MILAN — “We are looking into tomorrow to understand today,” said Bain & Co. partner Claudia D’Arpizio, presenting possible scenarios for the luxury goods sector in 2025.
While forecasts appear increasingly difficult to deliver in the short term, the management consulting firm and Altagamma said sales of personal luxury goods are expected to post average annual growth of 3 to 5 percent at constant exchange from 2018 until 2025. This would mean expected total revenues of between 320 billion euros and 365 billion euros in 2025, according to the Bain & Co. Luxury Goods Worldwide Market Study released on Thursday as part of the Altagamma Worldwide Luxury Market Monitor.
The study expects growth will be driven by “solid fundamentals” and the attitude of global consumers.
Bain does not rule out some “turbulence” in the near future, such as a soft recession in the U.S. and a slight slowdown of the Chinese economy. But this “does not detract from the solid potential of the future market.”
Trends to be expected in 2025 include:
• More Chinese-driven purchases taking place in China. Chinese consumers will make up at least 45 percent of the market, up from an estimated 32 percent in 2018, and they will make half of their luxury purchases at home in China. D’Arpizio noted that this will be driven by a reduction in price differentials around the world, leading to “less bargain hunting.”
• By 2025, online sales will represent 25 percent of market value, up from 10 percent today. D’Arpizio noted that 100 percent of luxury purchases will be influenced by online interaction. New technologies will allow brands to further enrich the shopping experience and connectivity, through mobile, for example.
• Brick-and-mortar stores will reshape their purpose and mission, and there will be a network consolidation, with fewer store openings. “Stores will become a touch point for consumers,” said D’Arpizio.
• New generations will be the primary engine of growth in coming years. Generation Z and Millennials will represent about 55 percent of the market in 2025. Also, different cultures and a democratization of body shapes will be increasingly influential.
• Brands in 2025 will experience a crossover of competitive boundaries, from fashion to lifestyle, sports and sports specialists.
D’Arpizio said companies will be able to weather the changes that are expected to take place over the next year through three main strategies. “Be proactive in developing dedicated approaches to serve new customers and address market trends; be distinctive in designing a winning formula, and keep in mind the next generation customers,” she urged. “The underpinning of all of these strategies is the emergence of new technologies, which will play a crucial role as a fundamental enabler for brands through 2025.”
She also said she expected brands to evolved into “monographic and anthological brands, from today’s specialist and lifestyle brands.” D’Arpizio emphasized how “two central functions” — merchandising and design — will merge in what she called “merchan-design.”
The study also stated that the personal luxury goods market is expected to close 2018 with revenues of 260 billion euros, a 2 percent increase compared with 2017. At constant exchange, the growth is forecast to reach 6 percent.
All geographic markets showed growth, with the exception of the Middle East, which was stable. China logged in a “particularly positive trend” and was driven by local purchases, as Chinese tourism was less strong in Europe. The rest of Asia was also strong, led by local shopping and increasing number of Chinese shoppers spending in nearby countries.
Jewelry and shoes were the top categories, while apparel was down 1 percent, due mainly to the slowdown of the accessible luxury giants, especially in the men’s wear segment.
The luxury goods sector is expected to log 5 percent growth at constant exchange to 1.2 trillion euros in 2018. Next year, sales of personal luxury goods are expected to grow around 5 percent.
“Last year, we saw the global luxury market return to healthy growth, albeit at a more moderate pace than in the past,” said D’Arpizio. “That trend continues in 2018, reinforcing the ‘new normal’ we predicted, led by flourishing luxury demand from Chinese consumers, the continued rise of online channels, and increasing influence from younger generations of consumers.”
There is no denying Chinese consumers were driving growth globally, given that in the 2015 to 2018 period, their purchases in Mainland China contributed twice as much growth as their spending abroad. Their share of global spending is estimated at 33 percent of global luxury spend, up from 32 percent in 2017.
In Mainland China, luxury sales grew 18 percent to 32 billion euros, driven by rising demand rather than by price increases.
In 2018, luxury purchases in Japan showed some softness, but retail sales still grew at 3 percent to 22 billion euros. Increased consumption from tourists in Japan is prompting brands to rethink their distribution models, said D’Arpizio.
Across the rest of Asia, retail sales grew 7 percent to 39 billion euros, due to dynamic growth in South Korea, driven by strong local consumption. Singapore, Thailand and Taiwan also contributed to the performance. Hong Kong and Macau benefited from Chinese shoppers.
Europe lagged in 2018 due to a strong euro that impacted tourists’ purchasing power. Local consumption was positive overall, despite mixed country performance, helping to boost retail sales by 1 percent to 84 billion euros.
Sales in the Americas grew 5 percent to 80 billion euros, lifted by a positive U.S. economy, even as brands remained mindful of a possible short-term soft recession. The strong dollar impacted tourist spending from Asia and Latin America. Canada and Mexico were strong players in the region, while political uncertainties dented Brazil’s performance.
The Middle East was stagnant due to a recent government spending restriction and low local consumer confidence.
While the retail and wholesale channels grew 4 and 1 percent in 2018, respectively, luxury shopping online continued to accelerate, growing 22 percent to 27 billion euros. The U.S. market made up close to half of online sales at 44 percent, but Asia is emerging as the new growth engine for luxury online, slightly ahead of Europe.
Accessories remained the top category sold online, ahead of apparel.
The younger generations are becoming more influential. In 2018, Generations Y and Z contributed 100 percent to total luxury market growth, compared with 85 percent in 2017. To respond to this, the luxury market is adapting in terms of product offering, communication and engagement. For example, Generation Z, which now accounts for 2 percent of the market but is expected to increase to 10 percent in 2025, is more individualistic and happy to shop in brick-and-mortar stores, while still expecting a digitally enhanced experience.
The industry is becoming more inclusive, with modest fashion accounting for about 40 percent of luxury women’s wear in 2018, inclusive of Muslim-specific garments and fashion targeting curvier customers representing about 20 percent of women’s ready-to-wear.
By product category, shoes were up 7 percent to 19 billion euros; jewelry, supported by Asians and younger customers, gained 7 percent to 18 billion euros; bags grew 5 percent to 51 billion euros; beauty was up 4 percent to 56 billion euros with cosmetics driving growth, skin care booming and indie brands on the rise. Watches were flat at 37 billion euros. Apparel was down 1 percent to 60 billion euros with women’s wear offsetting a negative performance of men’s wear, particularly from U.S. and European giants.
Armando Branchini, vice president of Altagamma, also presented the association’s Consensus, which forecast earnings before interest, taxes, depreciation and amortization of the companies in the luxury sector will grow 6 percent in 2019.
At constant exchange, in 2019, apparel is expected to grow 2 percent; art de la table is seen as flat, while jewelry, watches, pens and lighters are forecast to gain 4 percent. Leather shoes and accessories are expected to increase 7 percent and fragrances and cosmetics 5 percent.
By market, Europe is seen up 3 percent; North America up 4 percent; Latin America up 1 percent; Japan up 5 percent, and Asia up 10 percent. The Middle East is expected to grow 2 percent and the rest of the world also 2 percent.
“With an expected sales growth of 5 percent next year, the personal luxury goods in the 2017 to 2019 period continue to grow solidly,” said Branchini. “This despite a number of political and economic factors outside the industry have been more menacing in the second half of 2018 and they could have a further impact toward the end of next year.”
Altagamma president Andrea Illy emphasized the importance to strengthen made in Italy production through strong politics, starting with the reputation of the country and education. He talked about global inequalities, which lead to nationalism, conflicts and tax barriers. “Culture and education are the vital lymph,” he said.
Vittorio Radice, vice chairman of Rinascente, admitted “we live in uncertain times and we feel the pain, the news is not comforting and make us very nervous but there are things that people want to achieve and one is traveling. Our business is successful, with a substantial presence of tourists enjoying life. In spite of bad news, people still want to live a decent life.”
He was upbeat about retailing. “Stores that have traded up are doing well, they are alive and thriving, those that are stable and soulless are in trouble.”
Radice said Rinascente “worked very hard” on transforming its stores. “Shopping in our stores is an event,” he said, citing how Selfridges [which he used to head] is now classified as an entertainment company and not retail. “Nobody needs 800-euro-trainers, shoppers are not looking for product but for and experience,” he contended.
He noted that the Rinascente unit that opened in Rome in October 2017 had an “astonishing success, we did not expect it. It took 12 years to make and an investment of 200 million euros and already we are seeing sales of 120 million when the budget was 90 million euros.”
He said he was also “extremely optimistic” in spite of political issues. “We have to be agile and embrace a new way of doing business,” pointing to digital communication, too.
Javier Fernandez Andrino of El Corte Inglés concurred with Radice, saying the “market segment is healthy and consumers want to buy more. Italian products are showing a very good performance.” The wealthy want to buy products of quality, he observed, adding that the store sold 300 million euros in Italian high-end products last year.
“Experience is key if we want to compete with the likes of Amazon. We don’t need to change the number of stores, but to improve the entertainment. We don’t spend in magazines and newspapers anymore but dramatically changed our communication with customers.”
Andrino was also “very optimistic about the future — brands can help us and we don’t have to be nervous. Luxury is long term and those that do aggressive discounting are suffering. We must preserve the brand, Italians are the best in preserving quality and heritage.”
Radice and Branchini also discussed the negative implications if a new law to regulate store closures on Sunday were to pass. “Altagamma has written a report underscoring that closing on Sunday would diminish sales by 20 percent,” said Branchini. This would impact rents, since these extra weekend sales are taken into account when discussing contracts with the brands, as well as tourists, and students who are employed only on weekends.
“It’s crazy to close on Sundays,” said Radice. “These shopping moments are like a vacation from daily problems, a moment for yourself,” he said. At Rinascente, the weight of Sunday sales stands at 18 percent of total sales, following only Saturday (20 percent). Fifty-one percent of sales on Sunday are made by tourists, he added.
Pier Francesco Nervini, chief operating officer North and Central Europe and global accounts at Global Blue, elicited a round of laughter when he confessed he had no idea about 2019 and could not make projections for next year in light of the countless variables today.
In the first nine months of 2018, after a positive 2017, Nervini said tax-free spending saw a 6 percent slowdown, mainly due to a stronger euro. While the number of transactions has decreased, there’s been a 2 percent increase in the average ticket. From January to September 2018, tax-free shopping slowed in Italy, down 8 percent, and in the U.K., also down 8 percent. Germany was down 13 percent and Spain was down 8 percent. France is the only country that grew, up 1 percent, after a complex two years, said Nervini. In the first nine months, the Chinese, while down 4 percent, represented 29 percent of total tax-free shopping in Europe. In Italy, the Russians were down 15 percent, accounting for 13 percent of the total, due to the weak ruble, the embargoes and the political tensions.
Pietro Ruffini, executive board member of Archive and the son of Moncler chief Remo Ruffini, explained the strategy behind the independent company, which last month took stakes in fashion brand Attico and in Langosteria Holding Srl, which includes high-end seafood restaurants in Milan. “We believe in many different companies in different sectors and we want to bring added value,” said Ruffini, who sees the investments as more entrepreneurial than financial.
“Archive targets small and medium-sized companies in defined sectors, he said, including fashion, “with a strong product, strong digital and contemporary elements,” food and beverage, which has “enormous potential,” he believes, and hospitality. “The physical experience is still fundamental, digital [platforms are] an enabler.”
Designer Philipp Plein, whose company will close 2018 with sales of 250 million euros, said the biggest advantage in building his business was that he “started fresh on a white sheet of paper, from scratch with no experience, and learning from doing. For many years, fashion was a bit stuck in movement. ”
Asked by Branchini about his mega-runways show events and parties, Plein said they developed organically as he had no alternative because when he launched the brand and Italy’s Camera della Moda would not provide him with a slot on the calendar, he had to show at the end of the working day. “I was afraid nobody would show up, so I thought I would throw a party,” he said candidly.