MILAN — Resilience. This was a recurring term at the Altagamma Observatory 2016 on Thursday.
This year has seen the first decline of Chinese spending globally, terrorist attacks that hurt tourist flows in Europe, and exchange rates that were unfavorable to the euro. Despite this geopolitical uncertainty, the global luxury market is expected to grow 4 percent at constant exchange rates to 1.08 trillion euros, or $1.18 trillion at current exchange.
The performance was boosted by sales of luxury cars, up 8 percent, and a shift toward luxury travel, food, wine and fine art, according to Altagamma Worldwide Market Monitor 2016 and a study by Bain & Co.
But sales of personal luxury goods have dropped 1 percent to 249 billion euros, or $273.9 billion, compared with 2015. Personal luxury goods are forecast to grow 3 percent at constant rates in 2017.
Releasing the data, Claudia D’Arpizio, partner at Bain & Co., underscored how the industry was experiencing the “new normal” phase, initiated last year after a period of “Chinese bulimia” from 2010 to 2014, when sales in that region jumped 29.5 percent to 224 billion euros, or $246.4 billion.
D’Arpizio remained optimistic about the future of Chinese consumer spending, led by a growing population and pointing to an additional 32 million people by 2030, with an expanding urban middle class and an overall GDP increase. She characterized Mainland China as “the rebirth of the phoenix,” although it is not fully offsetting a decline in overall Chinese international consumption. Sales of personal luxury goods in Mainland China in 2016 are expected to decrease 2 percent at current exchange but are seen growing 4 percent at constant exchange to 17 billion euros, or $18.7 billion.
Chinese spending in 2016 represented 25 percent of the global total and that is expected to grow, although Chinese shoppers are spending less on personal luxury goods and more on fine art, luxury cars, luxury food and high-quality design.
South Korea is reporting a “buoyant trend,” which is offsetting declining sales in Hong Kong and Macau, although on a decelerating path.
Mainland China did not offset a decline in the U.S. and Japan.
In 2016, sales in the Americas are expected to drop 3 percent at current and 2 percent at constant exchange rates, representing 33 percent of global luxury goods revenues, totaling 82 billion euros, or $90.2 billion. The region will be hurt by the strong dollar and cautious local consumption. Department stores are trying to stimulate local consumption through discounts and promotions, which is detrimental to the brands while they rationalize and downsize their operations, said D’Arpizio. The U.S. election year is causing insecurity and is affecting consumer confidence in the region.
Selected currency movements strongly affected consumption through 2016, said the study. The Brexit vote drove the pound’s depreciation and lifted tourist shopping in the U.K. in a depressed Europe. The appreciation of the yen reduced Chinese spending in Japan and stimulated Japanese spending outside the country.
In 2016, Japan is forecast to gain 10 percent at current exchange rates but to decrease 1 percent at constant exchange to 22 billion euros, or $24.2 billion. Japan remains a key destination for Chinese consumers, although the scenario changed in April with the yen’s appreciation also denting local consumption.
Europe at constant exchange is seen decreasing 1 percent to 82 billion euros, or $90.2 billion, with tourism slowing in Germany and France.
Beauty is the fastest-growing category, gaining 4 percent and representing 21 percent of total sales. Hard luxury is down 5 percent, accounting for 22 percent of the total, with watches continuing to suffer from a slow Asian performance and overstocking. Apparel is down 4 percent, accounting for 23 percent of the total, and accessories are up 1 percent, representing 30 percent of the total.
D’Arpizio underscored the “dichotomy” in apparel “between struggling large specialists and more dynamic yet smaller lifestyle brands” and a “casualization trend” leading to the growth of luxury denim, down jackets and sport lines and activewear. Leather goods are outperforming at the entry price level, with men’s travel and backpacks. She also pointed to a dynamic footwear market, marked by a more casual trend.
Online is the fastest growing channel, up 26 percent in the 2013-16 period. Retail is still outperforming the wholesale channel and department stores are seen in a structural decline. D’Arpizio urged companies to focus on delivering “experiential” shopping.
“Luxury brands need to adjust and innovate. Brands that adapt their business and take an omnichannel, customer-centric approach will rise to the top,” she said.
She noted the “major changes” hitting the industry — including the digital revolution helping emerging bands to compete, the growing adoption of instant fashion and new acquisitions and divestitures — are leading to multiple management and creative leadership changes, with more than 20 new chief executive officers and creative director appointments in the last 10 months alone.
Despite this “era of uncertainty,” D’Arpizio forecast that the personal luxury market is expected to reach revenues of between 280 and 285 billion euros, or $308 billion and $313.5 billion, by 2020 scoring a compound annual growth rate of between 3 and 4 percent from 2017. She pointed to a recovery of consumption in the U.S., a rebound of Chinese global spending, and a healthier markdown market as reasons for the growth.
According to Armando Branchini, vice president of Italian luxury goods association Fondazione Altagamma, who presented the Consensus 2017 study, next year “apparel and accessories are expected to grow solidly after two years of stagnation, each category up 3 percent, as well as perfumes and cosmetics, up 4 percent,” while hard luxury, watches in particular, will continue to be slightly negative, down 1 percent. All markets, except for Japan, are expected to grow, with Asia leading, forecast to gain 4 percent. Earnings before interest, taxes, depreciation and amortization are seen climbing 5 percent.
According to Global Blue, tax-free spending in 2017 is expected to grow between 2 and 4 percent in Europe.
Interviewed by Branchini, Carlo Alberto Beretta, newly nominated chief client and marketing officer at Kering and former Bottega Veneta ceo, underscored that “the structure of the collections must change, as carryover products have lost their appeal.”
Opting to call customers “clients,” he said that each “creates his or her own icon,” which requires companies to be more creative and innovative.
This was a view shared by Paolo Riva, ceo of Diane von Furstenberg, who also underscored a “different business model, with more focus on brand, product and innovation, and less on aggressive distribution, markdowns, standard products and logos.”