Booming for more than a decade, luxury goods were one of the sectors hardest hit by the health crisis of 2020. Although the effects of the latter are destined to fade over time, the luxury industry will have to innovate and reshape itself in order to return to growth.
What is in store for luxury professionals in the years to come? When, how and why will the market recover? What are the emerging trends?
In order to better understand the challenges faced by retailers and e-tailers, here are some key statistics and figures for the luxury market for 2021-2022.
Traditionally, the luxury market is divided into two types of categories:
Before the coronavirus struck, luxury cars, luxury hotels and luxury goods dominated the sector’s sales; between them, they accounted for almost 82% of the total market.
Contrary to what one might assume, customers will not stop consuming “experiential” luxury in 2020 and the years to come. Indeed, globally, 40% say they are more likely to spend on “experiential” luxury, and less on products than before. However, they will prefer more isolated and intimate experiences, at least in the short term. As a result, patronage of bars, hotels, resorts and luxury cruises is expected to decline, with 50-60% of consumers saying they will spend less or much less in these categories over at least the next 6 months.
The luxury goods market is dominated by large traditional players, with the top 10 companies accounting for almost half of total luxury goods sales. According to the “Global Powers of Luxury Goods 2019” ranking by Deloitte:
Until the first month of 2020, the luxury market was doing well, and even very well. All indicators were green:
While luxury market numbers were on a positive trajectory before the virus spread – with predictions estimating a +3.2% expansion for the industry in 2020 – COVID-19 passed through, ending more than a decade of steady growth. The good numbers at the very beginning of 2020 were quickly offset by imposed confinements, air traffic disruption and border closures.
Thus, in 2020, luxury sales decreased in all major markets. Europe is the market most affected by the crisis, with a decline of 29%, followed by North America (-22%). The Asian market fared better, with a decline of only 5%.
This decline affects all luxury categories – leather goods, fashion, jewellery, perfumes and cosmetics:
After a 25% decline in the first quarter, the slowdown is expected to accelerate in the second quarter and could lead to an estimated 20% to 35% contraction in the luxury market by the end of 2020, compared to last year :
Although the major players in the sector, such as Chanel, have begun to reopen their stores, the number of visitors has fallen by half compared to last year. And it will take time for the market to recover, as explained in a study conducted by Bain & Company in partnership with the Altagamma Foundation.
Indeed, although we are seeing a resurgence in post-confinement sales, it will take until 2022 or 2023 to return to profitability similar to that of 2019. A return to growth will depend in particular on the level of consumer confidence, tourist flows and the ability of brands to anticipate and meet new consumer demands. According to the Bain & Company study:
In 2025, when the state of the luxury market is expected to return to normal, there will be 450 million luxury consumers worldwide, 60 million more than today. This conjecture is mainly explained by the growth of the middle class, particularly in Asia and more specifically in China.
It is China that has been helping to drive up the figures for the luxury goods market for more than a decade. Indeed, the Middle Kingdom remains the main growth engine of the sector in recent years, while the European and North American market figures remain relatively moderate.
Thus, the statistics of several studies carried out on this subject show the importance of the Chinese market for luxury:
In the months and years to come, China, the first focus of the epidemic and the first country to decontaminate its population, should also pave the way for a recovery. Chinese clients will thus consolidate their status as global luxury leaders even in the post-COVID era.
However, their consumption habits will change. Indeed, until now used to shopping for designer goods abroad in cities such as Paris, London or New York, Chinese customers will now be more likely to make their luxury purchases at home. For example, 73% of Chinese consumers confirm that they will spend half of their annual budget in China over the next 12 months.
Buying new products is not the only way for consumers to interact with the luxury market. Indeed, in recent years, the growth of the luxury market has been accompanied by a significant increase in sales of second-hand luxury goods:
This rise, encouraged by the change in mentality of luxury customers, can be explained by two factors in particular:
More than a threat, the development of the second-hand market represents a great opportunity for luxury brands to reach a new audience and expand their customer base; provided they adapt their strategy accordingly. Indeed:
The profiles of the luxury clientele are varied and evolving rapidly. Therefore, a distinction must be made between :
By 2025, generations Y and Z will account for around 55% of the luxury market, and are expected to contribute 130% of the industry’s growth, offsetting a decline in spending by older luxury consumers.
Thus, over the years, the luxury market will have to adapt to the new demands, behaviours, uses and habits of these consumers. For example, Generation Z customers are demanding more modernity and a continuous conversion with brands, while claiming new values oriented towards ecology, ethics and transparency.
And, since the spread of the virus, ethical and sustainable development issues seem to be influencing purchasing behaviour more than ever:
Luxury consumers are particularly concerned by :
Generation Y places a higher priority on the environment (42%) and the treatment of animals (26%), while baby boomers are more concerned with ethical manufacturing (32%).
If they want to respond to these new concerns, luxury professionals have every interest in being innovative in their commercial strategy and in their value propositions.
The luxury industry will also have to reshape itself to accommodate the younger generation of consumers who will play a dominant role as the years go by, given their growing purchasing power and ability to influence the older generations.
As these young customers are at the forefront, their preferences are the trends of tomorrow; they revolve around several axes: personalization, online shopping, the development of opinions via social networks and influencers, as well as an increased consideration of the ethical positioning of brands, as seen previously.
In order to attract and seduce this new clientele, some established fashion houses are choosing to partner with designers and other streetwear brands to create exclusive collections, such as the collaboration between Louis Vuitton and Supreme, Off-White and Rimowa or Fendi and Fila.
Strategies and biases that pay off, given the figures:
On the “experiential” luxury side, there is also a convergence between the fashion and travel worlds – recently Bulgari, Versace, Dolce & Gabbana, Armani and LVMH have all partnered with five-star hotels.
Luxury, in the traditional sense of the word, must therefore recalibrate and evolve its offer to suit these new consumers, who will become the major force in this market in the years to come.
Fearing to degrade their brand image and the quality of their services, the luxury industry has long been reluctant to invest fully in web technologies.
The luxury experience, characterized by rarity, refinement and exception, did not lend itself to online sales.
However, with the arrival of younger consumers who are more connected than the previous generation, digital is increasingly becoming an indispensable sales channel for the luxury market. E-commerce has indeed carried the sector through the lockdown, encouraging the last reluctant consumers to take the plunge and buy their luxury goods online.
Of course, luxury customers will continue to visit the stores. But the Internet should continue to grow in power and take an increasingly important place in the consumption habits of luxury customers in the years to come:
As the luxury sector’s clientele gets younger, attitudes are changing. Thus, all over the world, market consumers are becoming more and more influenced by the web, digital and new technologies; including when shopping in physical stores:
However, despite their affinity for digital, a study by consulting firm McKinsey & Company reveals that nine out of ten young Chinese consumers are impacted by their experience with store sales staff when it comes to making a purchase decision.
This can be explained by the fact that consumers do not have the same type of relationship online as they have with offline brands.
The rise of online channels does not mean the death of retail, which will have to evolve to meet the high expectations of consumers. The store 2.0 will now be very different: it will have to focus on experience and service, be more immersive and become a place of connection and sociability.
In conclusion, if they want to respond to the new needs and changing attitudes of consumers, luxury players will have to be transparent and innovative in all the experiences they offer to their customers to engage them emotionally and connect with them in a personalized way.
In order to return to growth, the priority will be to find the right balance between the younger generations – who are anticipating future trends and will become the main driver of growth in the market in the years to come – and the older generations who are currently the primary consumers of luxury.
Digitalization, the desire for personalization by customers, the emergence of the second-hand market as well as concerns about sustainability and ethics are all contributing to redefine the meaning of luxury. Thus, the pace of market growth will depend on the strategic responses of luxury players to the current crisis and their ability to adapt to these changes.
Read also our article on the
key figures for the luxury sector in 2020 (in French)