With the most unexpected year at an end, global luxury spending has fallen dramatically with only ‘one place’ where sales had roared in leaps and bounds. With the overall luxury market under lockdown for a good amount of time, the new epicentre of luxury is set to take the crown!
By: Tejashee Kashyap
Posted on: February 3, 2021
The dramatic year of 2020 has finally come to an end. The personal luxury goods market, which includes fashion, jewelry, watches and beauty, drop 23% to $257.5 billion, the largest annual decline in history and the first time sales have dropped since 2009, according to Bain’s 2020 Fall Luxury report.
...local luxury consumption soared high up in China. The country is said to become the world’s biggest luxury goods market by 2025. China is expected to rebound at full speed, while Asia, on the whole, is still in ‘recovery’ mode.
However, this year’s biggest winners may have been China’s uber-wealthy and luxurious peeps. Despite China’s slowdown in economic growth, the crackdown on gifting and weaker currency, the luxury goods market remained stable. China’s insatiable appetite for luxury continues to drive sales on the Mainland. Looks like the stage is set for a new luxury centre to unveil!
Where’s The Buzz?
The Covid pandemic took a sudden big chunk out of the luxury market. Historically, luxury markets in Europe and the United States have been fueled by international travel — especially of Chinese tourists. However, with travel restrictions, most of the sales have had a positive impact on their ever-growing domestic consumption. Hence, local luxury consumption soared high up in China. The country is said to become the world’s biggest luxury goods market by 2025. China is expected to rebound at full speed, while Asia, on the whole, is still in ‘recovery’ mode.
Glyn Atwal, Associate Professor at Burgundy School of Business in France says, “In the longer-term, Chinese consumers will become accustomed to making luxury purchases at home rather than abroad. This has important implications for luxury brands to invest in China. The potential of China's market is too big for luxury brands to ignore.”
But, personal luxury sales in Europe and North America are down. In the Americas, consumers are not offsetting lost sales from global travellers and department stores can be seen struggling, owing to the various bankruptcy cases. According to CNBC, “sales in the region are expected to contract 27% to 62 billion euros ($73.56 billion) this year.” Deloitte’s Global Powers of Luxury Goods 2020 report states that while Italy has the greatest number of luxury goods companies, France is the highest performing country with 15.7 percent composite sales growth, contributing 28.3 percent - the largest share - to the total sales of Top 100 luxury goods companies. However, Europe seems to be struggling through new pandemic-related lockdowns as cases are still rising robustly compared to the Chinese market.
Mr. Atwal further reasons, “A key factor has been China’s rapid economic rebound. China’s GDP grew by 3.2% in the second quarter compared with a year ago. Optimism drives luxury sales. Moreover, the average age of Chinese luxury consumers is lower vs. Europe and the US. Many of these young Chinese consumers are new to luxury. This dynamic will continue to be a positive factor. In essence, the Chinese consumer was never disconnected from the world of luxury thanks to social media.”
To capture the attention of China’s young luxury consumers, brands are quickly embracing emerging social media platforms. Louis Vuitton held a fashion show in Shanghai — its first since the coronavirus outbreak. Live streamed across multiple social media platforms such as Douyin, the Chinese version of TikTok; Weibo, China's Twitter; and a WeChat mini program, the show drew a sizeable audience, garnering more than 50 million views on Weibo alone. China has probably helped offset the damage from tumbling sales of many brands and organisations.
Even before COVID-19, young millennials and Gen Zers were the leading luxury consumer groups worldwide. But, most managers didn’t know how to address their needs and choices. Hence, only brands that are future-ready can return to strong growth automatically. But, many may not recover even once the luxury sector gets back into growth mode.
“Luxury brands will certainly need to assess how to manage costs in order to improve the bottom line. The harsh reality is that many luxury brands are competing in a very different market environment. Executives should be challenged on how to enhance both the extrinsic and intrinsic value of the luxury brand. Innovation will be a critical point of difference. For example, JD.com recently launched a white glove delivery service with the objective to improve the overall customer experience,” Mr. Atwal advises.
Women are currently making more than 70 per cent of personal luxury purchases in China and over 95 per cent of their luxury purchase decisions start with the digital journey. Gen-Z has partially shifted their consumption away from traditional luxury brands to other brands if the message is right. Consumers expect brands to be sustainable and transparent to the core, not just in their communication. Hence, ethics has become a priority in brand strategy and structure.
In terms of consumption, a wide shift could be seen between the Chinese and the Western market. “A shift in consumer values should benefit traditional luxury (European) brands vs. affordable luxury (US) brands as consumers reassess the meaning of luxury. However, an interesting revelation is that according to a twelve-country survey conducted by Edelman, 65% of respondents agreed that how brands respond to the coronavirus crisis will have a significant impact on future purchase intention. Interestingly, this was higher for China (88%) and India (79%). This has wider implications as consumers are willing to reward or even punish brands. Moral authenticity needs to be the cornerstone of every luxury brand strategy and of any purpose-driven marketing campaign,” Mr. Atwal added.
New Market Undercover
The Eastern Luxury Market seems to be only fixated on China. Even brands continue to remain obsessed with China’s appetite for luxury consumption. What brands and retailers may have overseen is Japan’s growing luxury goods market. Things are slowly but surely starting to heat up there.
Although there has been nonstop banter about China’s growth, one needs to focus that Japanese consumers spend roughly $33 billion (JPY 3.6 trillion) each year on luxury goods, making it 2017’s second-largest luxury market in the world. Showcased in movies and books, Chinese luxury consumers are stereotyped to be impulsive shoppers who splurge to stand out. However, according to a report from Agility Research & Strategy on Affluent Insights from Japan, Japanese consumers seek quality and durability in products, associating the concept of luxury with ‘expensive’ and ‘high quality’ rather than an emotional response or social influence/status.
Japanese millennials are said to care less about the aesthetic appearance of a product, and more about the story and quality behind it. This sounds exactly what the new-age consumers demand and might lead to a bigger opening into Japan’s luxury market.
Women are currently making more than 70 per cent of personal luxury purchases in China and over 95 per cent of their luxury purchase decisions start with the digital journey. Gen-Z has partially shifted their consumption away from traditional luxury brands to other brands if the message is right.
Japan remains a critically important market too. For Kering, Japan’s importance and its distinctive approach are underscored by the fact it remains the only country that the group consistently breaks out in its earnings report. Almost a quarter of all LVMH’s physical stores across the Asian region are located in the country. Luxury brands seem to be dependent on China but directing attention, strategies towards high growth emerging markets around the world can be beneficial too.
Japan’s age-old dependence on brick and mortar model and adapting to online experience also seems to be underway. The current crisis will push consumers of all ages to adopt new technologies and this could serve as a valuable opportunity to make long-overdue investments. In the latest study by Bain & Co, Japan’s luxury spending slid 24 per cent to EUR18 billion, while combined sales in Hong Kong and Macau tumbled 35 per cent to EUR27 billion.
A Gucci store in Macau
With the changing times and hardships, the stage is set for China to become the world’s biggest luxury market. The Asian market is still poised to grow with China stated to change the fate of the overall market demographics by 2025. What we are currently witnessing is a paradigm shift in the way people buy and experience luxury, not to forget a major acceleration towards sustained and ethical consumption patterns!