Student Research Projects/Outputs
No.058
New trends in Europe and
emerging luxury goods markets
Andre Yao
MBA 2010
China Europe International Business School 699, Hong feng Road Pudong, Shanghai People’s Republic of China New trends in Europe and emerging luxury goods markets BMT Research Report ‐‐ Andre Yao General Introduction The European luxury market has long been regarded as the origin of the mainstream luxury goods, including brands like Louis Vuitton, Chanel, Giorgio Armani, Prada, Gucci, etc. With its rich cultural heritage embedded within the brands, these big names have captured crazy fans and huge profits from all over the world. Following the global economic crisis, the European luxury market inevitably has encountered periodical downturn. According to the luxury sector report by Cheuvreux Group, over the past decade, listed luxury goods companies have delivered a 7% organic growth, but the year 2009 saw sector sales declining 5% organically and in terms of earnings, sector EBIT declined 9% in euro terms in 2009. However, the luxury companies will not put their capitals at stake. They have sniffed the business opportunities from the new markets and have identified the potential targets. Thanks to the interactive social media, the battle field has also turned from the traditional retail stores to online websites. Research Methodology The research is mainly composed of research reports and company strategy analysis. The quantitative part to address the current financial situation of the luxury goods company and the growth rate of the industry is derived from the sector report from Cheuvreux Group. Some other findings can also be traced to the “Wealth and Luxury Trends in 2010 and beyond” from the Luxury Institute. New trends in luxury market can find their source from some luxury industry news and company reports published within 3 years. European Luxury Market Performance The table above shows a positive growth trend, despite the economic crisis, among the major luxury goods companies (mostly from Europe). On average, the sector has an aggregated 18% organic growth although the rate had been down to negative during the first quarter of 2009. Q2 2011 has even seen a more promising organic growth rate. The growth can be attributed to the following factors: 1. Dynamic consumption in Western Europe and US. LVMH, Hermès and Richemont all enjoyed double digit growth since 2010. Strong growth benefited from both the local demand and the tourist group (price gap due to tax and exchange rate) 2. Price increase with stable demand. Owing to the increasing labor and raw material cost and volatile exchange rate, many luxury brands have increased their prices since the end of 2009. Louis Vuitton has increased its price twice from mid 2010 to Q1 2011. Other brands also followed. 3. Fast growing emerging markets. Rising demand from middle class in China and other emerging countries has pushed growth rate to nearly 30% in Asia for LVMH, Hermès and Gucci. The depreciating Euro will further lead Asian luxury zealots to escalate the luxury chase. Overall, the sector has been growing over the past decade except for 2009, the operating profit basically reveals the same pattern (See chart below). A linear regression could be developed to show the positive correlation between the sales and profit growth. The topline growth also has a correlation with the world GDP growth. In the years with good economy, the luxury market is able to catch the trend to pile up the profit. Even under bad times, the decline is limited to an acceptable number. During the economic downturn, the big players in the market have caught the opportunity to reshuffle the cards. LMVH SA acquired Bulgari SPA and two other watch companies in 2011. Tiffany is said to have received several offers from several large luxury groups. Recently, a Chinese firm acquired Italian luxury yacht builder – Ferretti Group. Industry believes that there will be more international M&A’s in the luxury and retail business. Some impatient newcomers in luxury industry, however, have paid their price for their hasty actions to look for immediate success. Especially in Europe, luxury brands are deeply rooted in their design, quality, craftsmanship and service and it takes decades to build their reputation. Those who want to instantly build a luxury brand are too naïve to succeed. The venture capitals and private equities should be more cautious in investing start‐up companies selling “luxury”. New Opportunities in Emerging Markets A report released by UBS shows that last year, 50% of the world luxury revenue comes from Asia. Over half of the consumption of European luxury goods is from the tourists from Asian countries. Large luxury groups have also witnessed strong growth in Asian markets. LVMH, Hermès, Gucci all posted better than expected results for 2011. The "Luxury Goods Worldwide Market Study" recently released by Bain & Company has stated that China has already overtaken Japan as the 2nd largest luxury goods consumer only after United States. The report listed growth rate for US and Europe to be 12% and 6%, Asia 22%, China mainland 30%. For 2011, China is expected to further grow another 25% to 11.5 billion Euros. On the other hand, European luxury companies still find India market hard to penetrate because of its lack of retail space and tradition of wear Indian dresses and accessories. Some other figures regarding China luxury market: •
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2nd largest consumer group of luxury goods in the world Close to 1 million Chinese millionaires today •
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250 million Chinese who can afford to buy luxury brands The ONLY market where men consume more luxury than women Youngest luxury market in the world Source: The spread of luxury model, the cult of the luxury brand: Inside Asia’s love affair with luxury, London, 2006 If you forget all the numbers above and take a look into the Chinese consumers, you can find there lays fundamental different needs for luxury goods among them and Western consumers. While in Europe, luxury brands represent high quality, noble class, cultural heritage, personalized lifestyle, in China, the same products or brands may only serve the function of showing off richness, love for vanity, cultural emptiness and sometimes even rent seeking behavior. However, the young luxury consumers of emerging markets (mostly from 1st tier cities) are more educated than their parent generation. Compared with their parents, they have less concern about what to eat or wear. The basic physiological and safety needs are met innately as they were born mainly after the 1980s. Unlike their peers in 2nd, 3rd tier cities or even in rural areas, they took the advantage of being exposed to capitalism and consumption culture much earlier and therefore are more willing to spend. Born as a single child in a family, they are mentally independent as consumers who will make decisions base on their own judgment. Surrounded by Western culture and digital media, the young generations also show great potential in purchasing products that highlight personality and sense of belonging. The gap has narrowed between how European (also American) young consumers and those from emerging markets view luxury goods. Lifestyle is no longer a symbolic word but a tangible tag from which luxury goods can establish strong binding between their brands and consumers. Companies like LMVH, Hermès may find this target group remote, but Apple (if counted as a luxury brand) is a perfect example of catching the needs of the digital generation. We can also find Burberry use teenage celebrity star Emma Watson as brand spokesmen. The earlier these big brands set out to reach these future upper middle class, the sooner they will see their dollars worth spending. Viewing Asia as a strategic market, Italian luxury companies have even planned to list in the Hong Kong stock market. Prada listed in June 2011 in Hong Kong, raising 2 billion US dollars. Emenegildo Zegna also plans to issue stocks in Hong Kong this year. Zegna recorded 40% revenue from China, Hong Kong, Brazil, India and Russia in 2010. Half of the new store openings are from emerging markets like China and Vietnam. The next battlefield: Men Many think that luxury goods are for women but not for men who only needs except for watches and cars, but that’s not true today. Since 2009, men’s luxury category CAGR has been 14%, almost doubling women’s 8%. Men’s luxury market has reached over 7 billion Euros, accounting for 40% of the total market. This trend first emerged in Europe as Burberry, Hugo Boss and Emenegildo Zegna all boosted their men’s share. LVMH has reacted by re‐launching men’s shoes brand Berluti while PPR acquired another Italian men’s suit brand Brioni. Targeting high end male customers, both brands introduce products pricing over several thousand Euros. LVMH also started providing tailor made shoes for its customers in Via Montenapoleone in Milan. In France, Hermès and Printemps increased their investment in the men sector by increasing space and bringing in tailor made services for gentlemen. Unlike women who are more impulsive in purchasing luxury goods, men value more the brand equity, quality and technical side of the products, especially in traditional men’s products like watch, car and outdoor equipment. When looking at suits, shoes and leather goods, most of them still keep the same criteria. As most men’s purchase frequency of luxury goods is lower than women’s, they have been increasingly preferred tailor made luxury products. In emerging markets, men’s consumption of luxury goods also catch up in all categories. However, most male consumers only consider well‐known brands. According to the luxury report from Bain & Company in 2010, the top five brands for men in mainland China are Zegna, Hugo Boss, Dunhill, Armani and Burberry. Luxury Goods Go Digital Someone says that the most striking difference between now and ten years ago is the time we spent on social network. According to the “Social network research report 2011” by comScore, 1 out of 5 minutes when we surf on the internet is spent on social network websites. Facebook alone has recorded over 1.2 billion users worldwide. In North America and Europe, women averagely spend 30% more time on social networks than men. But this gap is narrowing since 2010 as more young people join the network. There seems that little disparity exists on the usage time between genders. Luxury companies undoubtedly have noticed this move. The survey on “Social networking habits and practices of the wealthy” published recently by Luxury Institute shows that seven out of 10 wealthy consumers are now members of social networks. Although print and TV still remains the main media channels for luxury goods, websites, forums, fan pages have sprung up in the wake of the social networks. No wonder the adoption of social networks will generate noise among fans and potential buyers. Also will these online marketing practices increase brand stickiness. But can they help topline growth? Those who are engaged in online luxury community are by no means fashion outliers. Most of them can be industry insiders or die‐hard fans who know from head to toe about luxury brands and products. Brand websites and social networks should be equipped to engage customers in learning more about the brand without physical shopping experience, increasing interaction with certain exclusive offerings in the virtual environment. Taking Italy for example, Giorgio Armani launched Armani.com, offering delivery to 27 countries in Europe, as well as the US, Japan and China. Partnering with online retail provider Yoox, Armani offers Emporio Armani, Armani Collezioni and Armani Jeans, except its most premium products. Similar transactional websites can be found are Dolce Gabbana, Miu Miu and Balenciaga. However, the big players are still quite cautious about selling products through online channel. They believe that a fancy website does not equate to a luxury experience and sales return. Without further enhancement in customer service, logistic support and added value, it’s hard to lure luxury fans away from the real store where they can see, touch the products and enjoy the high end shopping ambience. Although whether the websites or social networks will boost sales still remains a question, the transfer of luxurious shopping experience from store to the computer screen (or smart phones) is promising and fruitful. Conclusion The European economy is experiencing another downturn. Historical data has shown that the luxury industry can survive the tough times. The pouring tourists from emerging markets are sweeping the luxury stores in Paris and Milan. New markets and segments are giving the industry growth points. One challenge for the luxury companies is to maintain the brand equity and cultivate on the customer relationships. The e‐commerce will definitely escalate the battle between luxury goods and fashion brands. The recent collaboration between H&M and Versace might be another solution. As luxury expands into more industries, we shall expect a more mature and segmented market, as a result, the consumers should also become more rational. Reference: 1.
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“Wealth and Luxury Trends in 2010 and beyond”, Luxury Institute “European luxury goods sector report, September 2011”, Cheuvreux Group “Luxury in China, 2009”, JWT (J. Walter Thompson) "Luxury Goods Worldwide Market Study,2011", Bain & Company “Social networking habits and practices of the wealthy,2010”, Luxury Institute “Social network research report 2011”, comScore “Luxury market, the masculine wave", www.bwchinese.com/article/1024480.html Industry newswww.fashionmag.com