The global luxury market tracked by Bain & Company comprises 9 segments, including ;

  1. personal luxury goods
  2. luxury cars
  3. luxury hospitality
  4. luxury cruises
  5. designer furniture
  6. fine food
  7. fine wines and spirits
  8. private jets and yachts
  9. fine art.

The overall market is at nearly €1.2 trillion in 2017 in retail sales value. Luxury cars, personal luxury goods and luxury hospitality comprise approximately 80% of the total market. 

The second largest segment of this market is the personal luxury goods market consisting which includes sales of jewellery, watches, leather goods, shoes, apparel, makeup and perfume 

Accessories remains the largest and fastest growing categories of personal luxury goods, capturing 30% of the market and growing by 7% in 2017 (at constant exchange rates).
Within accessories;
– high-end shoes (grew at 10%)
– leather goods  (grew at  7%)
– apparel (grew at 3%)

Hard luxury contracted by 5% in 2016.).
Within Hard luxury;
jewellery (grew at 10%) 
watches  (grew at 3%)

Makeup and perfume (grew at 4%).

 

Sales Channels within the personal luxury goods industry

Wholesale is still the dominant selling channel within the personal luxury goods market, capturing 66% of the total market with retail at the other 34%.

Wholesale grew by 3% in 2017, whilst retail grew by 8%.

E-commerce grew to a 9% market share in 2017.

Airport retail accounts for 6% of the global luxury market (unchanged),

 

As of 2017, the personal luxury goods markets was worth  €262bn in retail sales value. Below is a chart showing how the sector has grown.

The sector, cyclical in nature, has been going through a growth slowdown since 2011;

At constant currencies, so in real terms;

  • Growth was 13 percent in 2011
  • Growth was 5 percent in 2012
  • Growth was 7 percent in 2013
  • Growth was 3 percent in 2014
  • Growth was 1 percent in 2015
  • Growth was 0 percent in 2016.
  • Growth is estimated at 6% for 2017.

It is predicted that the compound annual growth in the personal luxury goods industry would be between 4 and 5 percent through the next three years.

The stronger forecast for 2017 vs 2016 stems from three factors,
– a resurgence in Chinese consumer spending, both at home and abroad (in Japan), fueled by growing consumer confidence and the rapid resurgence of a new increasingly fashion-savvy middle-class
– return of tourism confidence in Europe. Now again the top region for luxury sales by value
– efforts by luxury brands to identify and respond to the tastes of specific groups of consumers, particularly millennials.

We look again at growth in the industry (at changing currencies) v price inflation and we can see some correlation that proves that pricing power has put significant pressure on industry growth. Prices have grown on average at around 4% a year over the past 10 years, however price inflation slowed to 1% in 2015 and 0.5% in 2016. In 2017, price inflation was flat. Coincidentally, in these years the market performed at its worst, and revenue growth was only able to be achieved through higher volumes as a result of better global consumer confidence and further engagement by the Chinese. This was lucky since the strong Euro was a significant FX headwind to European-based fashion retailers.

Brands that are able to increase their volumes will be better placed to gain more pricing power in the market, charge higher prices, expand margins, cash generation to accelerate, which will lead to increased M&A activity.  Only the most innovative companies will be able to drive this volume, as a result of offering something unique and capturing the attention of its consumers in memorable ways. This cannot be done without a strong appreciation of how important the digital channel is as a method of distribution and generating awareness.

Brands will be slowly transitioning from physical stores and investing more capital into digital offerings and experiences. Analysts expect online sales to take more and more share from the overall market, as online grew 1% to 9% in 2017 and a 75/25% physical/online split expected by 2025. This will have an impact on margins due to lower salary, leasing, depreciation and capex costs.

Margins have grown quite steadily over the years across a basket of the largest luxury companies, although EBIT margin took a hit since 2015, dropping by about 400bps to 58% as a result of pressuring opex costs. The move to digital and reducing physical presence in the interests of saving costs, promoting ‘rarity’ and increasing brand prestige on the high street seems to be the way forward in tightening the gap between these margins.

The personal luxury goods market is a growth market, currently trading at 25x consensus PE and at a 27% premium to its historic average multiple of 19x in the past 10 years. This is remarkable since the sector has been consistently underperforming the EuroStoxx 600 index up until 2017 and analysts believe that low single digit revenue growth and ongoing margin pressures are still likely to persist.

Investors are therefore pricing in margin expansions and the belief that firms will be able to grow their top lines with at least high single digit LFL increases, which are the minimum requirements for getting material margin expansions. Investors are therefore pricing in outperformers that will be able to deal with the industry’s structural challenges and achieve superior top lines. They will be doing this through;

  • Strength of brand/product innovation, which are really key to success.
  • Brands working harder to keep their market share than ever before, since there is more competition now and retailers are having to adapt to the changing consumer landscape
  • The Chinese are back in the market, but they are a different type of consumer from their older counterparts and they demand different things. Catering to millenial experience-based spending and a growing affluent middle-class will be key to growing this market segment.

Luxury brands have also begun to focus on changing their portfolio structure to increase scarcity, helping maintain their aura of prestige. Examples of strategies adopted by luxury fashion brands include;

  • reducing the number of entry level products
  • physically distancing off-price outlets from city centre stores
  • re-orienting perceptions to emphasise higher-priced, iconic products with more subtle brand signifiers. For example, Dior in Paris holds sales only twice a year and for very short periods, and at separate rented locations, never in their flagship store on Avenue Montaigne.
  • Burberry burned unsold clothes, accessories and perfume worth over $50 million last year to protect its brand and maintain exclusivity. Fashion firms including Burberry destroy unwanted items to prevent them being stolen or sold cheaply to people they may not wish to be associated. 

     

Outlook

The personal luxury goods market is set to grow as much as 8% globally in 2018, according to a recent report, pushed on by double-digit sales growth in Asia and the accessories and footwear categories worldwide.

Data issued by the Altagamma Worldwide Market Monitor and by a Bain & Co. study has forecast personal luxury goods will fetch revenues of 276 billion euros to 281 billion euros this year, a jump of 6-8%, on 2017. Since the start of the year, both key players in the market; LVMH and Hermes, recorded strong 1Q sales driven by Asia despite ongoing trade wars between the US and China. 


Brand Momentum and Digital Footprint

A study by BAML revealed that in Q1 2018, among soft luxury brands, Givenchy, Versace, Gucci and Dior had the strongest combned digital presence and momentum whilst Zegan, Ralph Lauren and Michael Kors had the weakest.

On the hard luxury side, Bulgari, Patek Philippe, Rolex and Tiffany had the strongest combined digital presence and momentum, whilst Van Cleef, Tissot and Omega had the weakest.

Results below; 

Top 10 soft luxury brands by social media followers Top 10 soft luxury brands by website traffic Top 10 hard luxury brands by social media followers Top 10 hard luxury brands by website traffic
Chanel LVMH Tiffany Pandora
LVMH Gucci Pandora Rolex
Gucci Ralph Lauren Rolex Tiffany
Dior Chanel Cartier Swatch
Burberry Michael Kors Bulgari Bulgari
D&G Coach Swatch Omega
Michaek Kors Kate Spade Tag Heuer Cartier
Prada  Burberry Omega Tag Heuer
Versace Dior IWC Montblanc
Ralph Lauren Hugo Boss Longines IWC

 

 

 

 

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