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The luxury goods industry has shown a high degree of insulation from global economic volatility over the past five years, but what is the prognosis for 2012, and what are the main trends, opportunities and company strategies to look out for? Euromonitor International makes some New Year predictions for five key categories.
In 2012, designer labels will be up against a new set of challenges due to a new era of austerity in the developed markets. We will see stronger investment in secondary (or diffusion) luxury collections as a means to drive demand in lacklustre consumption bases, specifically Western Europe, North America and Japan.
Secondary segmentation in developed markets will align with a marketing strategy that focuses more visibly on face-saving down trade activity. The idea will be that consumers can spend less but still feel good about the designer clothing and footwear they purchase.
Prada’s decision last year to instigate an IPO in Hong Kong was evidence that emerging Asia, and China in particular, is the new beacon of opportunity for designer goods. Prada raised around a fifth less capital than initially hoped but its foray into Hong Kong’s capital markets will be a key driver of new expansion in China as well as other parts of emerging Asia in 2012.
The risk for Prada, and other designer labels which follow its Asian strategy, is that it dilutes some of its luxury heritage by expanding too quickly in China. Prada plans 50 new stores in China over three years and is rumoured to also be planning discount outlets. While secondary labels represent a value-enhancing opportunity in developed markets, a second-tier strategy in China could backfire, reining in demand at the top end of the portfolio.
Luxury timepieces and jewellery are seen as ‘hard’ luxury goods because of their capacity to retain long-term value. They are, therefore, more attractive as investment purchases than fashion-driven luxury goods. Demand for ‘hard’ luxury goods will be boosted in 2012 as high net worth individuals in developed markets become more risk-averse, triggered by anxiety over their long-term purchasing power.
We could see a significant shift in luxury gift culture in 2012, with prestigious timepieces for women, for example, gaining share from fashion-driven luxury products such as handbags, apparel and leather accessories.
Globally, there will be a stronger focus on traditional luxury timepieces. That will mean more visible commercialisation of high-end mechanical watches, notably for women. New ranges for women will increasingly showcase craftsmanship and quality, rather than diamond count.
We will not see any significant secondary segmentation in luxury timepieces and jewellery. Rising raw material costs, especially for precious metals, and a strong Swiss franc in the case of leading luxury timepieces, are already squeezing profit margins. Furthermore, affordability is incompatible with the hard luxury category because of its threat to perceptions of quality.
The UK’s Graff Diamonds, which sells some of the most expensive jewellery in the world, will instigate a Hong Kong IPO in 2012, and will use the capital to build a stronger position across Greater China. The logic behind the listing is clear – Chinese consumers will be major drivers of incremental value growth in the diamond market over the next five years.
Affordable luxury will be central to brand positioning in the developed markets in 2012. UK company Mulberry, for example, will be a key driver of trendsetting affordable luxury fashion, with a strong performance projected for the US market on the back of a new flagship outlet in New York.
Globally, China will be the fastest growing market for Mulberry as well as other leading players in luxury accessories. US company Coach, for example, is the latest luxury label to sell shares on the Hong Kong Stock Exchange, and will look to raise its brand profile in China in 2012 by opening upwards of 30 new outlets, in part to offset slowing demand in North America and Japan.
New Mulberry investment in Brazil, the second biggest market in the world for women’s luxury handbags, should not be ruled out.
The biggest threat to the luxury accessories category will be a consumption shift towards ‘hard’ luxury, but this will be mainly confined to developed markets where high net worth individuals will be shunted financially toward products with long-term investment potential.
There will be greater emphasis on the personalisation of beauty care brands in 2012, particularly in the higher value developed markets of Western Europe. There will, for example, be a strategic focus on artisanal and natural products, positioned at affordable luxury price points, as well as a stronger marketing emphasis on the themes of intimacy and originality.
The emerging markets will be a core new investment terrain for luxury fragrances in 2012. Beyond Russia and Saudi Arabia, super premium fragrance has largely been a nascent category in emerging markets, but that is set to change as high net worth individuals from China, Brazil and India develop a stronger interest in the world’s most expensive perfumes, in the same way they have for the world’s finest wines.
Developing the right type of scent for different emerging market consumers will be important, but will remain secondary to the presentation (packaging) of a bottle and the luxury credentials of the brand. For the new generation of emerging market trendsetters, the core of luxury attraction will be related to how much a brand says about social status. In short, aspirational consumption will drive this category.
We will see more ‘limited edition’ branding in 2012 because it offers the type of exclusivity that attracts image-conscious emerging market consumers. Limited edition brands themselves are not about making money, but about creating an aura around an umbrella brand. In fragrances, brand loyalty tends to be strong, but the loyalty is normally to the label, not necessarily to a specific scent. Armani Prive La Femme Bleue, for example, has given impetus to the Armani fragrance line as a whole.
Russia, Brazil and China will be a central focus of new investment in 2012 as luxury wines and spirits seek to tap into increasingly aspirational cash-rich consumption bases. China is particularly attractive for wine and champagne because it has a strong special occasion celebratory culture, including, for example, births, weddings and funerals.
The on-trade channel will be key to showcasing luxury wines and spirits in the emerging markets because this is where prestige-conscious emerging market consumers are most exposed to super- premium brand muscle flexing.
Globally, we will see more modest returns for fine wine investors in 2012 compared with the past two years of record growth due to weaker appetite from US and Western European collectors. However, collectors in Hong Kong and emerging Asia will continue to keep the price of luxury wine comparatively high. In emerging Asia, we will also see growth of so-called ‘super second’ luxury wines, such as Las Cases, Lynch Bages and Montrose.