Following a string of stellar financial results from some of the top players in the luxury goods industry, the sector kicks off the New Year with a hefty dose of fresh optimism.
But the newfound growth is also prompting broader changes to the sector that will drive company strategies in coming months.
With a large proportion of the improved business coming from China, sellers of high-end goods find themselves scrambling to adjust to the country’s growing weight. The share of luxury goods purchased by Chinese nationals reached 32 percent last year, according to Bain & Company’s worldwide study of luxury goods in December.
Technology will play a role in boosting high-end consumption in the fast-growing Chinese market, according to analysts at Bernstein, who estimate the growth rate there will be in the mid to high-single digits this year, following a brisk pace of around 18 percent in 2017.
Crucial to the battle for Chinese wealth, technology has emerged as a central pillar to the strategies of luxury brands.
Recent examples of this shift toward embracing the digital world also signal further change ahead.
In the past several months, two of the industry’s largest players have recruited new executives for key positions in the digital sphere, adding them to their management boards. Kering in December named Grégory Boutté, who once worked at eBay, to head online sales, client relationship management and data management efforts. Compagnie Financière Richemont, meanwhile, created the position of chief technology officer in September, filling it with a German retail executive, Jean-Jacques Van Oosten.
Analysts noted the appointments came as luxury brands accelerate the pace of their digital initiatives as they compete for consumers around the world, especially the tech-savvy Chinese.
Kering is considered a digitally advanced player compared to peers. The company acted quickly to launch online platforms for a handful of brands in the year following its 2012 alliance with Yoox, and, more recently, with triple-digit online sales growth from its star brand Gucci in the third quarter of 2017 — which launched its e-commerce site in China in July.
Boutté’s recruitment indicates the company sees further potential for its business online, analysts say.
At LVMH Moët Hennessy Louis Vuitton, recent inroads in the digital sphere include the launch of a new Internet site for the Céline brand last month in France, offering all product categories online for the first time — a project scheduled to extend elsewhere in Europe and the U.S. this year and Japan next year. The label set up a WeChat account for its Chinese platform in November and set up an Instagram account earlier last year.
The introduction of the Celine site follows LVMH’s launch last June of its e-commerce site 24 Sevres, linked to Bon Marche. The site sells more than 150 luxury brands, including Givenchy, Loewe, Fendi and Kenzo.
And just before the holidays, the luxury behemoth partnered with a Silicon Valley start-up Mode.ai to introduce a chat bot to Facebook messenger in the U.S. representing Louis Vuitton. Executives at Vuitton, which aims to take the virtual adviser to Europe and Japan in addition to other messenger platforms like WeChat and Line, consider artificial intelligence an important means of future communication with consumers.
Through the new service, people can access online catalogues, share products with friends and learn about Vuitton’s history while personalizing shopping experiences.
While many brands were slow to embrace technology in past years, the luxury sector’s rush to do so in 2017 is likely to continue into 2018. While product and personalized service still dominate the discussion when it comes to luxury, the use of digital – from social media to e-commerce – reflects an attempt by industry players to shore up their own systems amid the ever-growing dominance of tech pioneers Alibaba and Amazon – not to mention the ongoing expansion of fashion-focused sites like Net-a-Porter, Farfetch, Matchesfashion.com and Moda Operandi.
Analysts at McKinsey & Co., in a study of artificial intelligence across sectors, said they expect companies that are more digitally advanced will be able to improve their businesses through AI more quickly than peers by building on existing technical skills.
The luxury goods sector as a whole has already seen stronger brands making increasing gains on their smaller peers overall, not just in the online sphere. Business in the sector improved significantly last year, said analysts at Bernstein, noting “clear winners and losers.”
In a December report on European luxury goods, the analysts said they expect the differences to be demonstrated by diverging dividend policies.
“Names which have enjoyed great momentum and gained market share will take the opportunity to increase dividends to reward investors, while brands that are going through periods of transition and uncertainty will struggle to maintain historical dividend payments,” said Bernstein.
Citing likely lower capital requirements as brands ease up on expanding their store networks, the analysts expect significant dividend increases from Kering, Richemont and LVMH, as well as Hermes; flat dividends from Prada and Burberry while they pursue turnaround plans, and a cut at Salvatore Ferragamo as the company launches the first women’s ready-to-wear collection by Paul Andrew, who already oversees the firm’s footwear.
Analysts at RBC Capital markets, in a December note, sounded a cautious note on Tod’s Group, in addition to Ferragamo and Burberry, saying the Italian company “has been late in embracing digital marketing e-commerce and is now playing catch-up.”
Meanwhile, RBC analysts expect the majority of LVMH businesses will enjoy strong momentum, noting the “favorable external backdrop in Asia and relative ‘un-Amazonable-nature’ of tightly distributed brands” such as Louis Vuitton, Bulgari or Dior Couture.
Globally, the luxury sector is forecast to grow at a rate of around 4 percent to 5 percent a year for the next three years, according to Bain & Co.’s Claudia D’Arpizio, following 5 percent growth last year.
The sector bounced back in Europe in 2017, with 6 percent growth, while the Americas posted a 2 percent rise, a rate dwarfed by the 15 percent growth at constant foreign exchange rates clocked in China, according to Bain & Co.