The global luxury market is undergoing a structural change with too many luxury stores across Asia, not enough in most U.S. cities and a consumer who is both moving toward experiences and relying more on digital technology.
That’s the conclusion of a new study by The Boston Consulting Group and Bernstein, the research arm of Alliance Bernstein. The study draws its key findings from BCG’s proprietary Metroluxe Index, which checks luxury sales by city, and the Bernstein Proprietary Luxury Store Database, which maps global luxury retail environments by store and information on 7,000 stores across 36 luxury brands.
The latest research — which pegs the global luxury market at 1.5 trillion euros for 2015, or $1.4 trillion at the 2015 average exchange rate — indicates that physical stores continue to be important in brand building for luxury firms. But many large Asian cities now have too many stores. With top-tier cities such as Tokyo, Seoul, Hong Kong, Shanghai, Beijing, Singapore and Taipei saturated with luxury stores, brands with big footprints in many of those cities are unlikely to see a significant uplift in demand to support their fixed-cost investments in real estate. The study also noted that store saturation is now evident in China in Tier 2 cities, including Tianjin and Chengdu.
Olivier Abtan, partner and managing director in BCG’s Paris office and global leader of the firm’s luxury, fashion and beauty sectors, said the luxury market growth from 2015 to 2016 was essentially flat.
The study found that brands with stores in the six big luxury centers — New York, Tokyo, London, Paris, Seoul and Hong Kong — are likely to continue to dominate the physical channel. These luxury centers should continue to support multiple stores per brand, presuming there is a mix of flagship stores and other doors to cater to local shoppers and steady flow of tourism.
While the U.S. remains a solid for luxury brands overall, it is in second-tier cities where the market is under-penetrated, according to the study. These cities include Dallas, Boston and Washington, D.C. While they may have less tourist traffic than Los Angeles, or one of the six big luxury centers, there is still the opportunity for strong, steady sales from their local populations.
Abtan said luxury brands will need to consider the growth of e-commerce to best determine store location and which markets to enter. That’s where analytics can gauge the impact of technology and find the right balance between online sales and store locations in different metro markets.
Technology can also help luxury brands find efficiencies in how they operate their existing networks, particularly in Asia. These efficiencies could include some store closures in China and other Asian cities. And with luxury sales accelerating online, the BCG-Bernstein study noted that digital would be key to customer interaction across all segments in influencing the purchase behavior of luxury consumers.
Gone are the days when the “name of the game in opening stores in China was to be first out of the gate,” Abtan said. “Now they will rationalize their presence and focus on how to be more productive in the stores they decide to keep. [The focus now is on how] to increase sales per square foot. It will be back to retail basics.”
Abtan also said there is now a greater chance that companies will open smaller stores compared with previous locations, in part due to the growing market share from online sales.
The study projected 2 percent to 4 percent growth in the luxury market, with China remaining the main market at 30 percent of total share, followed by the U.S. with a 23 percent share and Europe rounding out the top three at 20 percent. About two-thirds of the next decade’s growth would be organic, with the local consumer becoming the focus in both mature and emerging markets. That compares with 60 percent in the last decade through retail expansion and 40 percent via organic growth. In the upcoming decade, growth by retail expansion is expected to drop to 30 percent, with organic growth to account for 70 percent of sales.
Organic growth will benefit from bringing more experience in-store for consumers, the study said, noting that the shift from “owning” to “being” is happening in all countries. Examples it cited are: The Fit Room, a full athletic experience in-store at Lane Crawford; The Burberry Booth, consumer-generated content at Burberry Group; Memory Mirrors, interactive screens and other digital touchpoints at Neiman Marcus, and complimentary community events such as those hosted by Lululemon Athletica.