THE RENAISSANCE OF LUXURY
The luxury market is back, and analysts believe two key trends could sustain its recovery in the coming years.
The luxury goods market is enjoying an upswing, thanks to growing wealth among mainland Chinese consumers, and analysts believe two trends could just further its growth -- digitisation and millenialisation.
Spending on high-end goods has rebounded as the global luxury market grew by 5 per cent in 2017 to be worth an estimated EUR1.2 trillion (HK$11.64 trillion), according to management consulting firm Bain & Company.
The group says Chinese shelled out the most in luxury spending, with consumption bouncing back in 2017, fuelled by renewed consumer confidence and the rapid emergence of what it described as a new and increasingly fashion savvy middle class.
Sales of personal luxury goods, such as clothes, handbags and jewellery, soared by 15 per cent in mainland China, and when combined with purchases made abroad, Chinese consumers accounted for 32 per cent of sales worldwide, according to Bain.
This buoyant trend looks set to continue going forward.
Bain has forecast a compound annual growth of 4 per cent to 5 per cent for the global luxury market in the next three years.
Carl Berrisford, equity analyst of UBS Wealth Management CIO, observes that the rebound in the luxury market has been evident in the last six months.
He also attributes the rise to the growing wealth of Chinese consumers, on the back of improvements in the Chinese economy and the wealth-effect people feel from rising property prices, most recently in tier three and tier four cities.
“There is also a structural discretionary income story. The number of people entering the ranks of the middle class is swelling every year and the actual discretionary income budget is increasing as people get wealthier,” Berrisford says. “This is an important long-term structural driver for the luxury market.”
Indeed, wealth grew fivefold in China since the beginning of the century, and in 2015, its middle class has surpassed the US’ to become the world’s largest, says the Credit Suisse Group in a report released in October 2015.
UBS Investment Bank estimates that Chinese consumers now account for 35 per cent of the global luxury market, and it has forecast near-term annual growth of 10 per cent and long-term annual growth of 7 per cent for the sector.
Berrisford expects growth across all types of high-end products, with the luxury watch market currently enjoying a particularly strong rebound in sales.
But growth is not only confined to personal luxury goods, with demand also strong for luxury experiences. Spending on high-end food and wine, and luxury cruises was up 6 per cent and 14 per cent respectively in 2017, while luxury car sales also rose by 6 per cent, according to Bain.
The positive outlook for the luxury sector has caught the attention of Chinese companies, leading to a high-end brand acquisition spree.
Most recently, Chinese conglomerate Fosun acquired a majority stake in Paris-based fashion house Lanvin, while Shandong Ruyi bought a controlling stake in luxury shoe maker Bally, adding to its existing brands, which include UK tailors Gieves & Hawkes and Aquascutum, and French apparel firm SMCP.
In October last year, Hony Capital bought a third of Duemmei, owner of Mr & Mrs Italy.
Berrisford says the acquisitions show Chinese corporates are aware that Chinese consumers bring more than a third of brand market sales, and they want a piece of the action.
“There aren’t really any luxury Chinese brands that have been able to compete or attract the same type of sales as the big, global luxury brands.”
He adds that he expects to see more M&A in the luxury goods sector in the future.
Zhang Tianbing, consumer business sector leader, Deloitte China, says that Chinese companies see the huge potential in the Chinese market, thus their appetite for acquiring luxury brands.
“This is very much about buying the brand and helping them to grow in China to capitalise on the domestic growth of consumption, particularly in the luxury sector,” he says.
Investors also have opportunities to capitalise on this growth as many luxury brands are owned by listed companies.
The S&P Global Luxury Index, which is comprised of 80 of the largest publicallytraded companies engaged in the production or distribution of luxury goods and services, is up 32 per cent year-on-year, after trading sideways for much of the previous two years.
A number of big names have also recently reported strong sales growth, with Kering, whose brands include Gucci and Yves Saint Laurent, posting a 27 per cent jump in year-on-year sales on a comparable basis in the fourth quarter, to give revenues of EUR4.26 billion (Hk$41.31billion). Within the total, sales at Gucci, which has recently revamped its brand, soared by nearly 43 per cent.
LVHM, home to Louis Vuitton, Dior, Givenchy and Celine, enjoyed record sales of EUR42.6 billion (HK$413 billion) in 2017, driven by its fashion and leather goods arms, while Hermes posted a 9 per cent rise for the year with revenues of Euro5.549 billion (HK$53.81 billion).
The positive performance was not confined to high-end fashion goods, with cosmetics maker Estee Lauder also posting a near 17 per cent jump in sales for the December quarter, beating analysts’ expectations.
But despite the rebound in luxury sales, investors will need to pick their stocks carefully. Berrisford thinks growth is currently brand-driven, rather than product driven, with big luxury brands likely to outperform second-tier mono brands, reflecting Chinese consumers’ preferences.
“Out of our universe of 11 luxury stocks, five are buys,” he says.
He adds that there is a proxy play between luxury spending and Macau gaming stocks.
“There is a quite a correlation between luxury spending and spending in Macau. For watches, there is an 81 per cent correlation between luxury watch sales in Hong Kong and Macau gaming growth,” Berrisford says.
Moody’s Investors Service expects the credit quality of the majority of the 11 luxury stocks it tracks to strengthen over the coming year. But it feels most positive about companies that have started to focus on online sales and improving store productivity.
It is also cautious about US companies, such as Ralph Lauren, which rely heavily on sales through department stores, where footfall is falling, while they also face headwinds from the strong US dollar. The internet presents both challenges and opportunities for high-end brands.
Zhang sees a big shift taking place in the luxury market, and thinks the brands that will enjoy the strongest growth going forward will be those that focus on customised boutiques and interacting with their customers, both online and offline.
“For luxury brands, transforming themselves to make sure they are relevant in the digital age will be critical to the success and even survival of these brands.
"THOSE WHO ADAPT THEMSELVES FASTER TO THE NEW DIGITAL WORLD WILL BE THE WINNERS AND THOSE WHO ADAPT SLOWER WILL BE THE LOSERS." – Zhang Tianbing, Deloitte China
“Those who adapt themselves faster to the new digital world will be the winners and those who adapt slower will be the losers.”
But most brands have not been quick to develop digital channels, and while global online sales of personal luxury goods jumped by 24 per cent in 2017, they still only accounted for 9 per cent in total global luxury sales, according to Bain.
Even so, the group estimates this channel will expand to reach 25 per cent of the market by 2025.
Online sales are most prevalent in the Americas, with the region accounting for 47 per cent of the global total, but Asia is catching up fast, largely driven by China.
Bruno Lannes, partner at Bain & Company China, says online luxury sales grew by 43 percent in mainland in 2017, compared with a rise of 19 per cent for offline ones. It is also seen as a pioneer for innovative digital services and models for consumer engagement, with the 40 leading luxury brands all having official Wechat accounts in China.
But while most brands have already launched their own website or intend to do so in the coming year, very few are exploring other online options, such as selling through aggregators.
Zhang points out that digitisation generally is still at a very early stage among most luxury brands.
“They are starting to create consumer data visibility and insights with the purpose of improving store conversion. “There are also attempts to upgrade store formats to make them digitally-enabled,” he says.
But he stresses the importance of digitisation in order to appeal to millennials.
“Millennials are becoming the major customer base and they are digital natives, spending 50 per cent more time, at six hours per week, online shopping than the older generations. They also live online and are a lot easier to be accessed and influenced via digital touch points.”
It is not only online that high-end brands are having to adapt to the demands of younger people, with the luxury industry undergoing a so-called “millennialisation”.
This involves reinterpreting streetwear to appeal to younger consumers, with T-shirts, down jackets and sneakers seeing sales growth of 25 per cent, 15 per cent and 10 per cent respectively in 2017, according to Bain’s data.
Appealing to millennials, particularly those in China, is likely to be key to the success of brands going forward.
Lannes explains: “New consumers, mostly millennials, have been major contributors to the market growth.
“Millennials are digitally savvy and very knowledgeable about luxury.”
He adds that they prefer fashion and casual clothes, but favour designer brands. They also start buying luxury goods at a young age and with relatively high frequency.
Despite the opportunities the rise in luxury consumption offers companies, significant hurdles and risks remain.
In the period from 2014 to 2017, among the 65 per cent of brands that managed to grew revenue, only one-third were also able to grow their profits, according to Bain.
Another vulnerability is the fact that the market is so Chinadriven, and a revival of Beijing’s anti-corruption crackdown could put a dampener on growth in the luxury market.
“The fate of the Chinese economy is a key issue. You really want growth to be more diversified. If the Chinese property market turns down, you will see it in the luxury market because it would end the wealth effect,” Berrisford says.
But Zhang thinks demand is now coming out of general consumption, which should lead to more stable growth.
Despite these hurdles, for brands that are able to connect with their customers, particularly those in China, and execute successful digital strategies, the rewards are potentially huge.