America the Beautiful.
That seems to be the song luxury brands are singing these days. With the Chinese market cooling and Europe in the doldrums, the U.S. is looking more like the luxury El Dorado it used to be. Simply scanning the third-quarter, or nine-month, results of leading luxury brands is proof of the market’s buoyancy: Saint Laurent’s North American sales leaped 47 percent in the third quarter; Moncler’s were up 32 percent; Brunello Cucinelli’s rose 16 percent; Hermès’ jumped 16.9 percent at constant exchange, and Gucci’s increased 8 percent at its own stores.
The data are unequivocal: In the third quarter, the U.S. notched 3.5 percent growth in gross domestic product, demonstrating broad-based improvement across the economy.
The most recent study by Bain & Co. and Fondazione Altagamma, the Italian luxury goods association, confirmed the Americas as a key growth driver, accounting for 32 percent of a global market for personal luxury goods estimated at 223 billion euros, or $277.8 billion at current exchange. It was the best-performing region year-to-date, up 3 percent, followed by Europe and Japan, each logging 2 percent growth, putting mature markets back playing their key roles in a global industry.
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The Asia-Pacific area is expected to post 1 percent growth, impacted by extraordinary circumstances and a negative currency effect. China posted a negative performance — down 2 percent — for the first time in recent history, impacted by the government clampdown on luxury spending and the evolution of shopping patterns.
Bain also noted that the lion’s share of luxury shopping by Americans is done locally, in contrast to the Chinese, who spend more than three times abroad what they spend at home. And the U.S. could become an even more important shopping destination for Chinese tourists following last week’s agreement between President Obama and Chinese President Xi Jinping to increase the number of tourist visas for Chinese visitors. The issue had been a priority for years for American retailers, who long envied the busloads of Chinese shoppers who flooded stores in London and Paris.
“I think the key point to understanding why U.S. luxury sales are developing the way they are is the consumer feel-good factor,” said Luca Solca, managing director at Exane BNP Paribas. “This has been supported for a couple of years by rebounding real estate prices.”
Solca explained that homeowners feel richer, making them feel freer to spend.
“Parallel to rebounding house prices, stock market appreciation has also been supporting feel-good,” he adds. “In Asia and in China, you have growth moderation, asset price declines — both in property and stocks. This obviously damages feel-good and consumer sentiment.”
According to data compiled by MasterCard SpendingPulse and disclosed at the recent WWD CEO Summit, luxury excluding jewelry generated the largest increase in U.S. sales in September 2014, growing 8.9 percent over the same month a year ago. Electronics and appliances grew 8.7 percent and lodging was up 6 percent. The weakest performances within the sectors were department stores, down 2.7 percent, while automotive was up 1.6 percent and grocery up 1.8 percent.
Spending on luxury accessories and apparel closely echoed stock market fluctuations over the past year, rising 3.8 percent in September. Their high-water mark in the past year was a 10.2 percent increase in May, and their poorest performance was a 2.4 percent decline in February.
MasterCard’s projection for holiday spending calls for a 5.4 percent uptick in luxury, excluding jewelry, which is expected to post a 7.4 percent gain. This compares to the 3.5 percent increase expected in total U.S. retail sales, excluding automotive.
“The U.S. macroeconomic climate is better than the European one, and the stock market performance has helped over the last few years,” said Helen Brand, a director in the equity research team at Barclays in London.
Brand also sees upside growth potential, noting, “There is a lower penetration of European luxury companies in the U.S. compared with Europe. For Richemont last year, the U.S. represented 15 percent of overall sales, while for Swatch, the U.S. was 8 percent of sales. The watch industry in particular is the least penetrated in the U.S. market, and Rolex remains a big Swiss watch name there.”
Brand noted that jewelry remains a “key category” in the U.S. market, something that has helped Richemont in the past.
As for future drivers of luxury in the U.S., Brand named two in particular: Brazil and online.
“For Brazilians, who have heavy import duties in their country, the U.S. remains the most accessible market for high-value products. Online, U.S. department stores are the leaders. If brands want to access pockets of wealth in the U.S., they don’t have to build brick-and-mortar stores, they just have to have a better online presence.”
She pointed to Richemont’s Web sites for Cartier and Montblanc in the U.S., which launched last year, and to Net-a-porter.com’s headquarters in New York and distribution center in New Jersey. “And if there is anyone in a position to take advantage of digital, it’s Burberry — they are the digital leaders. The company has also recently refurbished its stores in Chicago and San Francisco,” Brand said.
Burberry has said the U.S. is a market with a lot of opportunity. “This market is unique in that it’s defined by a shopper who is nearly 90 percent domestic, and in many cases, will experience a brand for the first time through digital or wholesale channels,” according to a spokesman. Burberry, however, speaks to an even broader audience in the U.S. “Our strategy to invest in key flagship locations, such as the newly opened one on Rodeo Drive, allows us to engage with both the domestic and traveling luxury consumer in some of the top global cities for luxury shopping.” Recent U.S. store openings include Oakbrook, Ill.; San Francisco; Washington; Chicago, the Beverly Center in Los Angeles, the Miami Design District and one in New York’s SoHo that’s set for the summer.
Jean-François Palus, group managing director at Kering, called the luxury market in the U.S. “very sound” and dynamic, underscored by local consumption and tourists flows, with a significant increase in Chinese inflows offsetting dips in Japanese and Brazilian tourists.
“We have opportunities particularly for our leather goods business and even more for our hard luxury business,” Palus said, highlighting the resilience of the watch business in the U.S., and an underpenetration by Kering’s watch and jewelry brands, which include Boucheron, Pomellato, Dodo, Qeelin, Girard-Perregaux and JeanRichard.
“Even a brand like Gucci has some capacity to open some new stores, or to relocate other stores,” he added. “A significant proportion of openings will still be in the U.S. next year. The U.S. market is the number-one market for luxury in the world. It attracts most of our attention.”
In the third quarter, luxury sales at Kering gained 12 percent in North America, versus 7 percent in Japan, 5 percent in Western Europe and 3 percent in Asia-Pacific.
Ralph Toledano, president of fashion at Puig, agreed the American market shows more promise than other regions, and has historically been very receptive to European brands and sensitive to newness and quality.
“When you come with real fashion, people buy it,” he said. “It’s important for us to have a very segmented price offer to address the needs of people who want to access the brand. But you still have room for very high quality and very high-end products in America — much, much more than in Europe.”
He noted that America is a crucial market for Nina Ricci, Carolina Herrera and Jean Paul Gaultier, now concentrated on couture.
Gucci chief executive officer Patrizio di Marco pointed out during the opening of the brand’s revamped flagship in Beverly Hills that the U.S. was the first overseas market the brand entered after it was founded 60 years ago. In his view, America has always been a great market for luxury. “Sometimes we tend to overemphasize the latest phenomenon, say 20 years ago it was Japan, five years ago China, before that Russia…so depending upon the date, I would say the fashion of the moment is the States,” he said. “For the past 15 years, there has been a constant luxury market within the U.S., especially now because a number of factors — the economy moving forward, the population being so young, the rise of so-called minorities with higher disposable income.”
Allyson Stewart-Allen, international marketing expert and ceo at the business consultancy International Marketing Partners, cited a strong appetite for luxury in the U.S., especially of the personalized variety. She said customers are increasingly looking to make special purchases. “They want to be apart from the crowd, to say ‘I spec’d this, it’s mine’ — even if it’s a Birkin bag,” she said.
In addition, Stewart-Allen noted luxury stores are becoming ever more elaborate, bigger and more luxurious, with brands trying to make a statement. As for online, she said it’s an easier sell for luxury goods companies compared to high-street firms because customers know what they’re getting with luxury. “You know what these brands stand for, you know about the quality, so you have no qualms about buying from them.”
Tourists, added Stewart-Allen, will tend to seek out the sort of stores in America they cannot find elsewhere, or where they know the goods are cheaper. “Tory Burch, Coach and Michael Kors are all cheaper in America so tourists will tend to [take advantage of] the prices.”
She said the luxury proposition from brands selling in the U.S. will be about exclusivity. “Something the customer knows is hard to get, something worn by the royals or a famous celebrity or a Monaco-based magnate.”
Meanwhile, the world next door — Canada — also offers enticing growth prospects, with Nordstrom and Saks Fifth Avenue among a multitude of retailers set to plant their flags north of the border.
According to Ledbury Research, citing WealthInsight data, Canada’s number of high-net-worth individuals is expected to grow by 9 percent until the end of 2018, reaching 473,426 by the end of the year. Their combined wealth will increase by 22 percent to $2.1 trillion by then.
“The reality is that Canada is a new market for luxury,” Kering’s Palus said. “We plan to really push our business in Canada.”
