May 21, 2015
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Luxury industry needs strategy change

May 21, 2015

The global luxury market is facing profound changes in shopping behaviours.
The power of the Internet on the one hand, which plays a deciding factor in the purchase of a luxury good both in terms of price and delivery, and the major increase in tourist shopping on the other, are completely changing the way people are buying and spending.

This was notably sees in the first quarter of 2015, during which currency fluctuations had an immediate impact on touristic flows and spending patterns, especially among the Chinese, who shopped more in Europe, Korea and Japan, becoming their top tourist destination. That is the picture given by the Fondation Altagamma, which brings together the main luxury labels in Italy, and Bain & Company.

Chanel FW15/16 - Pixel Formula

According to their valuations, presented this Thursday in Milan, the global personal luxury goods market reached €224 billion in revenue (at retail equivalent value) in 2014, up by 3% percent compared to 2013 and 10% in 2012.

The fluctuations in currency will have a major impact on the luxury industry this year. With a euro equaling $1.10, its lowest against the greenback since September 2003, labels can count on strong growth since most of them are based in France and Italy while selling 75% of their products in dollars. However, this phenomenon will have repercussions on the company's strategies, with a massive move of luxury consumers towards the euro zone, where luxury goods are less expensive.

"Current market dynamics shine a light on how the industry has changed over the last 15 years," said Claudia D'Arpizio, a Bain partner and lead author of the report.  "Pricing, distribution and customer strategy remain at the top of the agenda for luxury companies, but the old models are being called into question. In this new environment, brands must undergo a fundamental paradigm shift if they want to win in the years to come."

Currency fluctuations in 2014 et 2015 - Bain & Company

Especially since flows of Chinese tourists are extremely volatile, changing month to month. The overall number of luxury consumers has increased from 140 million worldwide to over 350 million. Today, Chinese consumers make up more than 30% of global luxury spending, compared to 2% in 2000. In this context, several factors come into play. For example, the number of direct flights available for each capital of luxury. As it currently stands, there are three daily flights from China to Italy, compared to 27 for Germany and some 20 for France…

The Web has also become a determining factor. With the Internet today, there is indeed a total price transparency.

"What point is there in making major investments in China if no one is buying products from certain labels that cost 60% in Europe? The truth is that people are willing to travel to make purchases where the prices are most attractive. On the other hand, houses cannot change prices that were often set a year ago in the middle of a season," points out the analyst, which is inviting the industry to change its strategy.

Today, 30% of luxury products are not sold at full price. The harmonisation of prices from one market to another, recently started by Chanel, should not hide the difficulties in the sector in China, and actually seems to be but a palliative solution.


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