By Jonas Hoffmann and Ivan Coste-Manière
After enjoying huge growth in emerging markets like China, the luxury industry is now rapidly slowing down. As Jonas Hoffman and Ivan Coste-Manière argue here, this does not need to be cause for alarm; it is simply the “new normal” regarding future growth in the luxury industry.
After a golden decade of double digit growth boosted by Chinese client demand, 2013 was a deceptive year for the luxury industry with worldwide growth averaging 2% (5% at constant exchange rates)1. The main reasons were the continued depressed European demand, the anti-corruption policy of China’s Xi Jinping Administration and the devaluation of the Japanese Yen due to the Premier Shinzo Abe’s economic policy.
Forecast figures for the coming years expect growth to be between 6% and 8% both in the global market and in mainland China. In comparison with the gloomy forecast for the European and Western economies, these figures may sound excellent, but as any Marketing 101 class explains, satisfaction depends on expectations, and expectations have become high, very high, for this industry in the past years. Consequently, financial markets are ‘disappointed’ and most luxury groups have lost stock market value in the recent months.
Companies are also struggling to cope with this new reality, especially in sectors like liquors, spirits and watches. These items used to be favourite gifts but are no longer in fashion. Plans for retail footprint development have been halted and companies are refocusing their efforts on their most exclusive items where margins are higher. One striking example is the change of creative direction at Louis Vuitton, where Marc Jacobs, the brilliant designer who created prêt-à-porter at LV, has been replaced by Nicolas Ghesquière, the man who brought Balenciaga back to life. LV is expected to move from its expansive, logo driven approach to a more selective, exclusive, even intellectual approach. Indeed, the coming years will see less visible logos, exemplified by the excellent results of logo free bags from Bottega Veneta.
All these elements signal a new normal for the luxury industry, where elements like craftsmanship, heritage, uniqueness and rarity are in fashion again.2
We expect six trends to shape the luxury industry in the coming years: the role of Chinese clients; digitalization everywhere; dealing with the happy few; sustainability goes mainstream; consolidation versus niche opportunities; and made in emerging economies luxury. These trends act as catalysts, presenting unique challenges and opportunities.
Role of Chinese clients
According to Bain & Co and Altagamma3, in 2013 the mainland Chinese were the first consumers of luxury goods, representing 30% of the world’s consumption. This long awaited prediction became true at the speed of a CRH bullet train. Even if slightly slowed down by Foreign Direct Investment policy, tariffs, and the booming real estate local market, companies are now expanding their footprint to second and third cities. Chengdu, the capital of the Sichuan, is a particular hot spot in the westt of China, due to consumers’ impulsive behavior and a flourishing economy.
As Chinese customers become more and more attracted to travel, they buy more than 70% of their luxury goods abroad. Last Christmas clients queuing to enter luxury boutiques at Avenue Montaigne in Paris or Via Montenapoleone in Milan have increased exponentially. The fact that tariffs are the main reason for purchasing outside mainland China force companies to have a global view on their P&L: operations in most emerging countries are, for the time being, investments in brand notoriety, awareness, and equity rather than profitable operations. The multichannel distribution is reducing the return on investment and enhancing the return on capital earnings.
Travelling is part of a growing movement of sophistication for the affluent Chinese. They are travelling ten times more than they were ten years ago, resulting in around 100 million travelers. The first catch-up phase during which they bought symbols, logos or labels is ending. Experiential bespoke luxury is on everyone’s lips for the coming years and is already the trend for some affluent Chinese. Wine tasting courses pop up around China, and clients gather to vineyards in France, Italy and the US eager to become connoisseurs, the way they already are in tea, kesi or jade. Numerous complaints about after-sales service in China show that much has yet to be developed on that front, but the sales forces level is improving at a fast pace.
In China more than anywhere else before, ‘logo fatigue’ is manifesting itself as Chinese customers’ tastes evolve. The decelerating pace of store openings can be seen as evidence that understated luxury is becoming the highest priority of brands’ core values; Hermès thus becoming the definitive strategic example to many.
“In China more than anywhere else before, ‘logo fatigue’ is manifesting itself as Chinese customers’ tastes evolve.”
Digitalization everywhere
Although at first reluctant to follow the web explosion, companies are now fully embracing digital possibilities and are leading the innovation gateway. In a world where smart devices pop up everywhere, smartphones and tablets become the first ultimate touch point for luxury brands, especially among the younger generations. Early (and fast) movers like Burberry have gained a solid reputation among the young crowd: the great London flagship store is an example of seamless online/offline integration even if the challenge ahead for retailing is huge.
It is also important to remember that clients in “emerging” markets like China, Brazil or India are younger than the traditional luxury clientele, and are hungry for novelty. Online social networks like Weixin and Weibo in China can be a powerful vector of differentiation or a great mimetic catalyst. However, problems may lie ahead for brands from the damaging effects of an increasing ‘mass–tisation’ over the vital ‘underground’ approach of ‘real’ luxury.
The Internet has also given birth to a new generation of opinion leaders in the luxury fashion industry, for example, bloggers like Brian Boy or street photographers like Scott Schuman.
Dealing with the happy few
One of the effects of globalization was the rise of a category drawn from the new international social class of the hyper-rich, which has quickly swelled the ranks of the exclusive ‘Billionaires’ Club,’ a group that has increased tenfold during the last twenty-five years. These Ultra-High Net Worth (UHNW) individuals with a net worth superior to US$ 1 billion have specific consumption patterns and represent a goldmine for bespoke absolute luxury offers.
Indeed, Maslow with his famous ‘hierarchy of needs’ may have been wrong as we see a new dynamic stretching the pyramid. Everywhere we turn, we see examples of hyper luxury. From private bizz-jets, like the Dassault Falcon FX, to Richard Mille’s racing machines on wrist watches, passing by Reuge music boxes and anti-gravity flights, hyper luxury is rocketing.
“Following the examples of Kering or LVMH, companies have integrated sustainable considerations in their operations. Luxury brands are seen as role models, and clients, celebrities and NGOs are vigilant on how they address environmental and social issues. “
Sustainability goes mainstream
Following the examples of Kering or LVMH, companies have integrated sustainable considerations in their operations. Luxury brands are seen as role models, and clients, celebrities and NGOs are vigilant on how they address environmental and social issues.
For example, Osklen from Brazil in partnership with the Instituto e championed the TRACES project to assess the social and environmental footprint of six Osklen e-fabric product life cycles. The company’s deep commitment to sustainability led the WWF-UK to name it a “Future Maker.”
Another interesting initiative is the 1.618 sustainable luxury movement in France that is exploring paths for the emergence of a new, more ethical luxury based on art, creativity, innovation and sustainability.
Consolidation versus niche opportunities
It seems like a hard time to be an independent player in the luxury industry. Luxury conglomerates have continued their acquisition policy (Kering buying Christopher Kane and Qeelin; Swatch buying Harry Winston; to name just a few) and are increasingly integrating vertically.
At the same time, niche opportunities abound. Luxury trends can be split so that each country, each state, each cluster of consumers could create a ‘contestable market ’4 on its own. From ivory to vegetal ivory, from real diamonds to synthetic ones sold for 30% less, every new additional sub-segment can create a new niche market driven by affinity.
“Looking to the future’ value propositions propose a viable future view for a certain luxury category, reframing the meanings associated with a certain luxury product.”
Made in emerging economies luxury
Given the key role of emerging markets in the luxury industry, can we expect local players to take a major role? The answer depends on the luxury sector: this is already a reality in the hospitality sector where the Shangri-la and Mandarin Oriental hotels have already become global. For personal goods, it is going to take a little longer. Which paths will accelerate this emergence? Given the strong focus of luxury incumbents on heritage, a meaningful frame for newcomers is to differentiate three orientations of luxury value propositions: ‘looking to the past,’ ‘looking to the present’ and ‘looking to the future.’5
‘Looking to the past’ value propositions are those that draw inspiration from history, revitalizing refined craftsmanship and heritage. For example, China has been an economic superpower for most of its history and this opulence has given birth to numerous refined crafts: silk, tea, porcelain, jade, bamboo, tailoring, , liquors, to name but a few. Shang Xia exemplifies this path.
‘Looking to the present’ value propositions build bridges between east and west and focuses mainly on luxury lifestyle. Luxury Hospitality is a sector where this approach has found fertile ground, as the Emirati hospitality approach (e.g. the Burj Al Arab 7 star hotel in Dubai), or the overseas expansion of Mandarin Oriental luxury hotels bear witness.
‘Looking to the future’ value propositions propose a viable future view for a certain luxury category, reframing the meanings associated with a certain luxury product. Richard Mille watches or Osklen symbolize this approach.
Although ‘Looking to the past’ and ‘Looking to the present’ value propositions can eventually lead to global players, this will probably be a long process. Perception inertia and the cultural framing of made in will take time to evolve. ‘Looking to the past’ value propositions in particular face issues of legitimacy vis-à-vis Western luxury incumbents: Europe has a long and strong luxury heritage, associated with refined craftsmanship. The tag, made in France, Italy or Switzerland, is perceived by consumers as being associated with “true” luxury goods. Therefore, following a ‘looking to the future’ value proposition is a promising path for newcomers.
How can this fascinating new normal in the luxury industry be navigated? Yacht racing provides an appropriate metaphor to describe the current market situation. As in the America’s Cup, there are competitors and capital flows from around the world in the market, technological breakthroughs emerge from time to time, regulations may be influenced by actors to a certain extent, and the weather conditions are akin to the ever-changing facet of the market in its economic, regulatory and demand components.
Some competitors are more powerful than others, but each team has a chance of winning a race if it makes the best use of its equipment and skills, and if it has a little bit of luck on its side. People are what will ultimately define who achieves lasting success.
This article is based on Hoffmann, J. and Coste-Manière, I. (2013), Global Luxury Trends, London: Palgrave Macmillan. Interested readers should refer to the book for further details; a previous version of this article has been published in the March-April 2013 issue of The World Financial Review.
About the Authors
Dr. Jonas Hoffmann is Professor of Luxury Marketing at SKEMA Business School. He has extensive experience in consulting and executive training, and has been a regular panellist at international luxury events. He has written several articles about marketing and innovation in the luxury industry. He is co-editor of Global Luxury Trends and Luxury Strategy in Action, and co-author of Sustainable Innovation Strategy (Palgrave-Macmillan).
Dr. Ivan Coste-Manière has extensive experience in the luxury industry; he has founded 8 companies in the fragrance, watch and marketing sectors. He is Professor of Marketing at SKEMA Business School and Head of SKEMA’s Master of Science in Luxury and Fashion Management. He is co-editor of Global Luxury Trends and Luxury Strategy in Action (Palgrave-Macmillan).
References
1. Morisset, D. (2013), Presentation at the China Luxury Summit, 27/11/13; figures based on BCG and Bain & Company 2013 reports.
2. Ricca, M. and Robins, R. (2012), Meta-luxury, London: Palgrave-Macmillan.
3. Bain & Company Altagamma Worlwide Markets Monitor 2013.
4. Baumol, W. J. (1982), “Contestable Markets: An Uprising in the Theory of Industry Structure”, The American Economic Review, Vol. 72, No. 1, (Mar., 1982), pp. 1-15.
5. Hoffmann, J. and Hoffmann, B. (2013), “Paths for the Emergence of Global Chinese Luxury Brands” in Hoffmann, J. and Coste-Manière, I. (2013), Global Luxury Trends, London: Palgrave-Macmillan.
