Surprise! Gens Y and Z are buying lots of luxury stuff after all
Generations Y and Z are rewriting the rules of the luxury market, according to a recent report by the consulting firm Bain & Co.
The global luxury market, encompassing goods and luxury experiences, is forecast to grow by 5 percent this year to an estimated 1.2 trillion euros, or $1.4 trillion, according to the study, compiled using market data and interviews with people in the industry.
But while older shoppers traditionally have driven the growth of sales in the luxury sector, this time it was shoppers born after 1980 who made the difference.
Generation Y provided 30 percent of all spending and, together with Generation Z (born between 1995 and 2010), generated 85 percent of the luxury growth in the last 12 months, said Claudia D’arpizio, a partner at Bain who specializes in the luxury and fashion industries.
“This power shift between generations, away from the baby boomers towards younger shoppers, means the latter are now the growth engine of the market in every region globally,” she said in an interview. “In order to recover following the downturn, brands had to strategically reposition themselves towards this new demographic and their state of mind and distinct product and shopping tastes. But what has proven particularly interesting is how those habits and preferences are now shaping those of other generations, too.”
Key to success with younger consumers have been efforts by brands to develop engaging content for digital platforms like Instagram and Snapchat, so they and their creative directors can connect with fans multiple times a day. Heavy investment also has gone into luxury streetwear, like sneakers, sliders (bedroom slipper-like shoes) and down jackets, with some brands showing double-digit sales growth across those product categories.
And pairing with pop stars and social media influencers, rather than just Hollywood glitterati and models, has become an essential part of product marketing for most brands.
“We were expecting a rebound as the industry shifted its strategy: We just didn’t expect there to be such a strong and immediate reaction from shoppers,” D’arpizio said. “The fact that customers are getting younger and younger is good for the future of the industry.”
Growth in the personal goods market flatlined in 2016. For 2017, Bain has forecast a 6 percent increase in the sector’s revenue, at constant exchange rates, to 262 billion euros, beating predictions earlier this year for growth of 2 percent to 4 percent.
The positive prospects painted by the report corresponded with the robust earnings reports from some of the luxury industry’s power players.
Shares in Kering reached record highs Wednesday after the French luxury group reported revenue of 3.9 billion euros in the three months to the end of September, up 23 percent, driven by the performance of star brands like Gucci, where revenue soared 42 percent to 1.5 billion euros in the quarter. Earlier this month, LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury group by revenue, continued its upward momentum with a 12 percent increase in the first nine months of the year that beat analyst expectations.
Of course, the latest change in fortunes is not all down to the selfie generation.
Tourism has recovered strongly in Europe, buoyed by a weaker pound in Britain and by the economic recovery in China, counterbalancing a slower U.S. market.
Chinese buyers now lead the luxury goods market, at 32 percent of all buyers, thanks to increased purchasing abroad and at home. That rise in domestic purchases is a result, at least in part, of a reduction in the price differentials that once existed in geographic markets and had driven buyers to shop outside their home markets.
Investment in streamlining sales channels and improving shopping experiences online and off also is paying off, the Bain report indicated. Online luxury sales jumped by 24 percent, with Bain estimating that online sales of personal luxury goods will make up 25 percent of the market by 2025.
But not everyone will benefit: While 65 percent of all luxury companies will see sales growth this year, only 35 percent will manage to increase their operating profits, Bain projected.
Still, the consensus was that the future — for now — looks bright.
“The last few years have been very painful for the luxury industry,” D’arpizio said. “But we are entering a new normal, where winners and losers are being decided by those who take a smart new approach to their business that factors in the changing macro state of the world. It will be exciting for everyone to see what happens next.”