MILAN — Luxury is about sexiness.

That is what emerges from the eighth edition of “The Luxury and Cosmetics Financial Factbook” annual study, which was released Wednesday by consulting firm Ernst & Young.

According to the research, which offers analysis and statistics on current trends based on the data of 28 listed companies from the luxury and beauty industries, the “coolness” a company and its products express is the key ingredient behind all of the great growth stories today.

“Ten years ago, if you had quality, heritage and retail doors in the right locations, your performance was in line with the market’s [expectations,]” said Federico Bonelli, EY partner of fashion and luxury transaction advisory services. “Now you have to add a fourth element to the equation: sexiness.”

Interviewing a sample of over 10,000 consumers, the research highlights that over the last year, sexiness jumped from the eighth position to fourth in the rank of factors representing luxury for customers. It follows material quality, exclusivity and craftsmanship and precedes elements such as brand visibility, innovation and heritage.

The cool-factor manifests itself in multiple forms, as it can originate from a disruptive approach — think of Gucci — or be a consequence of long-standing desirability — think of Hermès.

“Every brand is examining itself to understand how to be relevant for the consumer,” said Bonelli, who highlighted the importance of adapting the sexiness to each company’s own DNA as “the biggest mistakes happen when somebody tries to adapt a successful concept on a brand with different characteristics.”

“That’s the reason why the choice of a creative director today is more critical than ever, as companies need people able to interpret the current taste and [consumers’] demands, to understand the brand’s DNA and have a commercial attitude, working closely with the merchandising team. It’s not the rock star era anymore,” said Bonelli.

The sexiness quality is primarily connected to companies’ ability to develop appealing products and leverage iconic pop items once not considered in the high-end world, such as sneakers, T-shirts and backpacks, making them the platform for the new concept of luxury.

The strong growth in casualization, the fewer opportunities to wear traditional formalwear and the “mix and match” approach in shopping fashion goods reflect a deep evolution of taste and expectation that will determine the acceleration of premium and the growth of the entry-to-luxury segment while the luxury market will see a slowdown, according to the study. In particular, the expected compound annual growth rate, or CAGR, for the former will be around 7.5 percent for the 2017 to 2021 period, against 3 percent growth of the luxury industry in the same period.

Overall, sales of luxury and cosmetic goods are expected to reach 517 billion euros in 2021. In 2017, sales totaled 435 billion euros, with the luxury market accounting for 276 billion euros and the premium and entry-to-luxury segment reaching 108 billion euros.

In terms of product categories, accessories will fuel the premium and entry-to-luxury segment, as they will grow with a 9 percent CAGR in the 2017 to 2012 period. Shoes will remain the objects of desire leading the luxury growth and will register a 10 percent CAGR while premium fashion — also benefiting from the daywear and casual trend — will accelerate compared to past years and in 2021 reach the same market value of luxury apparel, 84 billion euros.

In this scenario, the future challenge for companies will involve increasing their competitiveness in terms of creativity and business model, focusing on three main areas. The first step is operating on the buying and merchandising departments, to enhance the product selection, its replenishment strategies and presentation in-store.

The customer relationship management will also be key according to Bonelli, who urged companies to develop an efficient, immediate, coherent and flexible communication, putting the consumer at the center and including both traditional and digital media. In particular, more than 60 percent of purchases are influenced by digital, whether consumers are looking online and buying in a physical store or directly on e-tailers. In addition, more than 70 percent of consumers connect to their favorite brands through social platforms, also encouraged by word of mouth that remains the first lever of influence for the luxury consumer and occurs for two-thirds through digital platforms.

The third challenge for companies is to improve the retail machine “to meet the increasingly extreme expectations consumers have,” said Bonelli.

“Consumers have been miseducated by Amazon, which brings them [goods] at home and within 24 hours, but now they expect the same treatment also from luxury [companies]. So having an efficient retail machine means enhancing operations, services, replenishments, buy-and-pick-up-wherever-you-want options,” he said.

Consumer behavior, digital engagement and transformative distribution will also affect the beauty industry. According to the report, the premium cosmetic market, which totaled 51 billion euros last year, will grow 4.5 percent for the period from 2017 to 2021. Innovation, natural and organic beauty trends and male-focused grooming products will contribute to the growth. In addition, the increase of middle-class consumers in emerging markets, which are expected to account for 50 percent of total personal-care sales by 2020, will contribute to the sector’s performance.

The EY study also analyzed merger and acquisition activities registered last year, which were central both for the luxury and beauty industries.

Transactions for the former were up 20 percent in 2017 with 140 deals completed, and Italy ranked as the second country for the number of inbound deals. The average size of the deals increased to 527 million euros compared to 262 million euros in 2016. Private equity funds also played a central role, as they were involved in 49 percent of the transactions in 2017, showing interest in middle-market companies in the premium and entry-to-luxury sector.

Regarding the beauty industry, the number of deals was up 42 percent last year, totaling 81 completed acquisitions — the highest in the last five years — compared to the 57 transactions in 2016. The average deal size was 304 million euros, in line with the 302 million euros in the previous year, if the deal involving the acquisition by Coty of 43 Procter & Gamble brands is excluded. The study highlighted that, in this case, private equity firms were involved in only 30 percent of the transactions, as global beauty groups continue to consolidate their positions, acquiring other firms in order to reach new markets, to diversify their offer with innovative products and to engage consumers with tech tools and apps.

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