the 10th Bain luxury goods study, October 2011(II): trends

Yesterday, I wrote about prospects for the luxury goods industry this year.  Today’s post is about trends in the business.

areas of current strength

Bain’s estimates current growth prospects by category as follows:

hard luxury (jewelry, watches)     +18%

accessories          +13%

luxury goods in general     +10%

apparel          +8%

perfume/cosmetics          +3%

art de la table          +3%

cyclical forces…

As you’d expect, more expensive items, those sold through wholesalers (who stop buying, period, in recession and turn all their efforts into converting their existing inventory into cash) and those with a large percentage of aspirational buyers all fare the worst in an economic downturn.  Luxury watches are the prime example.  Anything sold through department stores might also qualify.

Men’s apparel is also highly cyclical.  For whatever reason, women continue to buy luxury goods during a downturn.  True, they may trade down a bit and space their purchase farther apart.  But men tend to stop dead in their tracks.  One reason is that big traditional men’s categories like business suits and formal wear are expensive and easily postponable purchases.  Another is that women control the purse strings in most households around the world.

So it’s no surprise that this year watches, expensive jewelry and men’s apparel are all doing extremely well.

Maybe the unusual strength of luxury goods indicates there’s some pent-up demand being met.  In any event, luxury buyers are clearly signalling with their wallets that, for them,  the economic downturn is a thing of the past.

…and secular

who

The traditional picture of a luxury goods buyer is: female, older, from either Europe or Japan.

That’s changing.  Increasingly, customers are younger, more casual,  and male.  These may be trends in many geographies.  However, the main reason theses attributes are appearing on the radar screen is that they describe the Chinese luxury goods consumer.  At 20% of the market, Chinese buying is already very big, and it’s growing very quickly as well.

where

For at least the past decade, makers of luxury goods have been upping their own retail presence.  They are doing this so they can capture the wholesale-to-retail markup.  It also gives them greater control over their brand image and their inventories.

Nevertheless, the luxury goods industry is still predominantly wholesale.  But Bain thinks that the percentage of industry sales through wholesale channels will have shrunk in 2011 to 72% of the total from 75% just two years ago.  This comes despite the business cycle strength of department stores.

online

Internet sales comprise only 3% of total luxury sales at present.  But the category is expanding very rapidly.  Bain thinks online sales will be up by 25% this year, to €5.6 billion.

Online has two segments:  full price and off-price.

Full price is is growing faster than overall luxury sales and comprises about two-thirds of all internet business.  But it’s being left in the dust by off-price, which is one-third today but which amounted to only 20% of online sales four years ago.  Private “flash” sales are the fastest growing part of off-price.

outlets

Off-price non-internet sales amount to about €10 billion, or 5% of the overall luxury market.

Outlet sales grew by 22% last year.  Bain projects them to expand by another 13% in 2011.  That’s faster than the overall luxury goods market, despite the return to health of the full-price market and the consequently smaller amount of unsold merchandise sloshing around in the system.  (Although Bain doesn’t talk about it, part of the answer to this apparent contradiction is that luxury goods companies also produce low-end “outlet only” merchandise.)

This isn’t news.  Outlets are a long-standing, mature channel in the US and Europe.

What is noteworthy is the rapid growth–around a +30% clip–that’s just starting in off-price sales in Asia and Latin America.

brand proliferation, company consolidation

Over the past ten years, the market share of the top five luxury brands has shrunk from 26% of the market to 21%.  In contrast, the share of the top five luxury goods companies has risen from 30% to 35%.

To me, this means market power is shifting from the owners of iconic individual brands to companies that are sophisticated enough provide a common platform–supply chain, support for in-house retail, dealing with consumer preferences in many different geographies–on which a group of disparate brands can operate in an increasingly complex global environment.

More and more, these technology and management factors will be the keys to success.  This also implies that these factors will increasingly be the selling points used to convince acquisition targets to join a luxury conglomerate.  The recent sale of Bulgari to LVMH is a case in point.

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