MILAN — Consumers in China, the online channel and the younger generations are expected to be the main growth drivers of personal luxury goods, forecast to reach sales of between 330 billion and 370 billion euros in 2025, with a compound annual growth rate of about 10 percent.
For the time being, the industry is reeling from the coronavirus pandemic, and sales in 2020 are seen falling 23 percent to 217 billion euros.
According to the 19th edition of the Bain & Company Luxury Study, released on Wednesday in Milan in collaboration with Italy’s luxury goods association Fondazione Altagamma, this is the first contraction of the sector since 2009 and the largest since Bain and Altagamma began tracking the industry. Their Worldwide Luxury Market Monitor sees the luxury industry on a path to recovery by 2022-23.
The overall luxury market, comprising both luxury goods and experiences, ranging from luxury cars and fine wines to gourmet food and private jets, contracted at a similar pace and is now estimated standing at about 1 trillion euros, down 20 to 22 percent compared with 2019.
Bain partner and coauthor of the study Federica Levato said in a phone interview that luxury brands are showing resilience in the face of the challenges. “We believe that the industry will come out of the crisis with more purpose and more dynamism than ever before,” she said.
The industry will be drastically transformed by 2030, she continued, and luxury companies “will need to think boldly to rewrite the rules of the game.”
Levato contended that “we will not talk about luxury industry anymore, but of the market for insurgent cultural and creative excellence. In this new enlarged space, the winning brands will be those that build on their existing excellence while reimagining the future with an insurgent mindset.”
The pandemic accelerated several dynamics including that of online shopping for luxury goods, which doubled its share of the market to 23 percent in 2020 from 12 percent in 2019. In the luxury market, online sales totaled 49 billion euros in 2020, up from 33 billion euros last year.
Online is set to become the leading channel for luxury purchases by 2025, fueling the omnichannel transformation.
“Online shopping is now ingrained for the long-term, there is no coming back, and the lockdowns brought online alphabetization. This trend will not decelerate and the growth is expected to continue up to 2025, when online is seen reaching one third of total market value,” Levato said.
In 2020, sales of shoes and beauty online were up 60 percent.
She underscored that stores will not lose their role, but this will change as brands rethink different touch points. “Physical interaction and the relationship with people remain very important. The selling surface will be repurposed for a different experience, more inspiring and stores will be redistributed in different cities. One size does not fit all.”
In 2020, brick and mortar was down 21 percent in retail and 40 percent in wholesale. Within wholesale, the contraction in perimeter, the polarization in performance and the fiercer competition will lead luxury brands to increase control over the channel.
“We have all experienced a difficult year of rapid, unexpected changes and luxury has not emerged unscathed,” said Claudia D’Arpizio, a Bain partner and lead author of the study. “While the industry has suffered from a pause in global travel and ongoing lockdowns, we believe it has the necessary resilience to manage through the crisis. We have faith in its ability to transform its operations and redefine its purpose to meet new customer demands and retain its relevance, especially for younger generations.”
To be sure, Gen Y and Gen Z are set to drive 180 percent of the growth in the market from 2019 to 2025. They place an unprecedented emphasis on tackling social and racial injustice and they seek brands that align with their vision. Luxury brands are expected to demonstrate real and sustained commitment to diversity, inclusion and sustainability.
Uncertainties still loom ahead, but while the second quarter was the worst the sector has ever experienced, there were signs of recovery in the third quarter. The study expects a 10 percent decrease year-over-year in the fourth quarter. Levato underscored that this is obviously highly dependent on the future evolution of the pandemic, the speed of return to traveling globally, the resilience and confidence of local customers and the additional restrictions that national governments could put in place. Depending on these macroeconomic conditions, for 2021, Bain forecasts growth that ranges from 10 or 12 percent to 17 or 19 percent.
The decline in revenue is taking a disproportionate toll on profitability. Bain expects operating profit to decline by 60 percent in 2020 compared with 2019. This reflects an average of 21 percent margin slipping to 12 percent. According to the study, in 2021 the market is expected to recover 50 percent of the profit loss of 2020 — still below 2019 levels.
Mainland China has been the only region globally to end 2020 on a positive note, growing by 45 percent to reach 44 billion euros, boosted by local spending across all channels, categories, generations and price points.
The year is propelling China to become the biggest market by 2025, when Chinese consumers will make up close to 50 percent of luxury purchases globally.
Europe was deeply affected by the collapse of tourism. While local consumption remains, regional consumption fell by 36 percent to 57 billion euros. Russia stood out as the best performing area.
Sales in the Americas fell 27 percent to 62 billion euros. Levato said in the U.S. there is a “macro tendency toward wealth ruralization, and wealthy individuals moving to their second houses from the main cities,” citing the shift from Manhattan to Connecticut, for example. “There is a new updated map, where other cities emerged as champions. The question is will they remain relevant in the future?” This move is not limited to the Americas, as it is a trend seen in other markets, too, Levato noted.
Sales in Japan shrunk by 24 percent to 18 billion euros in 2020 and brands seen as long-term investments and timeless have shown more resilience.
The rest of Asia also struggled, with Hong Kong and Macau among the worst performers globally, said Levato, citing a “structural crisis” existing even before the pandemic, and the lack of tourists. The region contracted by 35 percent to 27 billion euros.
South Korea is showing a sound performance despite a slumping duty-free market.
Sales in the rest of the world were down 21 percent to 9 billion euros. Australia was dented by wildfires and, in the Middle East, the lockdowns were shorter and local spending helped boost sales.
The study shows that because of the travel restrictions, the share of local purchases reached 80 to 85 percent this year and going forward they are expected to represent between 65 to 70 percent.
All personal luxury goods categories suffered in 2020.
Shoes were cushioned by demand for sneakers, with the overall category falling by 12 percent to 19 billion euros, while jewelry decreased 15 percent to 18 billion euros, thanks to sustained growth in the Asia-Pacific region, mainly China, and an acceleration online. That category remains polarized with high jewelry and iconic entry-priced items leading the recovery.
Beauty was down 20 percent to 48 billion euros, affected by the shutdown of dedicated physical distribution and travel retail. Cosmetics over-performed compared with fragrances.
Watches and apparel both declined by 30 percent, to 27 billion and 45 billion euros, respectively. Formalwear demand was in sharp decline and apparel players faced increasing competition from social-media-savvy, direct-to-consumer brands.
Across product categories, entry-price items increased their relevance, reaching more than 50 percent of volumes sold in 2020.
The current crisis accelerated the shift in the role of brands, from producers to broadcasters.
“Brands will need to adjust their footprints to the new map of luxury buying, evolve the store role and its ergonomics, and maximize the customer experience,” the study points out. “The wave of transformation will not leave the wholesale distribution untouched: perimeter contraction, polarized performance and entry of new players will lead luxury brands to increase their control on the channel.”
During the webinar, the Altagamma 2021 Consensus was also presented by Stefania Lazzaroni, the association’s general director.
Earnings before interest, taxes, depreciation and amortization are expected to inevitably rebound and Consensus pegs the growth at 23 percent, helped by the news of several vaccines, new developments in the U.S. post-elections, and the fact that companies have rationalized costs and accelerated online sales.
Next year, all categories are expected to grow.
Leather goods, which in 2020 benefited from the growth of the online channel and from a trend of high-end investment purchases, is forecast to gain 16 percent, returning to 2019 levels.
Watches and jewelry are seen growing 23 percent, impacted by the lack of travel retail and from the difficulties in re-creating online those in-store experiences that are considered an additional asset for these products. Branded jewelry that has a strong presence in Asia is expected to perform better.
Skin care rather than makeup will help drive beauty up 15 percent.
Ready-to-wear and shoes are forecast to gain 14 percent, slowed down by inventory and its possible devaluation, the extension of remote working and growth in activewear and leisurewear.
Brick-and-mortar stores remain an important channel for luxury and are expected to grow 15 percent, but they must be perfectly integrated with digital retail.
Wholesale is more critical, and is seen growing 8 percent after falling 40 percent in 2020.
On the other hand, digital retail is forecast to grow 20 percent and digital wholesale is seen gaining 18 percent.
Asia is expected to grow 17 percent, led by China; Japan is seen up 11 percent, and Europe up 12 percent, hurt by the lack of tourists who in Europe account for 50 percent of luxury shopping. North America is forecast to grow 14 percent.
By nationality, the Chinese are confirmed as the first global luxury consumers, expected to grow 20 percent in 2021, with new luxury customers and a good dynamic movement of women. Europeans are expected to grow 11 percent and North Americans 12 percent.
Matteo Lunelli, president of Altagamma, expressed his confidence in the luxury goods sector, after “structural changes, and the acceleration of trends that have prompted companies to jump five years ahead in their business plans.” He foresees customers requesting “a more authentic and more sober luxury” going forward, with more attention to quality and added value. He also said the Italian industry is at a crossroads between entrepreneurial and managerial cultures. “If we move into a managerial culture, we will win,” he said.
Lorenzo Bertelli, head of marketing and head of CSR at Prada Group, has helped the company in its digital transformation and touted the potential of the channel, while underscoring the importance of human contact with customers. He pointed to the Farfetch, Alibaba and Compagnie Financière Richemont partnership as “ a strong signal, an indication that it is not only commercial but also political,” and he underscored the size of Alibaba, “a bridge from China to the West.”
Key priorities for Prada remain to make sure that products are sold online at full price, protecting the brand’s identity. Strong companies in the long term may tend to sell directly through their own platforms, he contended. At the same time, consumers are used to buying from third-party sites they trust, so that trend will endure, too.
As head of CSR, he underscored that sustainability for Prada is “not an accessory, but one of its main values.” Bertelli said it was important for him to also have this role because CSR is integral to the company and to marketing and it must be communicated to consumers.
Asked about his mother Miuccia Prada’s recent move to share co-creative direction of the Prada brand with Raf Simons, Bertelli said this is a “radical and thorough decision” that implied Prada’s “own way to express at the highest creative level the brand’s DNA.” Increasingly, he continued, it is key to “build bridges, stimulate and not close ourselves off.”
“We would never have imagined to live through this,” said Pier Francesco Nervini, chief operating officer, North and Central Europe and Global Accounts at tax-free shopping agency Global Blue. He admitted a sense of bewilderment in the first six months of the pandemic. “But it served to refocus,” and Global Blue has renewed its agreements with airports and plans to guarantee its lounge services. “The question and the challenge is to understand how much digitalization will influence the behavior of tourists. How much will click-and-collect weigh? We must be ready for that.” He said the idea of quarantining was stalling tourists more than the fear of traveling and urged bilateral agreements between countries that will facilitate tourism.