The market for luxury products for personal use, i.e. leather goods, fashion, jewelry and watches, perfume and cosmetics, grew slowly but steadily to 253 billion euros last year. In numerical terms, this equates to growth of 13%, but adjusted for currency effects, this represents an increase of just 1%. The final quarter of 2015 in particular was characterized by a weak holiday season in the USA, falling tourist numbers in Europe, unrest in the Middle East and the downturn in Hong Kong and Macau in particular. These are the results of the spring update of the "Luxury Worldwide Market Monitor 2016" study, which the international management consultancy Bain & Company produces annually together with the Italian luxury goods association Fondazione Altagamma.
Poor global outlook for the current year
Flat growth continued in the first quarter of 2016 with an increase of just 1%. The outlook for the year as a whole remains mixed. In the USA, the luxury market is shrinking due to low domestic demand and falling tourist numbers. In contrast, the trend in Latin America is slightly positive thanks to a renewed increase in tourists' willingness to spend. In North and South America, sales of luxury goods will fall by 2% and thus remain stable after adjusting for currency effects.
Terrorism and new biometric requirements in visa regulations will lead to a decline in tourist numbers in Europe. This will also weaken the luxury goods market. It is questionable whether domestic demand will be able to compensate for the decline in all luxury categories. In numerical terms, Bain is forecasting growth of 1 percent for the current year, which corresponds to 3 percent adjusted for currency effects.
In mainland China, the signs are pointing to a recovery in 2016, with sales expected to increase by 2% (4% adjusted for currency effects). This could mean the end of the slump that has persisted since 2013. Taiwan is characterized by stability, while Hong Kong and, to a lesser extent, Macau are still on a downward trend.
Japan remains the top growth market with a numerical increase of 5% (7% adjusted for currency effects), but is showing signs of fatigue compared to 2015. This is because the consequences of the rising yen and the declining number of Chinese tourists cannot be fully offset by domestic consumption. With the exception of Singapore, regional tourism and consumer confidence in the home market in Asia are supporting growth. Overall, the Asian luxury market (excluding China) will shrink by 1% this year, which corresponds to a currency-adjusted increase of 1%.
In the rest of the world, the luxury market is not expected to grow numerically in 2016, but will increase by 2% in currency-adjusted terms. The Middle East remains weak - apart from the growing interest in developments in Iran. Demand in Australia is healthy. And the luxury market of the future could emerge in Africa.
"The luxury market is in a holding pattern," says Serge Hoffmann, Bain Partner and expert for consumer and luxury goods. "Once again, all eyes are on the key market of China. It could trigger a global recovery."
Noticeable boost from younger generations
Bain expects moderate annual growth of 2 to 3 percent for the global luxury goods market until 2020, which would mean sales of 280 to 295 billion euros. However, this stands and falls with demand in China. The Chinese population - especially the middle class - will account for around 34% of global luxury consumers in the next four years, leaving US and European consumers far behind. The efforts of luxury goods manufacturers to regain the trust and approval of consumers in mature markets could also help to drive the overall market forward.
Around the world, younger generations X, Y and Z are beginning to overtake baby boomers in the purchase of luxury goods in all categories. The changing consumer behavior of 36- to 50-year-olds and the increasing emergence of the 18- to 35-year-old generation - especially in the Chinese middle class - are flushing around 50 million new customers into the luxury market. "The luxury market will receive a noticeable boost from these two generations," emphasizes Hoffmann. "Together with those born from 1995 onwards, these younger consumer groups will account for three quarters of the global luxury market by 2020. The industry can therefore definitely not afford to ignore them and their preferences for entry-level luxury products."
Regardless of age, luxury customers will continue to use traditional retail. This will still account for 40 percent of sales in 2020 - despite rationalization and the increasing importance of airport business (7 percent annual growth) and outlets (8 percent). E-commerce, with average annual growth of 15 percent, is rapidly gaining ground.
Luxury brands have their future in their own hands
Bain has identified three areas in which luxury brands can become active in order to adapt to the slower growth that will be the norm in the future.
Markets and consumers: The aim is to improve the customer's personal shopping experience in the store and to deliver value propositions tailored to local conditions in all key dimensions - in the product range, when shopping and in marketing. The aim must be to retain the new young consumers and win back more mature luxury customers.
Distribution: Sales strategy and channels should be reviewed in terms of their future viability in order to transform the current model into a high-quality "luxury to go". Manufacturers must also do more to ensure that they reach their customers better across all interfaces and channels.
Added value: Brand content and good storytelling should be elevated to an art form.
"The strategic decisions of luxury brands will determine the future of the market," Bain Partner Hoffmann is convinced. "Customer strategy, brand management, storytelling, multi-channel distribution and pricing remain at the top of the management agenda. The best are also looking at their pricing policy and first-class talent management in order to be among the winners even in a flat market environment."
About the study
Since 2000, Bain & Company, in collaboration with Fondazione Altagamma - the leading Italian association of luxury goods manufacturers - has been analyzing the market and profitability of 250 of the world's leading luxury goods manufacturers and brands. The company data, known as the "Luxury Goods Worldwide Market Observatory" and published annually as a study, has developed into a leading and globally respected source of information for the international luxury goods industry.