THEMES SHAPING THE PERSONAL LUXURY GOODS MARKET
UPDATE JUNE 2018:
DELOITTE HAS IDENTIFIED TWO MAJOR TRENDS THAT WILL CHARACTERISE LUXURY GOODS MARKETS IN 2018:
1. MOVING FROM PHYSICAL PRODUCT TO DIGITAL
Digital is at the forefront of progress in the sector and the significant challenge for luxury goods companies is to find ways of incorporating digital technology into their products and marketing channels without losing their heritage or their focus on traditional materials and methods of manufacturing.
– digital gives access to emerging market consumers to the market – in some parts of the world, regions that are virtually untapped by global luxury companies. Growth continues to be driven by consumers in emerging markets. Ie. China, Russia and the UAE.
Half of luxury purchases are made by consumers who are travelling, either in a foreign market or while at the airport. This proportion rises to 60 per cent 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 or the products are just not available in the emerging market.
– The emphasis now is on shifting focus from the physical to experiential buying and how luxury makes you feel. Status has now become less about ‘what I have’ and much more about ‘who I am’: more ethical, tasteful and discerning. Luxury is becoming more about how you identify yourself.
– Disruption in the sector to come from iterative manufacturing (3D printing), artificial intelligence, robotics and augmented reality/virtual reality
However, this doesn’t mean consumers don’t have a keen eye for high quality and high craftsmanship goods, together with awareness of manufacturing practices that are socially and ethically responsible.
2. FROM STANDARDISATION TO PERSONALISATION
Changing luxury shopper behaviour demands a different, more personalised response. Cobsumers are wanting more personalised products from the luxury retailers.
China and Transit retail
Transit retail ie. consumer spending by foreign tourists overseas in luxury goods markets (such as France, Italy, the UK and Hong Kong) is extremely important in this industry. Globally, the transit retail channel not only accounts for 40 per cent of total luxury goods spending, but it is growing at a faster rate than the industry overall.
Chinese consumers play a primary role in the growth of luxury spending worldwide – they account for the largest portion of global purchases (32%), followed by Americans and Europeans. They also spend the most abroad compared to any other country. In China, there is nearly no foreign tourist consumption.
Chinese consumers split their consumption between mainly Europe, the rest of Asia and America.
European consumers either shop in Europe or America and American consumers predominantly shop in America.
Transit retail has grown by an average of eight percent a year for the past ten years, compared to around six per cent for the wider luxury market. This is is because of the growth in;
- international shopping trips
- far more accessible private air travel. Air traffic is expected to double over the next 15 years and this growth is set to be driven largely by an increase in travellers from emerging markets
- the overseas super-rich wishing to get the European shopping ‘experience’ that is not the same in their country
- Chinese consumers more than willing to abandon their domestic markets and travel abroad to acquire products that they feel is providing value and they are getting the highest level of quality for their money. Products also lag the European and American markets before they hit China, so they wish to stay up-to-date with latest trends.
- Chinese consumers wishing to avoid high domestic prices and taxes
- The modern Chinese consumer that is different from their parents, who were previously willing to be told what to purchase by the big Western brand companies. They were keen to make large ‘show-off’ purchases from the big name labels in order to display their new-found wealth, however, today’s young Chinese luxury consumers have more confidence, prefer more subtle and sophisticated styles, and like to buy ‘cool’ brands and desire more of an ‘experience’. They also like to splash out more with their money rather than older generations who were less informed and took more time to make choices.
Overall Chinese consumers are the travel sector’s biggest spenders and they remain strategically important for luxury brands. China is the main drive of volume growth in travel retail and this will continue as the next generation of luxury shoppers come into the work force and start to acquire wealth. There are currently over 400 million millennials in China, which is more than the working populations of the US and Europe combined.
Despite the slowdown in China’s economic growth, China’s consumption is on a positive trajectory led by a growing population (+32m people by 2030) and by overall GDP increase.
There were however been factors that have caused a slowdown in overall luxury goods consumption in China;
- In 2016, China tried to revive its struggling economy by imposing taxes for goods imported from abroad in 2016. The aim is to reduce overseas consumption and boost the domestic Chinese luxury market which has worked
- Chinese Yuan has weakened against the US dollar since beginning of 2014 and got weaker when the the Chinese government devalued the renminbi in August 2015
- Chinese Yuan has been stronger vs the Euro in the past few years which spurred Chinese consumption in Europe, but more recently in 2016 it has started to weaken
- In general Chinese economy is weakening and businesses are not flourishing and individuals are not spending like they used to in general. Growth in the economy has declining linearly from around 10% back in 2012 to now at around 6.8%. The impact of a weakening economy is unlikely to stop wealthy Chinese consumers from travelling to buy their luxury, but it might change their destination of choice as well as total in-destination spend. Short-haul destinations such as South Korea and Thailand could reap the benefits whilst spending in North America & Western Europe.
A good sign was to see the Chinese returning back to Japan.
Luxury businesses need to fully embrace digital because their consumers already have.
- Globally, 95% of luxury buyers are digitally connected and it’s estimated that 75% of luxury purchases are influenced by at least one digital touchpoint
- Research has revealed that Chinese consumers (the number one consumer of personal luxury goods) consult more digital resources than UK consumers when making a luxury purchase.
- A Deloitte study estimated that 64 percent of all in-store retail sales in 2015 would involve digital technology, up from 49 per cent in 2014.
- By 2020 we see the share of luxury e-commerce reaching 10% of all sales, driven by a greater desire for speed and convenience
Bain estimates online sales of personal luxury goods will make up 25% of the market by 2025.
With the remarkable growth of the online channel, the role of physical stores will need to change. Stores haven’t lost their purpose, but brands need to reinvent them to better engage with customers, in a way that stores will have to pivot from a transactional role to become venues for a broader range of customer interactions.
In 2017, online sales grew by a staggering 24% and now capture 9% of the personal luxury goods market.
It is expected that physical store sales are expected to drop to 75%, as online moves from 9% to a 25% share of the market.
Digital technology has changed the way in which personal luxury goods and marketed and sold by;
- Giving consumers greater access as well as greater information around both luxury goods and the wider luxury lifestyle.
- Showrooming is a process where customers visit a store to decide on a product then seek out the best price and delivery options online.
- Being a platform that greatly aids penetration for luxury brands and also, creates awareness and desire among customers as they constantly see their favourite brands being flaunted all over the internet on platforms such as Facebook, Twitter and Instagram e.g. with images of dinner at Corrigans, nights out at The Box, shopping on Fifth Avenue, hotel Stays at the Connaught and the latest purchase of an Aston Martin. Aggregated, these images have increased global brand awareness and at the same time stimulate the desire to acquire these products and services.
- Being a sales and service channel for those customers unable to visit a store, particularly in the case of an emergency purchase.
- Lowering the barriers to entry for a wide range of nimble luxury competitors who may not be able to compete with luxury retailers in-store but online, it gives for a more level playing field.
- Luxury consumers continuing to value their buying experiences as much as the product so retailers need to find new ways of engaging with their customers and inspiring through digital technology. They also need to be competitive as their consumers have more information readily available.
- Social media and blogging have started to play an increasingly important role and successful brands are already targeting key social media influencers to drive their brand messages. Bloggers are becoming more important and we are beginning to see the emergence of a new breed of online stylists and digital assistants (for example, Stylit and Trunk Club), whose role is to advise and assist consumers through the evaluation and selection stage of the purchase cycle, exposing consumers to new forms of influence. This is happening across brands rather than within brands – making the shopping experience more enjoyable and easier for consumers
However, many luxury goods companies are ill-prepared to capitalise on the digital opportunity.
Digital poses a challenge that the luxury industry is getting to terms with – around what the luxury digital experience looks like, how they can use digital to inspire, what the customer expects and how brand identity can be transferred without loss to the digital platform. Many luxury brands have chosen to use mobile technology, but with m-commerce, there is the challenge of how to replicate the full luxury experience on a four-inch screen. Brands need to push holistic consumer engagement through all touch points.
The ‘winners’ will be stronger brands (with brand equity counting for more in the multi-channel age); nimble operators; those with close relationships with consumers; and masters of the ‘last mile’ – purchasing and delivery options. Those channels at risk of ‘losing’ will be traditional store-focused retailers, brands underinvesting in digital, and those with trailing retail portfolios, notably in second-tier locations. The old retail business model is at risk and clinging on to nostalgia will hasten its demise.
Acquisitions are helping a growing number of companies to use digital technology to create a competitive advantage.
In the coming years, and as analytics improve, brands will be able to identify the key targets and also measure both direct and indirect consumer impact.
Growth Potential in emerging markets
Still the fastest growing regions for luxury growth and still not fully tapped into.
The growing importance of non-western markets for the luxury goods industry has been supported by supply chain leadership, technological innovation and international investment. These factors will help maintain further strong growth in these geographical markets.
New technology and its uses are changing the market at all points of the business cycle. Yet, technology is an area where luxury brands are playing catch up with the rest of the consumer goods market.
- New wearable technology
Connected homeware, smart watches and wearable fitness trackers have already made a significant mark on the consumer mindset, but in the luxury goods market, there are still just a few wearables – Swarovski, the crystal jewellery company is producing (in partnership with Misfit) a collection of activity-tracking jewellery, including a solar-powered tracking device. Apple and Hermès to develop an upscale version of the Apple watch and its accessories.
- Virtual reality
Will enter the mainstream with the launch of the first commercial available VR headset from Facebook’s Oculus. The luxury store is still the most important touchpoint in the decision-making process for luxury buyers – VR will enable brands to present a similar experience digitally, extending their reach and potentially cutting their costs.
- Artificial intelligence – will enable luxury brands to take what they know about their consumers and what they know about their products to deliver an experience to customers that would be replicated in-store. Robots..
- Interactive fitting rooms
By using VR and AI technologies, luxury brands can provide a personalized consumer experience, reach a wider audience, deepen product experience, and build stronger customer relationships. In parallel, the development of technologies such as voice commerce and the Internet of Things (IoT) are reshaping the entire luxury industry.
These all require back-end technology to support them and luxury brands must now face the challenge of investing in market-leading technology solutions. The new skills that underpin this such as, social media, analytics, 3-D prototyping with 3-D printers and customer relationship management (CRM) are scarce in the wider economy, placing them at a premium. This will require more people with a different type of skills set involved in this industry.
Millenialisation and ‘experience’ based spending
The main growth engine of the luxury market is a generational shift, with 85% of luxury growth in 2017 fueled by Generations Y and Z. But a broader “millennial state of mind” is permeating the luxury industry and changing the purchasing habits of all generations. This shift in mindset is pushing luxury brands to redefine what they deliver to customers, and how they deliver it.
Millenials tend to be low earning compared to prior generations, burdened by debt and valuing more their work-life balance. For them to engage with brands and for brands to get their loyalty, brands have to focus more on these days at providing an ‘experience’ for these consumers and establish that brand identity that will differentiate them from the multiple numbers of all other brands available on the market today, being marketed from different sources. Millenials also care about that brand’s place in society and its social effects on the environment ie. the message it gives. Personal recommendations seem to be one of the main drivers at every stage in the purchase cycle and millennials these days who are comfortable with technology will always continue to look at trusted reviews – so reputational risk is becoming increasingly important as the brand’s position in the customer’s head is most sensitive in this market.
Where millenials are already bombarded with messages, brands have to be more creative and offer something unique and different.
Brands such as Prada and Tommy Hilfiger have held several catwalk events where consumers can be captured by the excitement of the catwalk and be converted into immediate sales. – this is creating an experience and increasing transit retail
At the same time, to capture the wealthy in domestic markets, customers demand the European level of service and engagement in their home markets, which is driving costs up for retailers.
One of the biggest trends we are seeing among the Millennial generation that will continue into 2018 is the drive for live events and more experience based spending. Today, one in four Millennials would rather pay money for an experience rather than a product.
• Millennials are quickly changing the live event industry through the way they research, purchase, experience and amplify these moments. They are looking for brands to not only host these experiences but to also create a frictionless consumer journey from getting the tickets all the way to sharing their pictures on social media. That means easy online access with mobile-first capabilities, connected Wi-Fi at the event and follow up connection points to relive the experience.
• Furthermore, Millennials are a generation that is not only gaining more influence, but also more disposable income. As Millennials are entering their peak employment years (the median age among Millennials today is 26), their bank accounts are growing.
• In the past, affluent consumers marked their affluence with luxury products (think Rolex or Hermes). However, as we are seeing the shift towards experiences the affluent millennial mindset is changing. Why buy a $10,000 bag when you can book a trip to Thailand or get front row seats to your favorite concert for the same price? This trend will continue to transform and evolve from what we have seen in the past in 2016.
Luxury brands must place greater emphasis on making their brand “younger” and more fashionable to capture the next generation of trendy customers. There will also be an increased focus on “exclusivity,” both in product design and store footprint.
Further, for millennials the emotional and personal context within which luxury brands appeal to consumers has widened considerably. Luxury brands are supplementing traditional attributes such as quality and scarcity with lifestyle values including sustainability to attract millennial consumers. The emphasis on sustainability is visible in many areas especially in advertisements. Luxury brands have begun to highlight their use of renewable and organic materials, and now emphasise their efforts to lessen the environmental impact of their production.
Brands must be aware that customers have high expectations of their luxury experiences, rewarding those that understand and deliver them while ignoring those that do not.
Customers in emerging markets, particularly early adopters, who have consumed luxury goods for an extended period, now seek products that better represent their culture and heritage. Some customers have identified the feeling that they are buying into a culture that is not theirs. This is an opportunity for new brands, in emerging economies, to add to the luxury landscape.
This is a move towards localisation – bringing cultural diversity to the luxury market and brands that cater for different cultures. Luxury brands must maximise the diversity of ideas, skills, backgrounds and influences without sacrificing quality. Diversity will allow brands access to influences and trends they may otherwise miss. It is these ideas that shape the innovative visions that define the luxury market.
Whilst catering for different cultures of consumer, there has also been a shift towards customization and individualism of various luxury brands – for those that can afford it. One challenge, as well as an opportunity is for firms to be able to provide these features to a more average consumer so that personalisation can be more mainstream but still maintaining the brand’s level of quality. Consumers these days are more concerned with the experience of buying from a luxury brand, the identity, being able to have something completely unique and that the value is derived from the purchase. The logical extension of that will be moving towards customer empowerment, freeing the customer to shape their outcome. Chiefly, this will involve an emphasis on product customisation and in some cases, full customer design.
The winners of the future will create novel experiences, but will also ensure that their offering evolves and remains current and relevant, adapting to changing customer tastes. The need to stay relevant and fun is important.
Top influencers of the luxury world
VIPS, bloggers, youtubers, actors, athletes, musicians
Instagram is emerging as the leading social media platform for fashion designers.
The Luxury Start-Up
Another potential development is further subdivision of the luxury brand into micro niches, serviced by the challenger brands lacking the capital or desire to compete with the luxury conglomerates. By attacking specific niches, they reduce the barriers to entry and can better tailor their proposition to their target audience. We are witnessing a boom in such brands. From Adrien Sauvage’s eponymous label, Aaron Dash with MrDash, Dymant in Paris to Lux-Fix, brands are exploiting niches that only small and nimble operators can exploit.
These are firms that can opt for a very lean manufacturing process, outsourcing all but the core elements to scale much more quickly than a traditional company that manufactures everything. They don’t need a big marketing team to reach the customer in today’s market. They may not carry the same weight as decades-old brands – they don’t have to in order to be a profitable and sustainable business in today’s start-up-friendly culture.
For luxury goods companies, the strength of the dollar has meant increased purchasing power for luxury goods for US consumers and lower demand from consumers abroad, especially those in emerging markets and large overseas luxury goods consumers such as China and Russia.
As America has one of the largest luxury goods markets, it will be hampered by a strong US dollar and the rate of growth of the market overall could be affected if the dollar continues to appreciate and rates are hiked up once again. The strength of the dollar will continue to hold back tourist shoppers from the US market.
In 2017, the U.S. luxury market benefitted from a weaker dollar. Tourists from Asia and Europe boosted key cities while local consumers were drawn to luxury again. Canada is growing while performance in Latin America is mixed.
Low oil prices are good news as this translates into increased purchasing power for consumers and higher real (inflation-adjusted) wages in most major markets.
2017 saw a drop mid-way through the year as markets were unimpressed with OPEC’s decision to maintain production volumes at their current levels, however prices sharply rise back up again as demand shows strong (especially from China) and evidence that the OPEC deal is still working.
At its annual November meeting OPEC surprised markets by extending the supply deal in place through the end of 2018 and placing additional caps on Libyan and Nigerian production. This decision and evidence of compliance has since supported prices at their highest levels all year.
Consumer Survey – generational based spending
BAML carried out a consumer trends survey and found that;
- older generations (older millennialsS, gen x, baby boomers) place far more emphasis on value for money, whilst generation Z and younger millennials seem to place far less emphasis on value for money and care more about what brand they are wearing.
- Generation Z aseem to putting more emphasis on quality and sustainability.
- Generation Z buy more in store than millenials and older generations, whilst using stores (by comparison to older generations) less for discovery and prefer to search online before making purchases. This behaviour indicates that online presentation and in-store service are both crucial for gaining relevancy with the younger generations.
The future to 2020
Bain anticipates the personal luxury goods market will continue measured growth of 4-5 percent CAGR through 2020, reaching an estimated €300 billion in revenue (currently €262 billion).
However, that outcome is heavily contingent upon the continuous growth of the middle class in Mainland China and millennial-based spending.
Around the world, younger generations continue to outspend Baby Boomers (a person born in the years following the Second World War) across all personal luxury goods categories. Growing spending among Generation X (the generation born after that of the baby boomers (roughly from the early 1960s to mid 1970s)) shoppers, as a result of changing consumption habits, and the increasing growth Generation Y (the generation born in the 1980s and 1990s), driven almost entirely by the Chinese middle class, will pump an estimated 50 million new consumers into the market.
These younger X and Y consumers will comprise three-quarters of the global luxury market by 2020. Therefore, the market cannot afford to ignore them or their preferences for accessible yet content-rich products and brands.
Long term, the luxury market should benefit from evolving global demographics, continued urbanisation, increased centralisation of wealth in global destination key cities, improving macro and socio-economic trends, strong luxury consumer travel flows and the continued increasing penetration of digital commerce that will drive the industry.
Deloitte Global Powers of Luxury Goods 2018
Bain & Co – Luxury Goods Worldwide Market Study, Fall–Winter 2017