MILAN — The luxury goods sector is expected to continue to grow in 2014, although at a similar pace to last year — and the double-digit gains seen in the 2009 to 2012 period are not in the cards.
The Worldwide Luxury Markets Monitor Spring 2014 update presented by Bain & Co. and Fondazione Altagamma here Monday confirmed a slowdown in growth last year, which was highly impacted by currency fluctuations.
The luxury goods market grew 6.5 percent at constant exchange and 2.2 percent at current exchange to 217 billion euros, or $288.2 billion at average exchange, in 2013, the study said.
The first quarter of 2014 is in line with that of the full-year 2013 numbers, showing a 6 percent gain at constant exchange and 2 to 3 percent growth at current exchange. This year overall, the market is expected to grow 4 to 6 percent at constant exchange.
“We are entering a new phase that I would call new normal,” said Claudia D’Arpizio, a partner at Bain & Co., noting that she expected growth between 4 and 6 percent at constant exchange over the next few years — “a more stable and healthy growth trend.” The forecast was made in “the absence in the short term of explosive phenomena” such as the development of the Chinese market over the past few years, while mature markets have shown increased sensitivity to the crisis.
Armando Branchini, vice chairman of Fondazione Altagamma, said the luxury goods industry “has shown its ability to grow by catching the right wind, like good skippers,” and that brands are “not dependent on specific consumers.” D’Arpizio concurred, remarking that this is “a healthy industry with strong fundamentals that will increasingly show polarized performances.”
At constant exchange, in 2014, Europe is expected to grow between 2 and 4 percent to between 76 billion and 78 billion euros, or $104 billion and $106.8 billion at current exchange; the Americas are expected to gain between 4 and 6 percent; Japan between 9 and 11 percent; Asia Pacific (excluding Mainland China) between 3 and 5 percent; Mainland China between 2 and 4 percent, and the Rest of the World between 3 and 5 percent.
In 2014, travel retail and online sales will “take great advantage of the most dynamic trends: tourism and the search for bargains,” said the research. The opening of traditional monobrand stores is expected to slow. Department stores will continue to be “fundamental” in certain markets, although international expansion, while a key target for established names, has been challenging, and luxury brands have been vying for concessions in the U.S. and Korea. The multibrand channel has been losing ground in Europe and is expected to continue to do so, especially as it lacks the support of tourists and brands are rationalizing their store networks, the study said.
D’Arpizio believes there will be “a polarization of consumption, with absolute and accessible outpacing the market, the latter thanks to a growing middle class of wannabes.” Niche brands will outperform, sustained by opinionated consumers, and “men are becoming more hedonist and opinionated.” As a consequence, brands are investing more in men’s wear.
By product, the monitor expects “marginal changes” in 2014. A number of trends seen last year are expected to continue, including the increased use of leather and the decrease of logos in accessories, in addition to the popularity of men’s bags in China and the Middle East. Men’s and children’s wear will maintain their momentum, while women’s wear shows “a mixed performance,” and logos in apparel are used with irony and irreverence.
Last year accessories was the top category, growing 4 percent compared with 2012, followed by beauty and hard luxury, each up 2 percent, and apparel, inching up 1 percent. Watches improved in the second half, but unevenly, with feeble U.S. growth and a contraction in Asia. The beauty segment was boosted by the Americas and Asia, while Europe underperformed. Color cosmetics logged in a positive performance, also following the launch of fashion brands’ products in the category. Superior growth rates are expected for natural and organic cosmetics in 2014.
Geographically, tourism will continue to underpin the luxury market in Europe, although it will be hit by the Russian crisis, and the U.S. is “the renewed growth motor,” said D’Arpizio. Japan will continue to grow but will be hurt by the weak yen. In Japan, the yen devaluation is pushing local consumption and international visitors are becoming a relevant target for the first time. Luxury brands, however, are raising prices to offset the weak yen. The first quarter was boosted by domestic purchases ahead of the April VAT increase.
Mainland China continues to grow at a low-single-digit pace in line with last year, dented by anticorruption policies hampering gift-giving, significant price differentiation compared with outside the country, and a “tough situation” in tier-one cities, compared with growing tier-two and tier-three cities.
Continental China is “not very dynamic,” while Hong Kong and Macau are much stronger, as is Southeast Asia. “Chinese consumers are increasingly more relevant both locally and outside the country, from Japan to Korea, Australia and South East Asia, the U.S. and Canada, while the Japanese are returning to domestic spending,” she said.
While Italy continues to lag behind, Germany is showing sound growth, and France and the U.K. present a mixed trend. “Eastern Europe and Russia are showing alarming signals,” she added, noting that they are strongly decreasing in Europe, for both political tensions and the devaluation of the ruble, while they continue to travel to Dubai. While underscoring the difficulty of forecasting the development of Russia, D’Arpizio projected a 5 percent domestic drop in 2014 due more to the country’s economic crisis than its political troubles. “Observers were saying that we should not have called the BRICS countries emerging because they had emerged, but since last year they have shown their fragility, and characteristics that are specific to emerging countries,” said Branchini.
The Chinese remain the top global consumers of luxury, said D’Arpizio. They are traveling more, and in the U.S., for example, they are moving from California to Miami and the East Coast, as well as investing in the education of their children in American universities. “The bulimic effect of the last two years has passed, the Chinese consumers are more sophisticated, and there is a new middle class arriving on the scene that is focusing on American brands and accessible luxury,” she said.
D’Arpizio also pointed to Africa as a potential market for the industry, with Angola and Nigeria “to watch.”
Altagamma also presented its own study, called the Consensus, which forecasts a 6 percent growth in the sector at constant exchange in 2014, in line with last year. Branchini said the research expects 9 percent growth for Japan, 8 percent growth for the Middle East, 7 percent for Asia, 6 percent for the Americas, 4 percent for Europe, while the Rest of the World is estimated rising 7 percent. Accessories, jewelry and watches are expected to be the best-performing categories, up 6 percent, followed by apparel, up 5 percent. Also, the consensus forecasts average company earnings before interest, taxes, depreciation and amortization to grow 7 percentage points compared with 2013.