Global luxury goods market: the ninth annual Bain study, October 2010

Note:  You can also get my analysis of the 10th Bain Luxury Goods Worldwide Market Study from October 2011.

I’m going to write about this topic in two posts.  Today’s will cover the present structure of the luxury goods market and the effect of the Great Recession on it.  Tomorrow’s will look at growth prospects for the industry, changes occurring to its structure and investment conclusions.

The industry data come from the 9th annual Bain and Company Luxury Goods Worldwide Market Study, directed by the partner who heads Bain’s fashion and luxury practice, Claudia D’Arpizio.  The results were presented at the Fondazione Altagamma conference in Milan earlier this month (thanks to Bain for sending me a copy of the presentation). You can find a summary on the Bain website.

structure of the market

size

The global luxury market peaked in 2007 at a sales value of €170 billion ($238 billion) in 2007.  Revenues fell during the recession (an unusual occurrence) by about 8%.  Bain predicts that the industry will bounce back to around the former peak this year and exceed it by a few percentage points in 2011.

participants

Bain counts 232 brands in the luxury goods market.  The top 6% of the brands average €1.8 billion ($2.5 billion) each in sales and together control 10% of the market.  The bottom 38% average €300 million each and control only 15% of the market.  It seems to me this segment, which has suffered more than bigger brands from the recession, is ripe for consolidation.

distribution

In 2008, 78% of the industry’s sales were made through third parties, notably department stores.  The remaining 22% went through company-owned stores.  Bain thinks that this year 27% of sales will flow through the direct channel, with indirect shrinking to 73%.  The percentage of direct sales will likely continue to increase, for two reasons:  luxury brands continue to open new stores, and company-owned stores tend to exhibit much stronger sales growth than luxury counters in department stores do.

Outlet stores make up about 5% of sales.  On-line comprises somewhat over 2% of the industry.

geography

Sales of luxury goods take place approximately as follows:

Europe     37%

Americas     30%

Asia Pacific (ex Japan)     17%

Japan     11%

Rest of the world     5%

One caveat about location:  Purchases by foreign tourists is a significant factor in this industry.  This is partly because of fluctuation in exchange rates and differences in import and other taxes.  But it is also partly the result of manufacturers’ decisions to price the same item as much as 40% higher in Japan and China as in Europe.

The top cities for luxury goods in the world?  They rank as follows:

New York City     €9 billion ($12.6 billion) in 2009

Paris     €6.0 billion ($8.4 billion)

London     €4.5 billion ($6.3 billion)

Bain estimates that Hong Kong will account for €4.4 billion ($6.2 billion) in sales for 2010, possibly edging it ahead of London in the rankings.  Actually, given that nearby Macau will likely chip in €700 million ($980 million) in sales of luxury goods this year, the two SARs together doubtless already surpass London and likely move ahead of Paris as well within the next year.

Greater China (that is, the mainland plus Taiwan, Hong Kong and Macau) will generate  €17.5 billion ($24.5 billion) in luxury goods sales in 2010 according to Bain, making it larger than any single country market, save the US.

gender

Currently, 62% of purchases are for women, 38% for men.  The numbers are influenced by two factors:  there is a long-term trend of increasing sales to men, counteracted by the much higher cyclicality of the watches and formal wear that men typically buy.

product categories

Apparel     27%

Accessories     24%

Perfume and cosmetics     24%

Hard luxury (jewelry and watches)     19%

Art de la table     4%

luxury in the Great Recession

Bain says the downturn just ended marks the first ever decline in luxury goods sales.

The industry’s customers can be divided into the truly wealthy, for whom luxury goods are everyday items, and a much larger group of what the industry calls “aspirational” buyers, for whom the products also act as badges of wealth, taste and status.  As one might expect, the second group of buyers is much more cyclical than the first.

In addition, in any downturn the indirect distribution channel cuts its new orders back to below the (reduced) level of sales as it tries to shrink its inventories.  This adds to the sales decline for manufacturers.

As one would expect, hard luxury was especially hard hit.  This is due, mostly because of the high price points in this segment, but also to the less-affluent and mostly male composition of the buyers.

Why is gender an issue?  Men’s items tend to be higher-priced and to be purchased less frequently.  As a result, it’s easier to postpone their purchase.  Also, it appears (to me, anyway) that women tend to control the purse strings in most households around the world.  They tend to continue to allocate funds for their own purchases, although they may move down market or buy less frequently, but to zero out their husbands’ allocations.

Surprisingly, and contrary to the Wall Street cliché, cosmetics suffered in this downturn as well. In fact, Bain calls them the “first thing to cut!”  In particular, sales of anti-aging products fell for the first time, as customers turned to non-luxury offerings.

The turn came in the December quarter of 2009, when year on year sales stopped declining.

That’s it for today.  Tomorrow:  the recovery in 2010, growth prospects and investment implications.

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