Chinese shoppers now account for 31 per cent of the world’s annual luxury sales.
According to Bain & Company’s 2015 Worldwide Luxury Report, the overall luxury industry will surpass €1 trillion in retail sales value in 2015.
The market delivered healthy growth of five per cent year on year (at constant exchange rates), driven primarily by luxury cars (eight per cent), luxury hospitality (seven per cent) and fine arts (six per cent). Aided by global currency fluctuations and continued jet-setting of “borderless consumers,” the personal luxury goods market ballooned to over a quarter trillion euros.
That sector – including leather accessories, fashion, hard luxury and fragrance & cosmetics – reached €253 billion in 2015. This represents 13 per cent growth at current exchange rates, while real growth is significantly slowing to between one and two per cent.
But the report warns that luxury brands will need the right pricing model to win against hard to predict currency volatility in the year ahead, which has impacted heavily on luxury retailers especially.
While global tourists flocked to Europe and Japan to capitalise on a weak euro and yen, the Americas region, stagnant in real terms, was strongly inflated by the super dollar, thus capturing more than a third (34 per cent) of the global market spend in 2015.
Meanwhile, Asia registered the worst historical performance (at constant exchange rates), driven by the lacklustre trend of Mainland China and the sharp drop in sales in Hong Kong and Macau.
“For the last several years, we’ve referenced ‘luxury’s new normal’ with a deceleration of the personal luxury goods market. Now, we are starting to feel the impact of that slow-down,” said Claudia D’Arpizio, a Bain partner in Milan and lead author of the study.
“The challenge for luxury brands in this environment is how to successfully navigate through hard-to-predict volatility.”
According to Bain’s research, Chinese consumers continue to spend the largest share of luxury purchases (31 per cent) globally, followed by Americans (24 per cent) and Europeans (18 per cent).
Chinese consumers are flocking to mature markets in droves, especially Europe, where an analysis of European tax-free shopping data, conducted in partnership with Global Blue, shows Chinese tax-free purchases increased by 64 per cent, particularly among the accessible and aspirational luxury segments, thanks to a weak euro.
Americans also increased their tax-free spending in Europe by 67 per cent, aimed largely at the high end of the luxury spectrum. Meanwhile, Russians cut their European spending by 37 per cent, and spending among the Japanese in Europe withered by 16 per cent.
“Undoubtedly, Chinese consumers play a primary role in the growth of luxury spending worldwide,” said Federica Levato, principal at Bain and co-author of the study.
“For years, we have known that they spend far more abroad than in Mainland China, but what’s changing is that they’re spending little money in historically popular destinations, such as Hong Kong and Macau, and are instead gravitating to new locales, such as Europe, South Korea or Japan, to benefit from currency fluctuations that drive favorable price gaps.”
In terms of constant exchange rates, the US market did not deliver. The “super dollar” was too expensive for many global tourists and though local consumption is growing, it was barely sufficient to offset the lost tourism revenue. Nevertheless, the US is the confirmed largest luxury market in terms of global luxury value, reaching €79 billion; New York City alone outweighed all of Japan.
Another trend evident this year is the impact of eCommerce, which grew to seven per cent market share in 2015, nearly double its penetration since 2012. Luxury globetrotters have also fuelled the performance of airport retail, which posted 29 per cent growth in current exchange rates (18 per cent in constant exchange rates) and now accounts for six per cent of the global luxury market.
With the growing middle class in economies such as China seeking good quality and good value, the off-price channel has more than doubled to nearly €26 billion. Mark-downs are also increasing in prevalence across more than 35 per cent of the luxury market, with a strong relevance in department and specialty stores, as well as online.
The Price of Luxury
According to Bain, the number one challenge facing most luxury brands is establishing the right pricing model.
The rise of eCommerce and global tourism growth create greater transparency around international price differentials. Additionally, price-conscious luxury shoppers are struggling to reconcile the price of luxury products with their real value. As a result, luxury brands must assess how to mitigate volatility and how best to deliver at local and global levels. This includes managing inventory to accommodate fluctuations in tourism and coordinating pricing and mark-downs across markets and channels.
Luxury brands also face a host of tough issues such as rethinking their store footprint and the role of their stores in a world of growing digitalisation, as well as figuring out how to delight local customers even as masses of tourists flock to stores in mature markets.
“Relentless price increases over the last decade, aimed at creating a more exclusive position in the market and maximising touristic flows are now starting to backfire on luxury brands,” said D’Arpizio.
“They face the long-term challenge of rebuilding credibility and trust among consumers, rather than simply making shortsighted, tactical pricing adjustments to benefit from market fluctuations.”