the study

Bain released its tenth annual Luxury Goods Worldwide Study on October 17th.  It’s based on data from 230+ luxury goods companies, compiled by Bain in cooperation with Altagamma, the Italian luxury goods trade association.  The analysis is directed by Claudia D’Arpizio, the well-known consultant who heads Bain’s fashion and luxury goods practice. (Thanks to Bain & Company for giving me a copy of the study.  You can find a summary on the Bain website.)

the results

I’m going to write about the Bain study in two posts.  Today’s will cover prospects for the full year, and for the holiday selling season, in 2011.  Tomorrow’s will deal with secular trends in the luxury goods industry.

another year of exceptional growth

Despite a litany of macroeconomic woes–the nuclear disaster in Japan, Libya, Greece, slowdown in emerging markets, political craziness in the US and EU–Bain is predicting that luxury goods sales in 2011 will reach €191 billion this year.  That’s up 10% from the all-time high of €173 billion posted in 2010.

Bain is projecting 6%-7% annual sales growth for the luxury goods market from 2012-2014.  I take these figures as general indicators rather than point estimates.  I think the ideas they are intended to communicate are that growth in this industry will continue to be healthy but that the torrid pace of the past two years is likely to slow somewhat.

the most important forces

Three factors are key to this assessment:

–affluent clients in the developed world continue to spend heavily on luxury goods.  This phenomenon is more than a bounce back to pre-financial crisis levels.  It’s a genuine upsurge in demand, despite a slowdown in overall GDP expansion in these markets.

–Chinese customers continue their buying binge, both at home and as tourists abroad.

–the negative effects in Japan of the earthquake/tsunamis have been milder than expected.  In fact, luxury goods’ consumption may be rising again after several years of decline.

the holiday season

Bain thinks the holiday selling season will be a good one.  Its base assumption is that sales will be up 7% vs. 2010.  However, it figures the chances of the season being considerably better than that, at +10%, are twice as high as that sales will be disappointing.  The more positive outcome would bring full-year sales to an 11% gain.

currency effects

Bain keeps score in euros.  This only makes some sense since it’s in partnership with an Italian trade association for this study and because many luxury goods companies are based in either France or Germany.  But political/economic instability in the EU has caused its currency to fluctuate more than usual in the past couple of years–which affects the results of the Bain study.

Constant currency numbers, which give a better idea of underlying unit volume growth worldwide.  They present an even rosier picture of the luxury goods industry today.  The 2010 results of up 13% break out into 8% constant exchange rate growth + a 5% boost from a weak euro.  Bain projects that this year’s underlying growth will be 13%, with a strong euro lowering the figures by 6%.  In other words, global demand for luxury goods is currently accelerating, not decelerating, as the euro-denominated results suggest.

China

Chinese customers now make up over 20% of global luxury goods sales.  Bain estimates that business in Greater China (the mainland + Hong Kong, Taiwan and Macau) will hit €23.5 billion in 2011, a year on year gain of 29%.  In addition, Chinese tourists will likely buy another €12-15 billion worth of luxury goods on trips abroad.  While the impact of Chinese tourists is noticeable in Hawaii and New York, in cities like Milan and Paris they are probably the main factor driving growth in sales.

Note:  In addition to the fact that travelers like to buy souvenirs, luxury goods prices are generally higher in China than everywhere else except possibly Japan.  You’re also much more confident the items you buy outside China aren’t counterfeit.  And there are outlet stores, as well.   On anti-terrorist grounds, both the US and the UK have made it very difficult for Chinese to get travel visas, a fact that merchants and hoteliers there complain about bitterly.  One result of this policy is to funnel Chinese tourists into continental Europe.

Japan

For many years, Japan has been nirvana for luxury goods companies.  Japanese have been persistent buyers of luxury goods, whether the general economy has been good or bad.  Domestic prices are very high.  And the market there is very deep.  It comprises perhaps the top half of the population, as opposed to the top quarter in the US or EU.

In 2007, the music–and Japanese luxury goods sales growth–finally stopped.  No one quite knows why.

For 2011, however, despite a 12% year on year drop in luxury goods purchasing during 1Q due to the earthquake/tsunamis, Bain is projecting a small (+2%) year on year gain for Japan.  The consulting company thinks results will come in at €18.5 billion, meaning Japan retains its place as the second-largest luxury good market in the world.

world rankings

The top five luxury goods markets in the world at year-end 2010 are:

US        €48.1 billion         28% of the world market  (NY at €15 billion represents 9% of the world)

Japan     €18.1 billion     10.6%

Italy       €17.5 billion     10.2%

France     €13.3 billion     7.8%  (Paris = €8.5 billion    5%)

China     €9.6 billion     5.6%

Strong growth propelled China up from 7th a year earlier, displacing the UK and Germany in the rankings.

That’s it for today.  Market trends tomorrow.