Bain Luxury Goods Spring update (II) : structural changes in the luxury market

structural changes

Yesterday I wrote about Bain’s analysis of prospects for global luxury goods sales in 2013.  Today, I’m going to take a look at what the consulting company perceives as possible structural changes in the worldwide luxury goods market.

There are two big ones:

Asian tourists remaining closer to home

Japan:  Twenty years + of economic stagnation had finally begun to take a toll on the seemingly insatiable Japanese demand for European luxury goods a few years ago.  Recent sharp devaluation of the yen has depressed this appetite further.  Skeptics (like me) of the ultimate success of Abenomics must believe that this is a permanent change.  Given that, pre-devaluation, the price of luxury goods in Japan has typically been much higher than elsewhere, the negative effect of lower Japanese spending on the profits of luxury goods manufacturers will probably be disproportionately high.

China:  Weakness of the renminbi vs. the euro is a mild negative.  More important, Bain points out that Chinese luxury buyers are beginning to turn away from Europe toward Macau, Hong Kong and Australia as vacation destinations.  On the surface, it shouldn’t make much  difference whether Chinese customers on holiday buy in France or Cotai.  However, the change in vacation travel venue may give a significant opportunity for budding Pacific-based luxury brands to take business away from European rivals.  I think this is already happening.

the Baby Boom passing the baton

Bain characterizes the luxury goods preferences of different age groups as follows:

Baby Boomers (55+)  want:

–a bricks and mortar store

–a one-to-one interaction with a salesperson who represents the brand ans who also knows them well

–high-priced scarce or one-of-a-kind items that they think confer status on them individually as people of unusual taste and means

–a formal buying ritual.

In contrast, Generation Y (20-35) and Generation Z (0-20)–i.e., the children of Baby Boomers–want:

–instant availability 24/7, whether through physical stores or online makes no difference

–to be defined by brand values, but to be able to influence those brand values as well

–unique or novel items, which are not necessarily the most expensive, but which are personalized and which identify them as members of a certain group

–to be entertained.

In a nutshell, this is the difference between buying statement jewelry in a private room and buying a handbag in an online flash sale.  The branding, selling and infrastructure skills differ greatly from the first transaction to the second.

This difference in outlook is increasingly important, because the Baby Boom is retiring and its children are emerging as a new generation of luxury buyers.  One might even argue–with how much validity I’m not sure–that the sudden drying up of demand for traditional high-end European luxury goods in Japan is mostly a function of an aging population and a shrinking workforce.  If so, we may begin to see the same phenomenon in Continental Europe before this decade is out.  Again if so, luxury goods companies that don’t refocus themselves to cater to the preferences of a younger generation of consumers will find themselves struggling to retain relevance.

Bain Luxury Goods Worldwide Study: Spring 2013 update

Consulting firm Bain issued the latest in its series of important studies on the global luxury goods industry last month.  Thanks to Bain, I’ve just received a press copy of the study itself.

I’m going to write about it in two posts.  Today I’ll cover Bain’s view of industry prospects for 2013.  Tomorrow, I’ll write about longer-term structural changes underway for luxury goods.

2012 results

(It’s important to note that the study, conducted by well-known Bain analyst Claudia D’Arpizio, is done in cooperation with the Italian luxury goods trade association, Altagamma.  This means the sales figures are presented in €.  Also, the concept of luxury goods used has a strong traditional European emphasis.)

in € terms

In € terms 2012 was an above-trend sales year, one very close to being on par with 2011.  In both period luxury goods revenues grew by just over 10%, in an industry whose long-term growth rate is closer to +5%-6%.

in constant currency

In constant currency terms, however, 2011 was a +13% year (meaning strength in the € understated how strong the worldwide luxury good business was).  In contrast, 2012 was a +5% year in constant currency (meaning half the revenue rise came from € weakness).

the holiday season

Four factors characterized the key yearend holiday sales season in 2012:

–weaker than expected traffic in the US and Europe

–purchases tended to be for the buyer’s own use, rather than as gifts for others

–online sales, especially mobile, were very strong

–online sales were increasingly driven by special offers and by discounted shipping

2013 prospects…

1Q13 appears to have been a low point.  Sales were up a mere 3% year-on-year in constant currency.  € strength cut that in half in current currency terms.

Bain forecasts a 4%-5% full-year rise in €-denominated sales.

…by region

Japan:  Sharp devaluation of the ¥ has had a strong negative effect on Japanese luxury goods consumption–driven by the resulting loss in wealth and purchasing power of Japanese citizens.

Bain expects luxury purchases by Japanese abroad–notably Hawaii and the EU–to be down by 40% yoy as foreign travel declines and because $- or €-denominated goods have become less affordable.

Bain estimates that an estimated 10% increase in domestic luxury goods purchases will offset some of the shortfall.  But the overall effect will be about a 20% yoy contraction in luxury goods consumption by Japanese this year, a figure more or less in line with the fall in the Japanese currency.

In  Bain’s view, continuing ¥ weakness will limit the luxury goods industry in Japan to +4%-6% growth in € terms in 2013.

China

Chinese spending on luxury goods grew by 20% in constant currency last year, and by 30% the year before.  Bain is forecasting a relatively modest increase of +7% for 2013, however.

The main reason is change in policy by the newly installed central government.  The new leadership in Beijing is discouraging conspicuous consumption by the ultra-wealthy, particularly those with family connections to high-level present or former Party officials (although Macau gambling doesn’t appear to be suffering).  Perhaps more important, the administration has launched an anti-corruption campaign aimed at the widespread soliciting of “gifts” by officials from those seeking, say, business or construction permits.  Some estimates I’ve heard are that such gifting has made up as much as 25% of the sales of certain luxury brands.  Bain only mentions that sales of watches have been especially hurt.

No mention of a shift away from European to domestic Chinese luxury brands, but I think this is also part of the story.

Europe

Although it seems to me that Europe has passed its cyclical low point, and will gradually improve through 2013, the region will scarcely grow at all this year.  As a result of continuing economic weakness, aspirational buyers of luxury goods continue to trade down.  Japanese tourism has slowed dramatically.  And Chinese visitors are purchasing less on their European trips, as renminbi weakness makes €-denominated goods look more expensive.

Bain pegs European luxury goods sales in 2013 at 0%-2% growth.

US

Bain has little to say–good or bad–about US luxury goods buying.  It has penciled in growth of +5%-7% for this year.

the world

Asia ex China’s the best, at +7%-9% growth.  China’s a close second.  Europe’s the worst.  Overall, Bain thinks worldwide luxury goods sales will advance by +4%-5% in 2013.

More tomorrow.