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2016 was indeed a bumpy year for the global luxury goods market, plagued by the decline in luxury spending by Chinese tourists, plummeting oil prices which led to a major currency shake-up in Latin America and Russia, terrorism threats in traditional luxury markets like France, and further economic upheaval triggered by Brexit and the Trump victory in the US.
This time last year we made 25 predictions of what might happen in the global luxury goods industry during 2016. It has once again been a hugely challenging year for global brands, particularly in formerly fast growing emerging markets. An important trend in 2016 was the increased political uncertainty facing the world, and luxury consumers enter 2017 against a backdrop of further uncertainty – especially in advanced economies with the arrival of Donald Trump in the White House and the UK Government moving to trigger Article 50 to begin negotiations to leave the European Union.
Over the course of 2016, consumer expenditure rose by 2.3%, with every household saving $3,609 on average. With the US still accounting for almost one-in-three dollars spent globally and remaining the clear global leader in terms of luxury goods spending, consumer behaviour in the Trump era matters to the world.
Despite its slowing economy, Chinese luxury goods consumers continued to be amongst the largest in terms of spending, and spending in emerging and developing economies overall grew by more than twice that of developed markets. Authenticity, convenience and experience were major buzzwords in 2016. The New Consumerism, with consumers reassessing their priorities and values, will continue to permeate consumer behaviour and the luxury goods industry as we now move into 2017.
Now, as the year has drawn to its close, we assess what we got right and what we got wrong.
In March, following a disappointing financial year, Burberry and its then-CEO Christopher Bailey announced a number of measures which would help to streamline the business but also promised to return its sales to positive growth. Shortly thereafter, Burberry announced that Bailey, who at the time was performing two key jobs of CEO and Creative Director, would be stepping down from the CEO role, remaining president and Chief Creative Officer, and to be replaced as CEO by Marco Gobbetti, formerly of Céline, in 2017.
Given how immensely complicated the global operating environment is at the moment, and given Burberry’s geographical mix within it, it was only a matter of time before it became increasingly untenable for Christopher Bailey to perform the two key jobs. While there have been some successes the company is still struggling to meet its financial expectations due to a number of obstacles; amongst others these include the repurchasing of its licenses and declines in wholesale orders thanks to ailing department stores.
Source: Euromonitor International from Burberry
On 4 October 2016, LVMH Moët Hennessy Louis Vuitton SA announced its purchase of an 80% stake in German luxury luggage manufacturer Rimowa GmbH. Founded more than a century ago, Rimowa is best known for the 1937 launch of an aluminium suitcase, recognisable by its parallel grooves, and makes it the first acquisition that French-based luxury goods company LVMH has made in Germany
In a market that is becoming increasingly saturated, the impending exit strategy of Rimowa, starting with the initial purchase of an 80% stake by LVMH, reveals the company’s uncertainty in surviving in the luxury market alone. Moreover, the global luxury travel goods industry saw slow growth of just 1% from 2015-2016 with one of Rimowa’s key regions, China, facing a sharp decline of 6%. With a gloomy outlook for the luxury market thanks to an increasingly volatile global economic situation, coupled with Samsonite’s acquisition of Tumi, Rimowa is in a vulnerable position but the company remains optimistic that this move will provide further jobs and security for the brand.
Following declining sales in fiscal 2016, new boss Mr. Larsson revealed his “Way Forward” plan to investors. Along with closing stores and eliminating unnecessary jobs, he has used his hugely successful experience in the fast fashion realm to build a faster supply chain at Ralph Lauren. He has streamlined the supply chain, consolidated its various brands and is aiming to get closer to consumers. Much like Burberry the brand showed its first ever “see-now, buy-now” collection at NYFW in September 2016.
After reporting seven consecutive quarters of sales declines, Tiffany & Co finally reported in November positive 1% growth for Q3 2016. The uptick in sales could be a glimpse of recovery, but it is also likely that the poor showing in 2015 is surely making it easier to show any positive improvement. Year to date, earnings are still down 4% compared to the same period in 2015. In the beleaguered luxury business, it is quite premature to say that good times are right around the corner.
With burgeoning demand for all things connected we indeed saw 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. The smart home market is expanding rapidly. Major brands are entering the segment and providing cost-effective solutions to everyday household problems. The need for luxury experiences as well as products, rising internet usage, smartphone penetration and high end domestic appliance sales globally have all enabled more homes to get smart, while the general rise in IT literacy in emerging markets has enhanced accessibility to products. The entry of several major digital brands into the market is expected to further strengthen visibility and awareness of smart-home offerings. However, smart home goods are still targeting a niche, tech-savvy audience.
Moving forward, household penetration of almost all domestic appliances will increase worldwide in the next five years, driven by rapid urbanisation and an increase in high income earners and middle class households (especially in emerging markets). With household appliances beginning to reach a ceiling in terms of capability, there is a growing need for manufacturers to provide high-end smart options to stand out in a crowded marketplace.
2016 saw the launch of German luxury luggage brand Rimowa’s first fully-integrated digital suitcase. The RIMOWA Electronic Tag ranges from USD300 to USD1,685 per case and features a built-in digital data module that provides passengers with the luggage information for upcoming booked flights before leaving home, allows the passenger to check-in their luggage from anywhere in the world and has built-in global-tracking. Whilst the new electronic tagging system was originally launched with partner airline Lufthansa GmbH other airlines are now also on board and the program will be expanded further throughout the year.
Source: Euromonitor International from Rimowa
Stronger global demand for luxury experiences such as fine dining, lavish holidays and beauty pampering, often as alternatives to luxury brands per se, have enticed leading fashion houses to build bigger footprints in areas such as luxury travel, luxury foodservice and luxury health and wellness in 2016.
Consumers are increasingly regarding ownership of stuff as less important than access to experiences and luxury brands can use the experience economy to their advantage by staging immersive experiences that ultimatelydrive loyalty and help to enhancebusinessperformance.
2016 saw the investment arm of LVMH, L Catterton Europe, enter into discussions to sign a deal to acquire a majority stake in Italian bicycle maker Pinarello. It is also believed that the company is in talks with high-end British cycling apparel maker Rapha about a potential acquisition later in 2017.
The Pinarello/LVMH acquisition is just one example of how fashion houses are driving-up investment in “luxury experiences” and “lifestyle branding” and that the demand for luxury health and wellness is growing. According to the latest data from Euromonitor International, in 2016 the overall global market for health and wellness reached USD701 billion and it is expected to grow by 17% over thenext five years to reach USD833 billion by 2021.This significantly outpaces the slower growth in thepersonal luxury goods market, which grew by just over 3% in 2016 on the previous year in real terms and is forecast to increase by 16% over the next five years to reach USD450 billion by 2021.
Source: Euromonitor International from Pinarello
The fashion for wearing fitness apparel away from the gym was well and truly cemented in the mainstream fashion retail and threw down the gauntlet to the jeans industry (due to the growing popularity of yoga and jogging pants). However 2016 saw a new battleground emerge in luxury fashion too, as more and more designer labels looked to cash in on this trend. This trend affected menswear as much as womenswear.
Whilst some demand for luxury health and wellness is consumer-led, celebrity endorsements have also fuelled the “athleisure” boom. We have long been familiar with Stella McCartney’s collaboration with adidas but 2016 saw a further spate of launches, with the global release of Beyoncé’s Ivy Park line, which is exclusive to selected stores and retailers, Rihanna for Puma and the very sought-after adidas Yeezy by Kanye West, to name but a few.
Chanel, Dior, Balmain and Louis Vuitton are among the latest luxury brands to offer couture sneakers, while Fendi, Chloé and Hermès all launched capsule collections in 2016, specially designed for skiing and cross-fitting.
However, it is not just the luxury brands themselves that are expanding their offering in “athleisure”. A number of high-end retailers and luxury department stores have also invested heavily in campaigns dedicated to “athleisure” and health and wellness. One recent example from 2016 is Lane Crawford’s Fit Room concept and two years ago, luxury internet retailer Net-a-Porter launched Net-a-Sporter dedicated to selling active wear and designed for 11 sports including golf, ski, equestrian, gym, yoga and dance. However, the biggest andmost prominent of such projects from a retailer probably comes from London-based luxury department store Selfridges.
In April 2016 Selfridges launched The Body Studio located at its flagship store on London’s Oxford Street. Occupying over 37,000 square-feet and housing over 150 brands, this was the largest department ever opened by the iconic store, with the idea of being an all-in-one holistic fashion and accessories destination created for women to promote and celebrate the mind, the body and overall wellness. Amongst other things, the department offers state-of-the-art private and VIP changing rooms with three-way “total vision” mirrors (including a “bum mirror”) and a new “zero-tape” measurement service.
At the same time, Selfridges launched the world’s first ever pop-up gym to be opened in a department store, The BodyWork, a six-week takeover by London-based boutique spin class studio Psycle and a two-week pop-up by London-based yoga group Yung Club.
The Body Studio also features two new permanent retail concepts; one by the Hemsley sisters, Hemsley + Hemsley Café, which offers an all-day menu promoting balanced and nutritious food; theother is a luxury salon by celebrity hairdresser Daniel Galvin. As well as providing full service cutting, styling, colour and treatment the salon also houses two beauty rooms and a private VIP room.
Source: Euromonitor International from Selfridges
Luxury Swiss watches became increasingly unaffordable in 2016 for big swathes of the global population, due to a free-floating Swiss franc on the one hand and slower economic growth in key emerging markets on the other. Sales of luxury watches stagnated in 2016. Demand was held afloat in 2015 by Western Europe and the US, but that scenario ended in 2016, due in part to a slower flow of Chinese outbound tourists as well as the continued backlash following the Chinese Government’s clampdown on luxury gifting.
Fine wine, champagne and luxury spirits was the fastest-growing category in 2016, with an incremental value of 8%. Much of this positive momentum is on the back of China. At LVMH, for example, the category recorded organic revenue growth of 7% in the first nine months of 2016, greatly on the back of China’s improved momentum.
Following their rapid expansion into China’s interior the likes of Louis Vuitton (LVMH), Gucci and Prada continued to close a number of their underperforming stores in 2016. As the country’s economic growth slows, consumers in formerly fast growing second and third tier cities have been reigning in spending more than in the first tier cities, which has forced leading global brands to slow their expansion plans in the interior. Whilst mainland China has been the focus of such culling of store-expansions in the last few years the same can now be said for Hong-Kong, which towards the end of 2016 also faced a number of store-closures from leading luxury brands.
Growing numbers of Chinese shoppers continue to head to Japan (and to a lesser extent South Korea) instead of Hong Kong. Indeed, much in line with our luxury goods research, our latest travel data show that the number of Chinese trips to Hong Kong dropped by 5% in 2015. However, at the same time there was a massive increase of 107% in the number of trips taken to Japan in the same year. Japan and South Korea have indeed enjoyed the strongest demand from China, aided by more relaxed visa programmes over the past two decades, but also owing to their favourable exchange rates when shopping for luxury goods.
The US was once again the biggest growth market for luxury goods (in absolute terms) over the 2011-2016 review period, followed by Japan, South Korea, the UK and Canada.
The size of the US market grew by around USD12 billion in the five years to 2016, well ahead of theUSD7 billion increase achieved by Japan, the second biggest growth market. The growth disparity between Japan and the US is a further possible indication of an East to West shift in industry revenue power in the last five years.
Sales of luxury goods in India grew by 16% (in real US dollar value terms) in 2016, fuelled by a slowdown in the black market and a commensurate uptick in the formal market. This made it thefastest growing market in the world, and indeed the only market to register double-digit, year-on-year growth in US dollar terms. India has been edging its way up the global luxury goods ranking, but remains just outside the top 20 markets in the world by retail value in 2016. Moving forward, however, India is already on track to leapfrog Brazil and the Netherlands in 2017 to become theworld’s 19th biggest luxury goods market
Despite their strong luxury goods tradition, both Russia and Hong Kong are facing some of their fiercest headwinds of the past decade. Both markets witnessed yet another decline in sales, for the third consecutive year. Political and economic instability in Russia held back sales and social unrest in Hong Kong, coupled with slower economic growth in China, leading to a sharp drop-off in visitors from China’s mainland. We predict that both markets will experience further declines in luxury goods sales in US dollar terms in 2017, which will further undermine the global performance of big-name players such as LVMH, Kering, Richemont and Prada.
With footfall in physical retailing falling, 2016 saw an increase in luxury goods retailers looking to bring consumers back into stores by improving the in-store experience using technology. Meanwhile, pure play internet retailers look to establish physical presence.
The blurring of online and physical platforms for big-name brands and companies such as Burberry, Gucci, McQ and LVMH became increasingly apparent in 2016, as these brands brought more of thefunctionality of the internet into their stores. The focus was clearly on connecting with consumers in a more personalised way – using social media as well as apps and pop up messages on smartphones. We also saw 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
Source: Euromonitor International from Burberry
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 did indeed become increasingly visible in 2016; however, the most successful apps and reward programmes were those that invested in and focus on client retention rather than new client acquisition. US luxury department store Neiman Marcus and UK-based luxury department store Harvey Nichols have both been successful with their tiered rewards program, which lets consumers gain new levels of exclusive services based on the amount they spend in a given year.
Overall, digital sales of luxury goods increased by almost 12% in 2016 outpacing all other retail channels and are set to increase by an additional 50% in actual terms over the next five years, to account for almost 10% of all luxury sales.
Indeed, the number of luxury consumers shopping online and through mobile is soaring by themonth. In 2016, mobile-driven commerce for all retail sales reached an estimated USD972.25 billion across the 46 markets where Euromonitor International conducts this digital research. Most impressively, mobile payments are expected to reach USD3 trillion by 2021. While that is a lot of transacted money across these small-screen devices, mobile-based payments will equate to only an estimated 11% of all consumer card payment volume across these markets in 2021, up from approximately 5% in 2016.
The proportion of households with possession of a smartphone has been growing rapidly and this growth will continue. By 2030, households in both developed, and emerging and developing markets will exceed 80%. The high penetration rate will yield new opportunities for luxury retailers to reach out to shoppers.
As mobile phones cement themselves as the most popular device on the planet and mobile-based commerce continues to expand leaps and bounds, the market potential for luxury goods in the next 10 to 20 years remains enormous. The stakes are certainly high for payment players, merchants and luxury brands and retailers, which are all fighting to be among the first to get mobile right and gain significant adoption among an increasingly more connected luxury consumer base.
Factory stores (selling products at discounted prices) did indeed become increasingly popular as places to offload surplus stock and last year’s lines. This trend was driven by the weakening of wholesale presence of many big-name luxury brands. Factory outlets are perceived as channels where luxury brands can legitimately offer discounts but without compromising the performance of full price stores but at the same time allows for better management of surplus stock.
One of the latest outlets to open in 2016 was London –based Hackney Walk which was unveiled in August 2016 to become London’s first luxury outlet district. Amongst the luxury retailers includes Joseph, MATCHESFASHION.COM, Anya Hindmarch, Burberry, Aquascutum, Bally, Pringle of Scotland and Nike outlets and a Gieves & Hawkes to name but a few with more luxury retailers set to join “TheWalk” later in 2017.
Source: Euromonitor International from Hackney Walk
Ageing populations are a common thread among the world’s biggest luxury goods markets. In China, for example, the number of over-55s will grow by around 150 million over the next ten years, offsetting a contraction of 105 million in the under 55s. Finding new ways to tap into this market became increasingly integral to brand strategies in 2016.
Since Céline hired writer Joan Didion, (81),as the face of its spring/summer 2015 collection, the“grey dollar” has become a key focus for luxury marketing and advertising. These older women would once have been considered past it but 2016 saw a number of “older” women hit the catwalks and advertisement and marketing campaigns as well as the return of super models Claudia Schiffer (46), Cindy Crawford (50) and Naomi Campbell (46) for Balmain’s spring/summer 2016 campaign.
Source: Euromonitor International from Balmain
2016 indeed saw an increase in crowdsouced marketing and sales initiatives as consumers increasingly 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. Thanks to digital technology, 2016 also saw an increase in the number of luxury brands and retailers collecting feedback from customers and shoppers alike.
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 predicted a strong return to growth as the brand expanded globally, diluting some of its US dependence. We also predicted that the brand would drop more into the middle ground in its key markets of the US and UK, challenging some of the leading fast fashion brands – especially in Western Europe and the emerging markets.
Whilst the third and fourth quarter of fiscal year 2015 remained positive, with both company sales and profits up, things took a turn for the worst in Q1 and Q2 of fiscal year 2016, with profits declining by 2% and 3% respectively. Sales were also down by Q2 of 2016. The poor performance in 2016was attributed to a slowdown in tourism spend as well as a decline in shopping-mall footfall. However the company remains optimistic about 2017 following the launch of several new digital flagships in Europe, the debut of its Michael Kors ACCESS line of smartwatches and trackers and the continued development of its menswear range.
Luxury eyewear maker and global leader Luxottica still has plenty of cash in its coffers following a successful year and will still look to build its global footprint through one or more targeted acquisitions. However, whilst it is estimated that the eyewear giant has €6 to €7 billion it could use on M&A, no activities took place in 2016.
Crucially, the company still needs to dilute some of its dependence on the US market in order to realise its long-term growth ambitions. Despite its Italian heritage, Luxottica generates about half of its revenue in North America, thanks to its heavy retail presence across the region. This compares with 21% in Europe (where it started out as a wholesaler), 13% in Asia Pacific, and 5% in Latin America.
Much was expected of Gucci in 2016 under CEO Marco Bizzarri and creative director Alessandro Michele, both were appointed at the start of 2015. We predicted that the brand would continue to experience sluggish sales in 2016 due in part to weaker spending by emerging market shoppers in Western Europe but also in part to the overexposure of Gucci in Asia Pacific.
However, Marco Bizzarri’s ambition to lift Gucci revenue to €6 billion was well and truly on track by the second quarter on the year and the brand overall experienced exceptional growth. Gucci gained further momentum in the third quarter, significantly outperforming the luxury category with a 17% increase in revenue on a comparable basis. Sales increased across all product categories and global regions (excluding Japan, where market conditions were lacklustre overall).
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, is driving up investment in luxury menswear and accessories – however luxury womenswear and accessories continued to outperform menswear in 2016.
That makes 21‘hits’, one ‘near hit’ and three ‘misses’. Not too bad given that 2016 was a hugely challenging year for the industry with nothing written in stone.
As we now move into 2017 we can reveal that that global luxury goods industry is expected to continue growing at a healthy pace, with a CAGR of 3% from 2016-2021, a clear increase from theperiod of 2011-2016 in constant currency terms. While emerging markets such as India and Malayssa remain at the forefront for growth, leading markets such as the US and China continue to perform well.
Look out for our ‘2017 Luxury Goods Predictions’ coming soon.