MILAN — “What do customers want?” is the niggling question for every entrepreneur and retailer navigating the current luxury market and facing consumers’ decreasing loyalty and their short attention span fanned by social media.
Yet the answer seems ready at hand. As experienced during high school years and widely portrayed by teen TV series throughout the decades, a person is driven by two main impulses: to be recognized in a community and feel accepted and celebrated in their individuality.
Although this might represent a dichotomy, the modern customer shows the same attitude in approaching fashion and beauty brands, according to the ninth edition of the annual “The Luxury and Cosmetics Financial Factbook,” which was released Tuesday by consulting firm Ernst & Young.
The research, which offers analysis and statistics on current trends based on the data of 29 listed companies from the luxury and beauty industries, this year focused on the importance of creating a community and offering a tailored luxury experience to final consumers.
“The brands that are winning today know their customers and the values they seek in a brand and communicate with them by making them feel unique, important and acknowledged,” said Elena De Cò, associate partner, head of EY-Strategy Fashion & Luxury.
“Every luxury good has to have superior content in terms of quality, aesthetics, craftsmanship and exclusivity, but today all these assets are not enough,” she continued, underscoring that the best-performing brands are those able to create, fuel and emotionally engage a community sharing the same values of the companies. “Through social media, customers become the newest and most powerful marketing channel of a brand.”
Overall, sales of luxury and cosmetic goods are expected to reach 541 billion euros in 2022. In 2018, sales totaled 451 billion euros, with the luxury market accounting for 282 billion euros and the premium and entry-to-luxury segment reaching 116 billion euros.
According to the study, the premium and entry-to-luxury segment will accelerate in the future, while the luxury market will grow at a slower pace. In particular, the expected compound annual growth rate, or CAGR, for the former will be around 7.5 percent for the 2018-to-2022 period, against 3 percent growth of the luxury industry in the same period.
“The luxury category is growing moderately as brands are showing polarized performances. Digital-native brands are growing triple-digit, luxury’s successful, big names are increasing their sales double-digit but other key companies with a strong heritage and quality product have lost their ability to create emotions,” explained De Cò.
To emotionally engage with consumers and consolidate a community of loyal customers, a brand has to know how to create a desire and deliver its values in an impactful way, often communicating provocative and disruptive messages able to start a conversation with the new generations of luxury consumers. The constant dialogue with customers is key for De Cò, who suggested companies should adopt innovative merchandising analysis such as as showing the prototype of a product online to get instant feedback and immediately evaluate its possible success.
To keep the conversation flow going, companies will continue to invest in communication — especially digital — and constantly release new products, capsule collections and collaborations with other brands.
Besides social media and digital platforms, one-to-one communication with each customer in every touch point of a company is seen as crucial, starting from physical stores. Here, profiling tools and geo-localized messages would fuel the customized shopping experience that would make each individual feel recognized and appreciated by the brand.
Regarding retailing, De Cò had good news for brick-and-mortar units, which in the last few years have been challenged by online platforms.
“Digital accounts for only 10 percent out of total sales of the luxury industry,” she said, specifying that modern consumers have an omnichannel approach to shopping. The research shows that 60 percent of purchases involved more channels, with the majority including physical retail.
“The traditional brick-and-mortar unit is still strategic because that’s the one efficiently conveying all the experiential elements and values of a brand, even if it has to be deeply renovated in its ability to relate with customers,” said De Cò.
The research showed that companies’ investments in retail are constant even with fewer stores opening worldwide, implying an increase of investments in the existing units. Beside operational costs, implementing digital tools in-store and enhancing merchandising activities are prime strategies to engage with customers in the brick-and-mortar environment.
“Fashion companies are growing even opening fewer stores,” added Armando Branchini, who last month joined the consulting firm as EY senior adviser for fashion and luxury. According to Branchini, the success of travel retail and outlets is contributing to the growth of firms not only in terms of sales but also through the expansion of their reach to different categories of consumers, including the travelers and occasion-seekers, respectively.
Trends in the beauty industry are in sync with those in the luxury category, as beauty customers prioritize customization — both in terms of formulations and services — and demand companies share and mirror their increasing passion for social and environmental causes. Consequentially, the increasing demand of natural products and of minimalistic skin care based on simple beauty routines will define the future of this dynamic category.
According to the report, the premium cosmetic market, which totaled 53 billion euros last year, will grow 6.4 percent for the period from 2018 to 2022. In addition to the rise of the natural and organic beauty trends, in the recent past the industry has undergone other rapid changes, evolving from female-only to men-specific products to now offer gender-neutral items.
Other assets contributing to the growth of the category are tech implementations, including beauty devices and tools suggesting the perfect foundation shade or correct treatment for each skin type. The increasing sophistication of products will also impact the roles of influencers and professional makeup artists, who will be more and more crucial in communicating products to final consumers.
The beauty industry’s heightened focus on sustainability compared to its fashion counterpart, its product innovation and new tech tools’ developments as well as its high margins make cosmetics companies appealing targets for merger and acquisition activities.
In particular, last year there were 90 completed acquisitions, but the average deal size decreased to 80 million euros, compared to the 304 million euros in the previous year, showing a preference for investments in small and medium-sized companies. In the first half of 2019, M&A transactions were already 49, with an average size deal increased to 429 million euros, excluding the jumbo deal involving Jab Holding’s investment in Coty.
The study additionally highlighted that private equity firms are increasingly being involved in the transactions, as they took part in 31 percent of the deals last year and 43 percent of the deals registered in the first half of 2019.
While the beauty industry continues to be appealing for these transactions, data show a slowdown in M&A activities in the luxury industry in 2019.
In the first half of the year, only 44 transactions were completed, with deals involving e-commerce platforms on the rise — think of Farfetch’s acquisition of New Guards Group. In 2018, there were 142 deals completed, and Italy ranked as the second country for the number of inbound deals. The average size of the deals decreased to 307 million euros in 2018 compared to 527 million euros the previous year. Private equity funds also play a central role in this category, as they were involved in 45 percent of the transactions registered in the first six months of the year and in 42 percent of deals in 2018.
While Italian companies were among the prime targets of investors along with French and American ones, last year deals in Sweden, Germany and Denmark were also on the rise, up 13 percent.
“After the record of deals in 2018, M&A in fashion showed a slowdown this year, due to the complexity linked to retail and to the overall strategies of engaging with customers, since the rules of the game are changing,” said Roberto Bonacina, EY partner and advisory M&A lead for fashion and luxury. He concluded noting that investors in fashion companies are showing more interest in taking over firms in the supply chain rather than brands since these companies are exposed to fewer risks and retail difficulties.