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Worldwide sales of luxury goods such as high-end handbags, shoes and jewelry are growing faster than expected this year thanks to thriving demand from Chinese customers and young shoppers, according to consultancy Bain & Co.
After stalling in 2016, revenues from personal luxury goods are set to rise six percent at constant exchange rates in 2017 to 262 billion euros (308 billion US dollars), Bain forecast in an annual report released on Wednesday, compiled with Italy’s Altagamma.
That trumped an earlier projection for two to four percent growth. The rosy outlook tallies with stronger earnings at many luxury retailers, such as France’s LVMH, owner of jeweler Bulgari and fashion house Louis Vuitton, or Italy’s Brunello Cucinelli.
A spate of security threats in Europe had curbed tourist spending in the region in recent years while a Chinese economic slowdown had rattled the luxury sector.
But visitors to Europe are splashing out again and demand from middle class Chinese has rebounded quickly, helping to offset a more muted US market.
File photo of a Louis Vuitton handbag
Retailers’ attempts to connect with younger buyers and bridge a price divide between Europe and more expensive Asia were also paying off, Bain said.
"Luxury goods companies have rethought strategies and are now regaining the trust they lost from customers," said Federica Levato, a partner at Bain and a co-author of the report.
The growth this year is "healthier," driven by a rise in volumes rather than in prices and is balanced between tourist purchases and local buyers, Levato added.
Chinese buyers made up 32 percent of the luxury goods market in 2017 – more than any other nationality – thanks to both rising purchases in their home market and abroad.
The industry as a whole could notch up annual growth rates of four to five percent until 2020, Bain projected, at a time when online sales, once a more peripheral channel for luxury brands wanting to project an air of exclusivity, are growing steadily.
They are forecast to reach a quarter of all sales by 2025, up from nine percent at present.
Customers in queue to shop at a Hermes store in Paris, France
Generation Z
Millennials, born between the early 1980s and mid-90s and who already represent a third of the market, and the later "generation Z," which grew up with smartphones, are starting to make a dent in the luxury market, Bain said.
Brands have been increasingly turning to social media or pairing up with pop stars and so-called "influencers," making sure their products chime with younger tastes and branching into casual wear and street wear, with t-shirts, sneakers and denim.
These efforts come at a cost, however. While 65 percent of luxury firms will experience sales growth in 2017, only 35 percent will manage to increase their operating profit, Bain found.
Young buyers are notoriously fickle, happily jumping from one brand to the other and keeping retailers on their toes.
"It raises the bar in how companies are thinking about their marketing strategies. It was traditionally just beautiful pictures in a landscape with a beautiful product, this is not the case any more," Levato said.
Man donning a hoodie co-designed by Supreme and Louis Vuitton
Street Wear Boost
High-end street wear helped boost global sales of luxury personal goods by 5 percent this year to an estimated 263 billion euros (309 billion US dollars), according to the report.
Fashion houses have been actively courting millennials in recent seasons, but it has taken street wear to catch the interest of Generation Z born after 1995. Think of it as a Harajuku sensibility – with pastels, emojis and rainbow or unicorn detailing – taking global flight.
"There is a big market of 2.5 million euros for luxury T-shirts, for example, that is growing very fast. And a half-a-billion-euro market for rubber sliders, which is very unusual in this market," Levato said.
While street wear has proven to bring the next generation of consumers into the luxury fold, it is a double-edged sword.
"Street wear is a macro-trend in all geographies" that represents a state of mind and transcends generations, Levato said. "We think it is more about how people live their lives and how people like to dress vis-a-vis 10 or 15 years ago, when work wear was more formal."
But it can be easily copied by producers of fast fashion. To counter that, Levato said, luxury brands are putting more emphasis into branding activities including Instagram stories, creating relationships with influencers and making stores unique in each city to attract both tourists and domestic shoppers.
"Once it was all about beautifying a product. Now product is just one of the many levers you use to maintain and capture your customer," she said.
(AP & REUTERS)
