It isn’t only consumer product goods companies targeted at the middle class that fared poorly in 2014. Regardless of what the confidence readings or the employment indicators say, shoppers around the world have exercised restraint for a number of years and have not returned to their free-spending ways of the late 90s and early 2000s.
Blame it on exogenous factors ranging from the Crimean crisis and the sanctions imposed on wealthy Russians; the tightening of anticorruption measures in China, creating a reluctance among the Chinese to be seen as ostentatious spenders; or the street demonstrations in Hong Kong.
There are also real macro financial factors as well, including Japan entering a recession in Q4 2014; weakening trends in Europe as the year progressed; and the continued consumer malaise in the US. When the numbers are finally tallied, 2014 will have been a year of very modest (if any) growth in the global personal luxury goods sector.
Uneven Growth Rates
By mid-October, before most Q3 financial results were announced, Bain & Company and Fondazione Altagamma reiterated their projected 2% growth rate for luxury goods in 2014 to an estimated €223 billion, down from the 3% pace set in 2013 and a 10% increase in 2012. Another new normal.
While personal luxury goods may be feeling a pullback – and we argue units were flat in 2014 given price increases and the trend of luxury brands to open retail locations, and the impact this had on assessing industry retail sales volume – some luxury categories are enjoying more vibrant growth. Specifically autos, up an estimated 10%, and luxury hotels, up 9%.
Luxury brands didn’t fare too well with Q3-2014 sales gains either. We tracked 16 luxury brands spanning accessible, aspirational and absolute luxury, and the average Q3 sales gain was +8.1% while the median was half that at 4.1%. Michael Kors led the luxury pack, accreting at a 42.7% rate; and only one of the luxury companies reported a sales decline, Coach at -9.7%. Interestingly, the US has become the growth region of choice, up an estimated 3% in 2014 and positioned to benefit from a modest US economic rebound and international tourism, while global online is the fastest channel, up an estimated 28% in 2014.
Luxury Long Haul
The forward-looking comments from many luxury executives have been cautious, but this group generally is managing their businesses (which closely translates into managing their brands) for the long-term with a multiple year view, not a quarterly earnings focus. At the accessible end – Michael Kors and Kate Spade – we see heightened promotional activity reflecting the tenor of the times and the channels they compete in, but for most of the luxury players, discounts are discrete. Walk through Bloomingdale’s and the sales associates will offer you in a discreet conversation an additional 15% off the 20% off friends and family promotion.
The big luxury brands are playing with product mix, customization and exclusives to attract and retain their clients. Smaller brands, such as Moncler, are entering new categories and expanding distribution for growth.
Changing consumer preferences for experiences over product is adversely impacting luxury as well, as consumers opt to spend their discretionary funds on fine dining over another trinket, a trip to Paris over a fine jewel, or a trip to the spa over a designer dress. We see this shift at lower income levels too, where trips to Chipotle are up while sales at Gap and department stores suffer. The 1%-ers are spending on yachts, ski trips, airplanes and Bentleys, less so on luxury personal goods. The wealth effect, with the S&P up 29.6% in 2013 and through November 18, another 11.6% should have provided a boost to luxury spending, but again, traditional luxury personal goods categories are not seeing the benefit, as experiences and other categories capture consumer interest, including Apple’s new offerings; the iWatch and iPhone 6.
The New Face of Luxury
In the past five years the profile of the average luxury customer has changed: they are world travelers, buying outside of their country of origin, in locations where the assortments are better and the prices are lower. For instance, the Chinese spend three times as much outside of mainland China as they do in their homeland. With 62% of all Brazilian outbound trips to the Americas and 34% to Europe, Brazilians are noted for their international luxury consumption and it’s no surprise given the 20%-80% higher prices in Brazil, in part reflecting high import taxes. (Source: European Travel Commission.)
The search for value has also resulted in the growing luxury outlet channel, which Bain estimates expanded at a 26% CAGR in the 2011– 2014 period to €19.1 billion. Fueled by tourist consumption and local residents, this growth is attractive, but at the same time threatens to erode the perceived exclusivity of luxury brands.
We see a continuation of trend in 2015. Preferences for experiences over products will eat into category growth, as will the geopolitical uncertainties around the world. The retrenchment in China will continue to impact sales of all types of luxury goods, from autos and watches to handbags and footwear in 2015. The “sugar high” of double digit demand growth emanating from China and other emerging markets will not support robust industry growth in 2015. In China, ostentation is frowned upon, and this trend is likely to be with us in 2015, if not longer. Another year of 2%-3% growth demands luxury brands return to their ateliers and nurture creativity on the product, marketing, social media, and retailing fronts. Slow growth in a fast paced world can quickly lead to irrelevancy.