How will 2016 shape up for the global luxury goods industry? Mounting instability in emerging market economies poses the biggest threat. Equally, the prospect of marginally stronger economic growth in Western Europe and North America could offer some respite for global brands.
It is set to be another challenging year strategically, with nothing written in stone. Within that framework, here are our predictions of the brands, the markets and the battlegrounds that will grab the headlines as the year unfolds.
The Movers and Shakers
There will be change at the executive helm of Burberry
Given how immensely complicated the global operating environment is at the moment, and Burberry’s geographical mix within it, we believe it will become increasingly untenable for Christopher Bailey to perform the two key jobs of CEO and Creative Director. We predict he will have to relinquish one of those roles as Burberry battles to turn things around.
Market leader LVMH will make a medium-value acquisition
LVMH is heavily exposed in Asia Pacific, where there are likely to be punishing headwinds in 2016. We predict the group will look to offset some of those headwinds with a mid-value acquisition in the fashion or jewellery categories. We identify Italian company Tod’s as a likely target.
Ralph Lauren will position more down market under new CEO Stefan Larsson
New boss Mr Larsson has been hugely successful in the fast fashion realm, and will use that experience to build a faster supply chain at Ralph Lauren. In so doing, we predict the brand will increase its offerings of affordable and lower-priced luxury fashion.
There will be merger and acquisition activity in eyewear as Luxotica looks to expand globally
Luxury eyewear maker Luxottica has plenty of cash in its coffers and will look to build its global footprint through one or more targeted acquisitions. Crucially, the company needs to dilute some of its dependence on the US market in order to realise its long-term growth ambitions.
Kering’s Gucci will experience a slowdown in sales despite recent executive changes
Much is expected of Gucci in 2016 under CEO Marco Bizzarri and creative director Alessandro Michele, both appointed at the start of 2015. However, we predict the brand will continue to experience sluggish sales due in part to weaker spending by emerging market shoppers in Western Europe and in part to the over exposure of Gucci in Asia Pacific. Kering, as a result, will rely increasingly on its lower-profile brands, such as Saint Laurent, to shore up revenue.
Tiffany & Co will experience a drop in revenue and profitability
The iconic jeweller is heavily reliant on spending in the US by international tourists. However, a strong US dollar combined with weaker spending power in key emerging markets will have a toxic effect. Efforts to win over younger, style-conscious consumers could also backfire, by diluting the brand’s cachet among more traditional consumers.
Michael Kors will bounce back in 2016 due to global expansion and a shift into the middle ground
A decade long run of like-for-like sales growth at Michael Kors came to an end in 2015. In large part, this was due to saturation in its core US market. However, we predict a strong return to growth as the brand expands globally, diluting some of its US dependence. We also predict the brand will drop more into the middle ground in key markets, challenging some of the leading fast fashion brands – especially in Western Europe and the emerging markets.
The Digital Revolution
There will be new investment in luxury ‘smart home’ devices
With burgeoning demand for all things connected, we will see an uptick in the development of high-end smart devices for the home, from washing machines and refrigerators to sophisticated cooking devices and even personal robots. Just as leading luxury brands have followed Apple into smartwatches, so they will want to cash in on smart home trends too.
Luxury luggage with built-in technology will become increasingly visible
Suitcases and carry-on luggage with functionality, such as fingerprint locking, built-in global-tracking, Bluetooth speakers, self-weighing scales, SIM cards and Wi-Fi hotspots will be an important growth segment of personal accessories as luggage makers look to cash in on global growth in smartphone and app usage.
There will be growth in brands offering luxury reward programmes
Like many brands in the retail industry, luxury retailers are necessarily adapting to the digitalisation of consumer lifestyles. Smartphones are ubiquitous; also the functionality of apps and social media platforms is getting more sophisticated by the month. As a result, device-driven loyalty schemes and reward programmes will become increasingly visible.
Bricks-and-mortar retailers will ramp up in-store digital innovation
There will be a blurring of online and physical platforms as big-name brands and companies such as Burberry, McQ and LVMH look to bring the functionality of the internet into their stores. The focus will be on connecting with consumers in a more personalised way – using social media as well as apps and pop-up messages on smartphones. We will also see advances in augmented reality innovations – for example, so-called ‘magic mirrors’ with high-definition cameras that transport shoppers to catwalks, or advise them on the apparel, accessories and beauty products they should buy.
M-commerce will be the fastest growing segment of internet luxury retailing
It is striking that even in markets where the middle class is squeezed by economic pressures, such as Brazil, people are not giving up their smartphones. Yet, mobile internet retailing is still only scratching the surface of its value potential. We predict a sharp rise in luxury m-commerce as the year develops, fuelled by growth of so-called ‘shoppable ads’ whereby consumers can buy directly from adverts viewed on their mobile devices.
Fashion houses will drive-up investment in ‘luxury experiences’ and ‘lifestyle branding’
Stronger global demand for luxury experiences such as fine dining, lavish holidays and beauty pampering, often as alternatives to luxury brands per se, will entice leading fashion houses to build bigger footprints in areas such as luxury travel, luxury foodservice and luxury health and wellness.
Factory outlets of luxury brands will grow in volume and visibility
Factory stores (selling products at discounted prices) will become increasingly popular as places to offload surplus stock and last year’s lines. This trend will grow as the wholesale presence of many big-name luxury brands weakens. Factory outlets will be seen as channels where brands can legitimately offer discounts but without compromising the performance of full-price stores. They will be most visible in the US, Western Europe and Asia Pacific, but will grow too in Latin America and Eastern Europe.
There will be growth in luxury ‘athleisure’ offerings
The fashion for wearing fitness apparel away from the gym is a big deal in mainstream fashion retail and is throwing down the gauntlet to the jeans industry (due to the growing popularity of yoga pants and jogging pants). It will be a new battleground in luxury fashion too as more designer labels look to cash in. This is a trend that will affect menswear as much as womenswear.
The ‘grey dollar’ will be a key focus of luxury marketing and advertising
Ageing populations are a common thread among the world’s biggest luxury goods markets. In China, for example, the number of over-55-year-olds will grow by around 150 million over the next 10 years, offsetting a contraction of 105 million in the under 55-year-olds. Finding new ways to tap into this market will be integral to brand strategies in 2016. Expect more brand ambassadors aged over 50 years, for example.
Crowdsourcing will grow in profile among leading fashion houses
Professional models will fall out of favour as consumers show a burgeoning desire to see apparel and accessories worn by fellow shoppers instead. In the UK, for example, it is estimated that two-thirds of consumers trust photos on social media and blogging sites more than they do professional images in magazines. This trend will fuel an increase in crowdsourced marketing and sales initiatives.
Category Winners and Losers
Sales of luxury Swiss watches will fall
Swiss watches are becoming increasingly unaffordable for big swathes of the global population, due to a free-floating Swiss franc on the one hand and to slower economic growth in key emerging markets on the other. Demand was held afloat by Western Europe and the US in 2015, but that scenario is less likely in 2016 due to a slower flow of Chinese outbound tourists.
Luxury menswear and male accessories will outperform womenswear and female accessories
Globally, men’s annual disposable income is around 50% higher than women’s. That, coupled with a growing male desire to look good in major emerging markets such as China and India, will drive up investment in luxury menswear and accessories, triggering a significant shift in the portfolio mix for some leading brands.
Luxury wine will be a fast-growing alternative asset class for investors
Fine wine investment is developing a reputation for holding up well during periods of adverse economic conditions. We believe that 2016 could be its biggest year yet, fuelled by burgeoning interest in fine wine investment in the Chinese and Hong Kong markets.
Regions to Watch
Leading global brands will trim their store networks in China’s smaller cities
The likes of LVMH, Gucci and Prada have expanded rapidly into China’s interior over the past decade. However, as the country’s economic growth slows, consumers in formerly fast-growing second and third-tier cities will rein in spending more than in first-tier cities. This will force leading global brands to slow their expansion plans in the interior and in many cases to close underperforming stores.
There will be a further shift in Asian consumption power from Hong Kong to Japan
Growing numbers of Chinese shoppers will head to Japan (and to a lesser extent South Korea) instead of Hong Kong. The comparative weakness of the yen will help drive this. Retailers in Tokyo and Osaka (as well as Japan’s duty free and tax free shops) could also pick up some of the slack from declining Chinese tourism in the major cities of Western Europe and North America.
Developed countries will comprise the top five growth markets in absolute terms
The US will again be the biggest growth market for luxury goods (in absolute terms), followed by Japan, South Korea, France and the UK. China will be conspicuous by its absence from the top five growth markets, underscoring a shift in revenue power from emerging to developed economies.
India will be the ‘star of Asia’ and the only major market in the world to register double-digit year-on-year growth in US dollar terms
We predict that sales (by US dollar value) of luxury goods in India will grow by around 15% in 2016 (versus 2015), fuelled by a slowdown in the black market and a commensurate uptick in the formal market. India will edge its way up the global luxury goods ranking, but will remain just outside the top 20 markets in the world by retail value.
Russia and Hong Kong will be the weakest of the leading global markets
Russia and Hong Kong have a strong luxury goods tradition, but both are facing some of their fiercest headwinds of the past decade. We predict that both markets will experience a decline in luxury goods sales in US dollar terms in 2016 (versus 2015), which will undermine the global performance of big name players such as LVMH, Kering, Richemont and Prada.