Survey finds that luxury labels need new approach to growth
The luxury goods industry is going through a profound transition phase, and it is changing as the market experiences a generalised slow-down. The Exane BPN Paribas survey 'Luxury Goods, Challenges & Opportunities', presented at the recent Luxury Forward conference in Paris, has provided some clues on new, potential growth drivers.
In the last decade, the luxury goods market based its success on retail growth and price increases, but these strategies are no longer effective. "In terms of prices, fashion labels are already being aggressive, and it is hard for them to do better," noted research author Luca Solca.
The luxury market has grown by 6% in the last 10 years and 8% in the last five. "Growth has been driven by Chinese consumers, who represent over a third of global customers. Now that their consumption is declining, the entire industry is suffering," added the analyst, saying that in future "it will be the middle classes which will push growth." In China, the latter segment currently "has less liquidity available."
To make matters worse, it has now become very easy to compare prices on the internet. At the same time, accessible luxury brands have increased their market penetration. Between 2013 and 2015, such brands increased sales by 8.6%, with stellar results from U.S. labels like Michael Kors and Tory Burch.
In the same period, sales for major fashion labels such as Louis Vuitton, Gucci, Burberry and Prada increased by only 0.6%, while those of premium luxury brands such as Hermès, Chanel, Dior, Céline and Saint Laurent grew by 3.7%. The return on investment (ROI) has also slumped for the majority of these brands.
In recent years, luxury goods groups have actually morphed into retail corporations and in the wake of the economic slow down, their profitability per square meter has declined accordingly, sending their ROI into a sharp decline.
In light of the situation and the market's current situation, the survey suggests several different solutions for luxury corporations to return to growth. "After years of extravagance, and as they are becoming less profitable, luxury groups must go back to an 'ordinary' way of doing business, paying more attention to their costs and investments. They need to jettison their less profitable operations. They must also put more effort in being attractive through appealing products, as Gucci has succeeded in doing under the aegis of its new Creative Director Alessandro Michele," said Luca Solca.
The other crucial element will be the brands' ability to leverage segments that are currently booming, such as luxury goods purchases online and airport retail. The digital domain is actually the most promising new avenue for growth. The luxury goods industry will need to rely on online and cross-channel sales, as they are both blossoming. But to do so, it must learn how to convey the experience of physical luxury online.
The Exane PNB Paribas survey demonstrates how this is an obvious but far from easy task. Researchers carried out two extensive tests, purchasing a wallet and a belt online from 29 leading brands or fashion websites. They then compiled a ranking based on 32 parameters, including the ease in searching for a product, availability, and the overall shopping experience. Fendi came in first place, followed by Cartier and Mr Porter, while Ferragamo, Prada and Tiffany ended up at the back of the pack.
In a second test, researchers visited 34 stores and department stores to measure how effective brick-and-mortar shops are though the use of digital services. The test tracked 21 parameters, including the technology available in-store, a direct connection with online customers, the coordination of promotional deals online and in-store, etc. The winner this time was Ralph Lauren, followed by Bergdorf Goodman, Burberry and Louis Vuitton, while Dolce & Gabbana, Ferragamo, Saint Laurent and Céline ended up at the bottom of the list.
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