Bain Luxury Goods Worldwide Market Study: Spring 2011 update

Note:  you can also get my analysis of the October 2011 Bain Luxury Goods Worldwide Market Study.

Last week Bain released an update of its annual Luxury Goods Worldwide Market Study, created by the head of its luxury goods practice, Claudia D’Arpizio (thanks to Bain for providing me with a copy of the presentation materials).

While the buying habits of the affluent may have some interest in themselves, studies like Bain’s (which is the best I’ve seen) are particularly significant for investors. Publicly traded global luxury companies are an excellent way of participating in the superior growth of emerging countries without having to take the risk of owning consumer-oriented stocks in local markets.

The main conclusions from the April update:

1.  The 2010 holiday season was surprisingly strong.  To some extent, we already knew this from earnings reports, but–

–in addition to Greater China (the mainland, Hong Kong, Macau, Taiwan), the US was notably robust

–the high end did the best

–internet sales, although still small, are growing more quickly than the overall industry

–when the final reports are in (not for another month or two for some companies), 2010 will likely show global luxury sales surpassed the 2007 peak of €170 billion.

2.  2011 is following in the same vein. 

–retail continues to show double-digit same store sales growth, resulting both from higher traffic and from higher average purchase

–Chinese tourists are boosting business in Europe (over half of Chinese luxury spending is done abroad)

–wholesalers are restocking, after a couple of lean years.  Highly cyclical categories, like watches and menswear, are enjoying a rebound.  More stable areas, like leather goods and women’s shoes, are also showing strong growth.

3.  Greater China will pass Japan as the #2 luxury goods market this year, likely posting sales of €22 billion (up 25% year on year) vs. Japanese revenue of €17 billion or so (-5%).  The US will remain the #1 market at about €52 billion (+8%)–although, if we counted tourist purchases, China may already be #1.   According to Bain:

–the Chinese consumer is younger and more open to e-commerce than the typical Western luxury goods buyer

–the market is more skewed toward male consumers

–demand for luxury goods is spreading from the biggest cities on the east coast to second- and third-tier cities inland, following the development of the overall Chinese economy

–global luxury brands are increasingly shifting from distributing in China through wholesalers to opening company-owned stores there.  This move raises the capital intensity of their Chinese businesses.  But it also allows the firms to capture the lucrative wholesale to retail markup, as well as to better control their inventories and their brand message.  Perhaps most important, it signals the brands’ higher level of comfort in selling to consumers on the mainland.

4.  Japan will likely begin to recover from the March 11th earthquake in 3Q11.  Still, full-year luxury sales will probably fall by 5% from last year’s level.  Two Japanese luxury goods issues:

earthquake

–luxury goods stores were closed for ten days after the Fukushima earthquake/tsunamis on March 11th, due to lack of electric power.  Business was good after the stores reopened.  But (to me, anyway) it’s not clear how much, or for how long (six months?) luxury goods spending will be affected by feelings of jishiku –the idea that one should refrain from excessive consumption to show solidarity with those who suffered earthquake losses.

–business in Japan’s second city, Osaka, hasn’t been affected

secular

For many years, Japan was a premier market for Western luxury goods, driven by the strong preference of perhaps half the population (a much bigger proportion than elsewhere) for these products, and a willingness to pay much higher prices than prevailed in the rest of the world.   In my opinion, two developments of the late 1990s began to change this favorable picture:

–younger Japanese began shifting to local brands, partly as a rejection of their parents’ values, partly because Japanese brands were more affordable

–older Japanese began to retire (the working age population peaked in 1996).

I’m not quite sure why, but as Bain notes, these factors only impacted the Japanese luxury goods market in a significant way in 2007, when sales were flat, year on year.  In the two years since, revenues have dropped by about 15%.  Pre-earthquake, industry estimates for 2011 were for revenues to stabilize–but not increase.

Sales may get a temporary boost as Japanese GDP gains from spending to rebuild holes and factories destroyed by the earthquake/tsunamis, but my guess is that this is only a temporary reprieve.  Bain expects only 1%-2% annual growth in Japanese luxury goods purchases over the next several years from the depressed levels currently.

my thoughts

Ex Japan, the global luxury goods market looks to be in excellent health, driven by explosive growth in Asia ex Japan and expansion at a better-than-GDP rate in the US and EU.  Bain also highlights the increasing importance of developing markets like Brazil, Russia, India and the Middle East.  Today they amount to only about 7% of the world luxury goods market, but they are growing very quickly.  Companies able to manage their Japanese exposure effectively appear to me to be very well situated for superior growth.

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