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How To Find Growth In An Increasingly Turbulent Luxury Market
By Pamela Danziger
Thursday, 21st March 2024
 

The personal luxury market’s explosive growth from 2019 through 2023 – up almost 30% over the four years – has come to an end.

Starting at $301 billion in 2019, it rode the pandemic roller coaster, dropping sharply in 2020, then more than recovered in 2022 as it climbed 20% to reach $373 billion, according to Bain and Company.

However, in 2023 luxury consumers hit the pause button and revenues advanced only about 4% to $387 billion.

Exuberance turned to caution as the year progressed. “Market performance softened quarter by quarter,” the Bain report stated with particularly troubling signs in the industry’s two major markets – China and the U.S.

Following a strong first quarter, Mainland China slowed as the year progressed and macroeconomic concerns rose. The Americas also decelerated throughout the year to end with an 8% decline in revenues from 2022.

Further, the number of companies that experienced growth in 2023 is down from 95% in 2022 to about two-thirds in 2023.

Looking ahead, Bain expects a “relatively soft personal luxury goods performance in 2024,” resulting in low-to-mid-single-digit growth, “based on current scenarios.” However, one thing we’ve learned over the past three years is how quickly current scenarios can change.

Headwinds Mounting

Already, the U.K. and Japan have fallen into a recession after two-quarters of negative GDP growth. In this age of globalization, recessions can be contagious.

While many continue to put a positive spin on U.S. economic performance – “America’s Economy Slowed—It Probably Won’t Stumble” reported The Wall Street Journal – retail sales in January slowed more than expected during a time when consumer spending is often fueled by holiday gift cards.

Last year’s dramatic 8% pullback in luxury spending in the Americas challenges the popular narrative. The affluent luxury customers are those most shielded from inflation and other economic swings.

Consumer Edge, a data services company that tracks credit and debit card spending on an industry and brand level, found U.S. direct-to-consumer luxury spending was down 7% last year, compared to a 15% increase in 2022. And through January, the spending trend continued to worsen.

Another sign of trouble is year-end bonuses for the professional class were down last year. Bonuses represent found money that often goes toward luxury spending. And corporate layoffs have disproportionately impacted these workers too.

Facing the mounting headwinds, what’s the path forward for luxury brands? A look back at its trajectory since 2000 provides an interesting perspective as do the results of a new survey that looks ahead.

Resilient Yet Volatile

We’ve been trained to think of luxury as a reliably steady growth market and it is – at first glance. Since the turn of the century, the personal luxury goods market has more than tripled in size based on a compound annual growth rate (CAGR) of 5%.

Personal luxury goods market according to Bain & Company, using current exchange rates from Euros to Dollars

Myth Of Stable Growth

However, the CAGR obscures the tremendous year-over-year volatility in the data. Tracking those trends, the luxury goods market is quite turbulent, even before the pandemic.

Year-over-year growth in personal luxury market according to Bain & Company

From 2000 through 2019, there were five years of double-digit growth, three years of decline, and two flat years, with the other nine tracking between 2% and 9% growth. It challenges the myth that the luxury market is more or less stable.

Considering the high growth rates in 2021 and 2022, even advancing 4% in 2023 is remarkable. But given historical patterns and current economic uncertainty, it’s more likely the luxury market growth will continue to slow, even contract in 2024 rather than meet Bain’s low-to-mid-single digit growth projection.

“The nuanced economic and political landscape presents a layered challenge, particularly affecting mid-tier luxury buyers, who’ve historically contributed significantly to luxury sales,” said Chandler Mount, founder of the Affluent Consumer Research Company (ACRC), with which I am affiliated.

“Brands that rely on ultra-wealthy consumers have a buffer, but evolving economic and political factors may influence luxury investment behaviors across all segments,” he added.

Watching And Waiting

Compared to other consumer goods markets, luxury runs on people’s emotions. Nobody needs anything luxury brands sell, making it particularly vulnerable when consumer sentiment turns south. That is reflected in the state of luxury survey conducted by Unity Marketing and ACRC.

Among the roughly 200 luxury goods company executives surveyed from mid-December through mid-February, a near majority (48%) believe conditions in the luxury market are worse now than a year ago; only 16% see it as doing somewhat better.

Some are hopeful things will pick up as the year progresses, with 23% expecting an improvement. Yet more – about one-third (34%) – expect business conditions to worsen.

They see the industry’s greatest growth challenges as:

  • Keeping next-generation luxury consumers engaged (55%). These are the so-called aspirational customers whose spending power will be significantly impacted by an economic downturn than the wealthy affluent. Trading down to less premium brands, buying second-hand luxury and the loud budgeting trend that recently emerged on TikTok could siphon off many of these customers.
  • Slowing economy (54%) and geo-political turmoil (31%). There is no way around these.
  • Competitive pressures with more players vying for the same or fewer customers (31%) and brand loyalty slipping among current customers (28%).

Further, insiders believe that some luxury brands have failed in their promise to deliver high quality commensurate with price increases post-pandemic. These practices have tarnished the reputation of the entire category and threaten consumer trust around value.

That’s why 37% of luxury goods insiders said keeping the price/value equation elevated for luxury is a key challenge for growth.

Finding Resilience In The Face Of Adversity
The strategy for luxury brands in this uncertain market is to return to what made them great in the first place, according to those surveyed:

  • Devotion to quality (71%)
  • Authenticity (67%)
  • Craftsmanship (66%)
  • Commitment to service (57%)
  • Artistry and design (52%)

The luxury strategy must remain the same, but the tactics to reach new customers and engage existing ones must evolve.

“The digital realm emerges as an essential battlefield for luxury brands, particularly as they seek to engage a broader spectrum of customers,” observed ACRC’s Mount.

“Advanced digital marketing, rooted in personalization, optimization and targeted outreach, stand as critical tools for connection with potential luxury buyers in meaningful ways,” he continued, with meaningful being the operative word here.

For example, influencer marketing has captured the imagination of many brands, but true luxury customers march to their own drum; they don’t follow the crowds or the next high-profile celebrity who emerges.

They demand to know why a brand and its products are valuable to them personally. Just because some influencer chooses it is no reason at all and these savvy consumers know the influencer is paid for their influence anyway.

“Brands need to foster trust through transparent and reassuring communications to help consumers navigate in these uncertain waters,” Mount said.

Top among the list of increased marketing investment in 2024 after website enhancements is to tell the brand story even better (62%) and more in-store special events (50%). This creates new opportunities to show, not just tell, and brings personalization and heightened customer service to the fore.

Path Ahead

“The future of the luxury market in 2024 is undeniably complex, marked by an interplay of economic, political and consumer-driven challenges. Yet, within this complexity lies opportunity – be it through strategic investments in sustainability, digital innovation or nuanced market positioning,” Mount said and added:

“It also presents opportunities for nascent luxury brands to carve out their niche and for others a strategic reassessment, highlighting an opportunity for consolidation among established players.”

For example, LVMH-backed investment arm L. Catterton just acquired a major stake in Tod’s, the Italian luxury shoe brand, to take it private. Kering recently acquired Creed fragrances and a 30% share in Valentino, which begins a strategic partnership with the Qatari investment fund Mayhoola, which also owns Balmain. The U.K.-retail giant Fraser Group bought luxury marketplace Matches Fashion to get a foothold in the luxury sector.

“The industry’s path forward is not without its hurdles, but with a committed focus on quality, innovation and embracing change, luxury brands can navigate these turbulent times by prioritizing consumer engagement and trust,” Mount concludes.

Pamela N. Danziger is an internationally recognized expert specializing in consumer insights for marketers targeting the affluent consumer segment. She is president of Unity Marketing, a boutique marketing consulting firm she founded in 1992.

www.unitymarketingonline.com

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