11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (iii): market structure

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.

Several reasons:

–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.

11th Annual Bain Luxury Goods Worldwide Study, October 2012 (ii): long-term trends

post # 2

This is Day two (of three) blogging about the 2012 Bain global study of personal luxury goods.  Yesterday I wrote about Bain’s analysis of the industry’s growth prospects.  The consulting company’s general picture seems to be that after a post-Great Recession surge in luxury goods spending the industry is settling back toward trend growth.

In the Worldwide Study, Bain has pencilled in 4% – 6% annual revenue expansion as being “trend.”.  My sense, however, is these numbers are there more as prudent (read: low-ball) placeholders than the product of hard core analysis.

Trends

That was yesterday.  Today I’m going to write about the major trends Bain sees in the luxury goods market.  They are:

–tourism  

According to Bain, 40% of the total money spent by buyers outside their home country!  I knew that this phenomenon was big, but I didn’t realize it was so large.

Why not spend at home?

price   Prices are cheaper in the EU than anyplace else.  This is partly because luxury goods makers set prices higher in Asia and partly because of government duties imposed on foreign luxury goods imports.   Outlet shopping may also not be available in the home country (more below).

selection  Two-thirds of worldwide luxury goods distribution is through third parties like department stores, which may focus on only a small number of items.  In some cases (think: China) there may not be stores nearby

anonymity  Buyers may prefer to make purchases that don’t advertise their affluence to their friends and neighbors

–authenticity  Buying from a luxury firm’s retail store gives greater assurance that the merchandise isn’t counterfeit

vacation atmosphere  buyers may be less careful about spending when abroad.

How does Bain know this?  Traditionally, the information comes from credit cards, although in today’s world more progressive companies will be using “big data.”  If so, they’re probably not telling anyone, though.

the geographical spending mismatch

Chinese citizens do 25% of global luxury goods spending; China accounts for 7% of worldwide sales

Europeans do 24% of global spending; Europe accounts for 35% of worldwide sales

Americans do 20% of global spending; the US accounts for 31% of worldwide sales

Japanese do 14% of global spending; Japan accounts for 9% of worldwide sales

Everyone else does 17% of global spending, everywhere else accounts for 18% of worldwide sales.

In the aggregate this is an East/West phenomenon.  Yes, Americans do a little bit of luxury shopping in Europe and Europeans in the US.  But Japanese and Chinese citizens do the majority of their personal luxury goods buying abroad.

–China accounts for 25% of the global luxury goods market.  That’s more than any other country.  And it’s up from basically nothing 12 years ago.

–accessories, not apparel   Accessories, typified by leather goods and shoes, are now the largest segment of the luxury goods market, comprising 27% of total sales vs. 26% for the #2 category, apparel.  They’re also growing faster than apparel.  Reasons:  lower prices, greater recognizability, faster innovation

–men, not women…  Fifteen years ago, men made up a third of the luxury goods market.  Today, that’s up to 41%.  The impetus for this change is the emergence of younger male consumers in China.  Now luxury brands are beginning to cultivate males in the US and Europe as well, where men hav e traditionally been second-class citizen, on the view that men “normally” buy less than women–and are much more highly business cycle sensitive customers.

–…except maybe for China, where Bain notes, for the first time I’m aware, that women business owners, “power women,” are becoming a significant force in luxury goods consumption

–off-price  Outlet shopping, long a staple in the US (59% of global off-price sales this year) , has arrived in Europe–and is being rapidly developed from a very low base in Asia.  Bain reports growth in luxury outlet sales from Chinese customers in Europe of up to 100%+.

The category as a whole will likely grow at a 30% clip in 2012, although it will only account for about €13 billion in total sales.

–online  This market, which is still tiny at an estimated €7 billion in sales this year, is growing at about a 25% annual rate.  It’s 2/3 full price, 1/3 off-price, with off-price growing faster.  Private sales, flash sales and sites for men are the hottest sub-categories.

That’s it for today.  Tomorrow, structural features of the personal luxury goods market.

11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (i): short-term performance

the study

Bain and Company published its 11th annual study of the global luxury goods industry in Milan last month.  The study is authored, as usual, by Claudia D’Arpizio, the head of Bain’s luxury goods practice.  It’s developed in cooperation with Altagamma, the Italian luxury goods trade association.  (Thanks to Bain for giving me access to the study, a summary of which can be found on the Bain website.)

three posts

I’m going to write about this year’s study in three posts.

Today I’ll cover Bain’s assessment of the personal luxury goods industry’s prospects for the upcoming holiday season and for full-year 2012, as well as what’s likely to be in store for 2013 and beyond.

Tomorrow I’ll write about the longer-term trends developing in the luxury goods market.

On Wednesday, I’ll add Bain’s view of the geographical structure of the luxury goods market, in addition to–something new this year–the consultant’s sense of where the €212 billion in annual sales of luxury goods stands in the context of the overall €750 billion “market of markets” of all worldwide luxury expenditure.

€ vs. constant currency

The Bain study is framed in euros.  This makes sense, since a majority of the important luxury brands are European and the largest single bloc of affluent customers still remains the EU.  Also, historically the € has been relatively stable.  However, the currency has been uncharacteristically volatile over the past several years, as the Great Recession has brought long-simmering economic, political and demographic issues in the EU to a head.

From an equity investment point of view, it’s no bad thing in an area under economic strain to hold stock in companies with strong global brand names and lots of overseas sales.  So luxury goods firms will find support from local investors.

We’re not all €-based buyers, however.   Also, almost 2/3 of luxury goods sales, and the lion’s share of the growth, lie outside the EU.  For both these reasons, it’s important to separate underlying expansion in demand from fluctuations in currency.

2012

the recent past

The personal luxury goods market hit what was then an all-time peak of €170 billion in 2007.  The market fell by 10% over the following two years to €153 billion in 2009, before rebounding to hit new highs of €173 billion (+13%) in 2010 and €192 billion (+11%) in 2011.

Bain predicts another new record of €212 billion in personal luxury goods sales (+10%) for 2012.

2012 to date

The first two quarters of 2012 are already in the books, showing +14% growth.

Although publicly traded companies have by and large not yet reported 3Q12 earnings (many have fiscal periods ending in October), monthly sales announcements, industry data and anecdotal evidence give us a good sense of how the quarter will play out.  Year on year deceleration is the operative word.  Bain has pencilled in a 7% yoy revenue advance.

two forecasts for the holidays

For the upcoming holiday season, Bain has two forecasts.  Its base case is that 4Q12 will show the same yoy gain as 3Q12, up 7%.  It’s optimistic case is that the holidays will show the same yoy growth they did in 2011, +12%-+13%.  (For what it’s worth–personally, I’m not familiar enough with Ms. Arpizio’s work to have an opinion–both Bain’s base case for 4Q11 (+8%) and is optimistic case (+10%) were conservative.)

Bain continues to project annual +4% to +6% growth in personal luxury goods growth in constant currency over the next several years.  This will be driven by Asian consumers, tourism, deeper penetration of emerging markets and of second-tier cities in developed markets, and rapidly expanding online and outlet channels.  I think this figure may prove to be too low.

Accessories–leather goods and shoes–will likely be the best categories.

weaker than it looks in 2012

2010 industry growth of +13% breaks out into +8% in constant currency and +5% from € weakness

2011 growth of +11% breaks out into +13% in constant currency and -2% from € strength

2012 growth of 10% breaks out into +5% in constant currency and +5% from € weakness.

The Bain study, then, is projecting a continuation of the current environment of slower growth through 2015.

my take

There’s an increasingly large separation between the nationality of the buyers of luxury goods and the places where the purchasing takes place (more about this tomorrow).  If we look at the economies where the large groups of buyers reside,

–China (25% of the market) is, I think, at a cyclical low point from which growth will accelerate next year.  Luxury purchases should be a high-beta function of this rebound.  +20% in 2013?

–Europe (24%) is a continuing mess, from which I’m expecting no better than flat

–the US (20%) is an enigma.  Layoffs of high paid bankers will continue to dampen growth in luxury goods purchases.  But the current slowdown in luxury goods sales is more widespread.  Who knows why?  My guess is that this isn’t the affluent anticipating higher personal income taxes.  Rather it’s the worry, symbolized by the “fiscal cliff,” that gridlock in Washington will undermine economic growth.  Legislators on both sides of the aisle appear refreshingly open to compromise in their post-election statements.  The administration doesn’t sound so willing.  Negotiating stance?…tin ear?  We’ll know more in the coming few weeks.

If I’m correct about Chinese growth in 2013, that country alone will provide Bain’s 5% constant currency growth.  The big imponderable for me is how much the US will add to that number.

At this point, therefore, to me the safest bet–maybe the only safe one–seems to be on accessories sold to Chinese luxury consumers.

10th annual Bain Luxury Goods Worldwide Market Study, October 2011 (I)

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.

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.