Yesterday I wrote about long-term trends in the personal luxury goods industry, as seen by the Bain Luxury Goods study. The prior day, Monday, the topic was short-term revenue growth prospects.
Today’s post will deal with the responses by luxury goods firms to the development of the global market for their products. I’ll close with Bain’s estimates of the size of the personal luxury goods market in the context of the market for all luxury goods.
continuing slow vertical integration
The traditional model for luxury goods companies has been to design and manufacture their products and sell them at wholesale to third-party retailers, like department stores or multi-brand specialty retailers (think, e.g.: jewelry stores).
The virtues of this way of doing business are:
–it’s simple and
–the time that company cash is tied up in inventory is, under most circumstances, the shortest. So its financing needs are the least.
Over the past decade or so, however, luxury goods firms have been entering retail themselves by opening free-standing stores of their own or company-owned boutiques in department stores. Where necessary to do so, they’ve also been buying back territorial distribution rights they had previously granted to third parties.
The rate of change toward vertical integration is slow, but steady, at the rate of about a 1% increase in market share per year. Currently, luxury goods’ distribution is still predominantly wholesale, with 30% through company-owned retail channels.
Why the shift?
After all, going all the way to the retail customer requires a much more complex company organization and a lot more capital to meet the heavy extra expense of building and keeping up a store network. At the same time, a firm’s existing wholesale customers can scarcely be thrilled to see the luxury goods company entering into direct competition with them.
–the price markup from wholesale to retail for luxury goods is immense
–the company has much better, and more current, information about customers, sales trends and inventories if it has a retail operation
–it has much better control over the brand message and the customer experience
–the company has the opportunity to make the customer its client, rather than the department store’s, thereby increasing the size and frequency of purchases.
single brand vs. conglomerate, private vs. public ownership
the rise of luxury conglomerates
In 1995, according to Bain, a majority (55%) of personal luxury goods sales were of products made by a single-brand company. The rest came from multi-brand groups.
Today, in contrast, sales by multi-brand groups are double the size of those of their single-brand counterparts, which account for only a bit more than a third of industry revenues.
…and publicly owned firms
In 1995 companies that had raised expansion capital in the stock market represented only 30% of luxury goods revenues. The vast majority of sales were by privately held firms, mostly family owned.
Today, those proportions are reversed. Only 30% of industry sales come from traditional privately held companies. Firms representing 65% of total revenues are publicly traded. Private equity and sovereign wealth funds hold the other 5%.
The reasons behind this transformation are a bit more complex. They include:
–the massive rise in world GDP over the past few decades that has made the luxury goods market accessible to many more consumers. According to Bain, the personal luxury goods market has almost tripled in size since 1995
–the development of supply chain software, which makes the management control task more manageable
–revival of once moribund businesses through modern management techniques–Gucci, Tiffany, Coach are names that immediately come to mind, which has attracted capital to the industry
–often a diffuse group of second- and third-generation owners of a private firm would prefer to cash out rather than remain involved in the family business.
where the personal luxury goods industry stands in overall luxury spending
According to Bain, global luxury spending breaks out as follows:
luxury cars €290 billion, up 4% from 2011
personal luxury goods €212 billion, up 10%
luxury hospitality €127 billion, up 18%
luxury wines/spirits €52 billion, up 12% (no beer?)
luxury food €38 billion, up 8%
design furniture €18 billion, up 3%
luxury yachts €7 billion, up 2%
Total ~ €750 billion
Note: in the food and beverage category, Bain detects a trend toward in-home consumption rather than in restaurants. Apparently even the wealthy need to economize somewhere.