Louis Vuitton Fall 2017

MILAN — Welcome to the “new normal.” With factors like Chinese gift buying and currency swings that drove shopping-related tourism largely gone from the luxury goods landscape, the global personal luxury goods market is on a steady 3 to 4 percent compound annual growth rate (CAGR) path for 2017 as well as the next several years.

This is structurally “sound” growth — compared to the heady days of double-digit year-on-year expansion — driven mostly by increasing domestic demand and tourism in Europe and healthy domestic demand in China.

That was the picture that emerged from studies presented on Monday in Milan by Altagamma and Bain & Co., which offered an update to research presented last October.

Sales of personal luxury goods in 2017 will reach some 254 billion euros to 259 billion euros, or $284 billion to $290 billion at current exchange, up from last year’s 249 billion euros, or $273.9 billion, according to the studies. The figures were in line with last October’s 3.0 percent growth forecast for the current year.

By 2020, the personal luxury goods market is seen reaching 290 billion euros, or $324 billion.

While most of the figures were the same, or barely different, there were two standouts in the product segment: Altagamma’s forecast for hard luxury sales in 2017 went from minus 1.0 percent to plus 2.0 percent, in part due to the end of excessive stocking in regions like Asia, while sales of leather, shoes and accessories are seen expanding by 5.0 percent this year, compared to 3.0 percent forecast last October.

In terms of market expectations in the various geographies, there were also a couple of variations in the updated figures presented Monday.

The personal luxury goods market in North America, which in October was forecast to grow by 3.0 percent this year, is now seen expanding by 2.0 percent, in part due to the continued crisis in the department store sector.

Latin America, last fall seen expanding by 3.0 percent in 2017, is now seen growing by a modest 1.0 percent this year, in part due to less favorable currency conditions.

Expectations for average growth in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2017 remain unchanged, at 10.0 percent.

During the presentation Monday, Armando Branchini, Altagamma vice president, commented: “In general economic terms, the good news is that 2017 is set to be an improvement over 2016.”

He explained that last year was the only one since the Second World War when international trade actually decreased, year-on-year. More specifically referring to the luxury goods industry, Branchini also recalled other factors making 2016 an annus horribilis of sorts, including the terrorist attacks in France – which hit tourism flows – and the turbulent U.S. presidential campaign, which ended with a leader apparently hostile to free trade in the White House.

Branchini said that factors like improving tourist flows to Europe and – especially – purchases by locals in both Europe and China are helping sustain sales growth and are the main drivers of Altagamma’s slightly enhanced 2017 forecasts.

In offering some insights into the performance of the main international markets, Branchini said North America – after a year of “being absent” – is forecast to grow again in 2017 (sales of luxe goods fell some 2.0 percent at constant exchange rates last year, according to the October study). Last year the U.S. was hit by the strong dollar and cautious consumers, as well as the well-known department store crisis, Altagamma said in October.

Branchini said Japan – where the luxe market is now seen flat for the whole year (a slight improvement over the minus 0.1 percent forecast back in October) – “remains complicated,” with the uncertain prospects of Abenomics and unfavorable exchange rates. But Branchini also pointed to the rapid pace of cultural change as adding an element of uncertainty in the market even as it provides opportunities for Japanese designers: “The country’s culture is changing very much, and younger people are very creative in the way they develop their collections.”

He pointed to Hong Kong and Macau as markets “which had begun to work” towards the beginning of the year thanks to Chinese New Year but which have been once again showing “contrasting signs,” although nothing compared to the “dramatic state” of the recent years.

Picking up from Branchini, Claudia D’Arpizio, partner at Bain & Co., said that 2016 was a year of “normalization,” which does not mean luxury goods markets are slowing down; rather they have found a “healthy” rate of growth, with a return of local consumers to the fore. She also said that the big price differentials of the past – which sometimes could be 20 to 30 percent and encouraged shopping tourism – have largely vanished.

“We are in a situation of solid, single-digit growth, with two strong epicenters,” D’Arpizio said, also referring to Europe and China. She said that the women’s wear market in China is “developing very nicely, it’s not just [about women’s] accessories.” As regards hard luxury in China, D’Arpizio pointed out that the forecasts may hide a phenomenon whereby true consumption is actually higher than what export figures from Switzerland – a proxy for hard luxury sales in the Asian country – would lead to believe, as the excessive stock accumulated over previous years is sold down.

D’Arpizio offered insights into the U.S. market, saying that there remain “structural” problems, like a strong dollar and the weakness of department stores. She said the strong greenback has discouraged shoppers from Asia and South America, who were popular in locations like Miami.

As for department stores, she said among their main critical issues is that “they have not found a link with Millennials. They are still very tied to Baby Boomers and traffic is dropping.” She added that another issue impacting department stores is the recent influx of private equity investment in parts of the industry. This has cast the focus of their business models on generating cash, “which essentially means getting rid of merchandise and, therefore, selling at discount.”

While e-commerce and outlets continue to perform strongly, D’Arpizio pointed out that the retail channel will remain the “ make or break” of luxury goods brands. “The role of stores will be increasingly important” for as the “epicenters of storytelling” they allow brands to build relationships with customers. That said, in a world where ecommerce is cannibalizing retail networks in some countries (like the U.S. and the Nordic countries, but not yet in Japan and Europe), D’Arpizio pointed out that clearly brands are asking themselves how many stores will they need five to ten years from now. “Surely not 500, like the bigger brands,” she said, even though she pointed out that these legacy store networks are for the most part profitable as they have amortized their investments. So over the next five or so years, D’Arpizio said she expects a “strong reduction” in the network and “a focalization on the storytelling in the stores that remain.”

During a question and answer period after the presentations were finished, both D’Arpizio and Branchini were asked about their view of the future of multi-brand ecommerce businesses, in light of increasingly valuable newcomers like Farfetch. D’Arpizio said that multibrand retailers have “enormous raison d’etre” because they add fashion content and they do editing, “responding to the need of consumers who are looking for both advice and digital content.” But she said she felt that business models based purely on managing big brands’ websites were “obsolete,” even though there would always be small brands that needed similar services.

D’Arpizio said that “the only real threat” she saw to established ecommerce players was Amazon. “If a player like Amazon wanted to enter this business, it could be a disruptor that would rapidly gain large market share.”

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