiple touch points. This shift will also be reflected in advertising, with some brands such as Calvin Klein going so far as to pull their print strategies entirely in favour of online outlets.
The impact of millennials on the luxury sector, however, concerns not only the online experience. The millennial consumer has new values in comparison to preceding generations, with greater concern for the environment and sustainability among them. Luxury brands will need to respond by considering their overall product, supply chains and marketing to ensure they reflect their customer’s concerns’ and demonstrate clear corporate social responsibility (CSR) practise. There is also increasing concern over issues such as privacy and security, as the wealthy seek to remain anonymous, as well as increasing demand in seeking out new experiences as part of the luxury market.
Beyond the disruption by e-commerce, luxury brands also face some more fundamental challenges, particularly in developed markets. Shifting consumer tastes towards “experiences, not assets” may make for a smaller allocation towards luxury goods. New trends such as luxury goods rentals, a growing secondary market, and even a new trend for shared ownership, also known as “the assetization of personal goods” further reduce demand for new items.
Those brands able to evolve with the changing tide of consumer preferences, tastes and values, have ample opportunity to increase their market share. But as the increasingly diverging performance patterns among leading luxury brands shows, the winning formula, particularly in newer markets, requires considerable expertise. From digital solutions through to millennial and Generation X attuned marketing practices, as well as consideration of increasingly diverse tastes and cultural preferences, luxury brands will need to continue evolving with market trends to stay ahead of the game. The opportunities presented in emerging markets particularly, including China, India and the GCC make for promising opportunities for those able to establish their market presence.
July 24, 2019
CEO at Awad Capital