New Luxury Goods Research, Part I: What is it telling us?

Euromonitor International’s latest research on the global luxury goods market indicates another solid year’s performance in store for 2013.

Driven mainly by strength in emerging economies, overall retail growth is set to be stronger than in 2012, with luxury goods sales expected to exceed US$317.0 billion worldwide. This represents a year-on-year real value gain of over 3% on 2012.

This impressive growth has all been in the face of profit warnings from some of the world’s leading luxury brands, such as Mulberry and LVMH, mounting troubles in the Eurozone and political instability in several emerging markets.

Our latest findings indicate that we are definitely witnessing a renewed sense of positive momentum across the luxury industry:

  • Luxury spending in China is rising steeply despite a government clampdown on extravagant consumption
  • A weaker yen is bolstering Japan’s penchant for premium brands
  • Affordable luxury is still breaking new ground in Western Europe and North America
  • Rapidly expanding A and B classes across sub-Saharan Africa, Latin America and emerging Asia are fuelling a new culture of luxury aspiration.

In fact, thanks to the swelling ranks of the burgeoning middles classes in emerging markets from China to Brazil, luxury consumers the world over are indulging  over US$6.0 billion in total sales per week on luxury goods. That is 3% more than in 2012, almost 20% more than in 2008, with the figure set to increase by 34% in the next five years in constant value terms.

Emerging Economies Still Drive Growth

The majority of this impressive growth has come from the emerging markets of China, India, Indonesia and Malaysia. Continued urbanisation, economic development and the overall love of luxury has continued to bring a large proportion of consumers into the mainstream luxury market. However, diversity amongst spending patterns still exists within emerging markets, as these economies are at very different stages of development.

The dominance of emerging regions like Asia Pacific and Latin America is becoming increasingly apparent. Whilst Western Europe currently takes the lead in terms of regional value sales, accounting for around 33% of total global luxury sales, Asia Pacific is catching up at an impressive rate. Sales of luxury goods in this region are forecast to grow by a massive 170% in constant value terms in the next five years.

With this impressive trajectory of growth set to continue in the short to medium term, we predict that Asia Pacific will overtake Western Europe as early as 2018 to become the largest region. At the same time, the value of Latin America’s luxury market has sky-rocketed in the last five years, thanks to a growing middle class, strong consumer confidence, wider access to consumer credit and a surge in retail modernisation.

Luxury fashion is Manning Up

From Mexico City to Shanghai to London, men are putting higher stock in their appearance. This is especially visible in the emerging markets of Asia Pacific and Latin America. Whilst the worlds HNWIs may be more discerning in their brand preferences, the emerging middle class tends to view premium brands as badges of social standing. Surprisingly, this is especially visible among male consumers, with categories like men’s luxury accessories and jewellery growing faster than women’s.

For global luxury brands such as Burberry, this newfound cachet in menswear has gone beyond the iconic trench coat. Burberry has developed a portfolio of trendsetting male accessories, which
fuelled 20% of its total accessories sales in Q3 2013. A new men’s fragrance  line will be rolled out later in the year. And, there are plans to widen its bespoke tailoring service, which is currently offered in 70 stores.

It has long made strategic sense for consumer goods companies to target male consumers. Globally, men’s annual disposable income is 50% higher than women’s. Western Europe is the most
egalitarian of the regions, but the disparity is still around a third. Not surprisingly, emerging markets have seen the biggest hikes in male disposable income over recent times.

In the BRIC markets, for example, male per capita annual disposable income has been growing at an average annual rate of more than 10% since 2007, at fixed US dollar prices. In China, male per capita disposable income rose from US$2,370 in 2007 to US$4,487 last year. This growth runs concurrent with the emergence of a new middle class.

Fine wines, spirits, luxury electronic gadgets, timepieces, cigars and writing instruments are all categories in a strong position to tap into beefed up male spending patterns. But, the newest
and arguably most untapped opportunity is in fashion and accessories. The strategic challenge will be in tailoring products to specific male consumers. The profile of men in Shanghai is very different to that of men in Rio de Janeiro on London. It follows that the more effectively brands are able to harness both the wealth and the unique consumption cultures of male consumers,
the more successful they will be.

Africa and the Middle East and the Next Luxury Frontier

In 2013 Investment interest has grown further in the Sub-Saharan Africa region which is set to become a key battleground for the luxury goods industry. Between 2008 and 2013, sales of
luxury goods in this region grew by 35% in current value terms, and they are set to increase by a further 33% in the next five years in constant terms. Sub-Saharan Africa is experiencing the second-fastest global economic growth – behind Asia-Pacific – and is home to five of the 10 fastest growing economies in the world. This is set to translate into higher incomes and subsequent consumer spending growth. To this end many African consumers will move into the categories of discretionary spending for the first time offering significant potential investment returns.

South Africa and Nigeria are the region’s main emerging markets (rather than frontier markets) and, as such, afford some insight into regional luxury goods demand. According to Euromonitor International, Nigeria was the third fastest growing market in the world for champagne between 2007 and 2012, with a CAGR of 26% in value terms. This impressive sales growth is forecast to increase by a further 78% in constant value terms in the five years to 2017. Total consumption reached 750 million bottles (75cl) in 2012 (higher than in Canada and UAE), and placed Nigeria among the top 20 champagne markets in the world.

Whilst in 2013 South Africa accounts for only 10% of regional and less that 0.5% of global luxury goods consumption respectively, it is the largest market in the Middle East and Africa region,
both in terms of total disposable income and total consumer expenditure in 2012. As such, it offers extremely strong prospects and diverse opportunities to luxury marketers, as the country’s large size and population (50.8 million people in 2011) provide a diverse and multi-layered consumer market. However, there is a strong divide in South Africa, with the country being one of the most unequal countries in the world in terms of income, and marketers must tailor their products in geographical, income and ethnic terms.

In April this year, Italy’s luxury menswear label Ermeneglildo Zegna opened a franchise store in Nigeria’s capital city Lagos, on the same strip as German luxury car manufacturer Porsche and, two
months earlier, Hugo Boss opened a franchise store in the Capitals Palms shopping mall (located on a 45,000 sq m plot of land in the Lagos’s Lekki Peninsula).

It may be hard to believe that a country where most of the people live on less than US$2.00 a day could be one of the fastest growing markets in the world for luxury goods. Yet Nigeria, Africa’s most populous country, is just such a place, where the pursuit of wealth has even become a religion.

For luxury brands and retailers there are indeed many challenges to overcome in the region – although the middle class is expanding, poverty remains widespread, infrastructure is weak, retail markets undeveloped and brand awareness lacking. Corruption can also be a problem as can political stability in some countries. However, other luxury brands are certain to follow the likes of Zegna, Hugo Boss and Porsche opening new outlets in the Sub-Saharan Africa region. Prada, for example, has already confirmed plans to open in Angola which could be a good bet for Nigeria in 2014. However, in order to succeed brands will need to overcome these challenges through careful research of suppliers, local partners, end consumers and the business environment.

Luxury Accessories: Affordable Luxury Steers Global Growth Strategy

One of the changes taking shape in the global luxury goods market at present is the resurgent appetite for affordable luxury, especially in North America, Western Europe and Japan.

Rising demand for affordable luxury in developed markets is linked in part to the industry’s strategic obsession with China. Retail prices of many European luxury brands have risen sharply over the past year as part of a deliberate plan to align more closely with China, where heavy import duties push prices up. The rationale is that higher prices in Europe will encourage Chinese consumers to do more of their luxury shopping at home rather than on foreign trips.

As prices of luxury brands rose in Europe, so a new and largely uncontested space began to open for brands positioned at more accessible price points. Luxury brands such as Michael Kors and Coach, with portfolios of affordable luxury handbags, timepieces, sunglasses and fashion accessories, have clearly won over middle-class consumers who can no longer afford the likes of Prada and Louis Vuitton. These brands also act as a stepping stone onto luxury for new middle-class luxury consumers in emerging markets.

Super Premium Beauty Care: Luxury Fashion Houses Fuel the Sweet Spot of Opportunity

Whilst there is nothing new about fashion houses developing their own branded fragrances, what is new is luxury fashion houses ramping up exposure across the full beauty care remit to include
products such as nail polish, lipstick, eye and facial make-up, body lotions, self-tanners, even bath and shower products.

We have recently seen the likes of Marc Jacobs, Michael Kors, Tom Ford, Tory Burch and Giorgio Armani team up with big-name beauty care players to set up their new portfolios, whilst others like Burberry have adopted more independent strategies.

One way or another, almost all the industry’s leading players are looking for a bigger piece of the action. Marc Jacobs has even opened a Manhattan-based store dedicated solely to cosmetics and
fragrances, and, this October, Tom Ford launches his men’s cosmetics line.