StudentResearchProjects/Outputs

No.058

New trends in Europe and emerging luxury goods markets

Andre Yao MBA 2010

ChinaEuropeInternationalBusinessSchool 699,HongfengRoad Pudong,Shanghai PeoplesRepublicofChina

NewtrendsinEuropeandemergingluxurygoodsmarkets BMTResearchReportAndreYao
GeneralIntroduction TheEuropeanluxurymarkethaslongbeenregardedastheoriginofthemainstream luxurygoods,includingbrandslikeLouisVuitton,Chanel,GiorgioArmani,Prada,Gucci,etc. Withitsrichculturalheritageembeddedwithinthebrands,thesebignameshavecaptured crazyfansandhugeprofitsfromallovertheworld. Followingtheglobaleconomiccrisis,theEuropeanluxurymarketinevitablyhas encounteredperiodicaldownturn.AccordingtotheluxurysectorreportbyCheuvreux Group,overthepastdecade,listedluxurygoodscompanieshavedelivereda7%organic growth,buttheyear2009sawsectorsalesdeclining5%organicallyandintermsofearnings, sectorEBITdeclined9%ineurotermsin2009. However,theluxurycompanieswillnotputtheircapitalsatstake.Theyhavesniffed thebusinessopportunitiesfromthenewmarketsandhaveidentifiedthepotentialtargets. Thankstotheinteractivesocialmedia,thebattlefieldhasalsoturnedfromthetraditional retailstorestoonlinewebsites. ResearchMethodology Theresearchismainlycomposedofresearchreportsandcompanystrategyanalysis.

Thequantitativeparttoaddressthecurrentfinancialsituationoftheluxurygoods companyandthegrowthrateoftheindustryisderivedfromthesectorreportfrom CheuvreuxGroup.SomeotherfindingscanalsobetracedtotheWealthandLuxuryTrends in2010andbeyondfromtheLuxuryInstitute. Newtrendsinluxurymarketcanfindtheirsourcefromsomeluxuryindustrynews andcompanyreportspublishedwithin3years. EuropeanLuxuryMarketPerformance

 Thetableaboveshowsapositivegrowthtrend,despitetheeconomiccrisis,among themajorluxurygoodscompanies(mostlyfromEurope).Onaverage,thesectorhasan aggregated18%organicgrowthalthoughtheratehadbeendowntonegativeduringthe firstquarterof2009.Q22011hasevenseenamorepromisingorganicgrowthrate. Thegrowthcanbeattributedtothefollowingfactors: 1. DynamicconsumptioninWesternEuropeandUS.LVMH,Hermsand Richemontallenjoyeddoubledigitgrowthsince2010.Stronggrowth benefitedfromboththelocaldemandandthetouristgroup(pricegapdue totaxandexchangerate) 2. Priceincreasewithstabledemand.Owingtotheincreasinglaborandraw materialcostandvolatileexchangerate,manyluxurybrandshaveincreased theirpricessincetheendof2009.LouisVuittonhasincreaseditspricetwice frommid2010toQ12011.Otherbrandsalsofollowed. 3. Fastgrowingemergingmarkets.RisingdemandfrommiddleclassinChina andotheremergingcountrieshaspushedgrowthratetonearly30%inAsia forLVMH,HermsandGucci.ThedepreciatingEurowillfurtherleadAsian luxuryzealotstoescalatetheluxurychase. Overall,thesectorhasbeengrowingoverthepastdecadeexceptfor2009,the operatingprofitbasicallyrevealsthesamepattern(Seechartbelow).Alinearregression couldbedevelopedtoshowthepositivecorrelationbetweenthesalesandprofitgrowth. ThetoplinegrowthalsohasacorrelationwiththeworldGDPgrowth.Intheyears withgoodeconomy,theluxurymarketisabletocatchthetrendtopileuptheprofit.Even underbadtimes,thedeclineislimitedtoanacceptablenumber.

 Duringtheeconomicdownturn,thebigplayersinthemarkethavecaughtthe opportunitytoreshufflethecards.LMVHSAacquiredBulgariSPAandtwootherwatch companiesin2011.Tiffanyissaidtohavereceivedseveraloffersfromseverallargeluxury groups.Recently,aChinesefirmacquiredItalianluxuryyachtbuilderFerrettiGroup. IndustrybelievesthattherewillbemoreinternationalM&Asintheluxuryandretail business. Someimpatientnewcomersinluxuryindustry,however,havepaidtheirpricefor theirhastyactionstolookforimmediatesuccess.EspeciallyinEurope,luxurybrandsare deeplyrootedintheirdesign,quality,craftsmanshipandserviceandittakesdecadesto buildtheirreputation.Thosewhowanttoinstantlybuildaluxurybrandaretoonaveto succeed.Theventurecapitalsandprivateequitiesshouldbemorecautiousininvesting startupcompaniessellingluxury. NewOpportunitiesinEmergingMarkets AreportreleasedbyUBSshowsthatlastyear,50%oftheworldluxuryrevenue comesfromAsia.OverhalfoftheconsumptionofEuropeanluxurygoodsisfromthe touristsfromAsiancountries. LargeluxurygroupshavealsowitnessedstronggrowthinAsianmarkets.LVMH, Herms,Gucciallpostedbetterthanexpectedresultsfor2011. The"LuxuryGoodsWorldwideMarketStudy"recentlyreleasedbyBain&Company hasstatedthatChinahasalreadyovertakenJapanasthe2ndlargestluxurygoodsconsumer onlyafterUnitedStates.ThereportlistedgrowthrateforUSandEuropetobe12%and6%, Asia22%,Chinamainland30%.For2011,Chinaisexpectedtofurthergrowanother25%to 11.5billionEuros.Ontheotherhand,EuropeanluxurycompaniesstillfindIndiamarkethard topenetratebecauseofitslackofretailspaceandtraditionofwearIndiandressesand accessories. SomeotherfiguresregardingChinaluxurymarket: 2ndlargestconsumergroupofluxurygoodsintheworld Closeto1millionChinesemillionairestoday

250millionChinesewhocanaffordtobuyluxurybrands TheONLYmarketwheremenconsumemoreluxurythanwomen Youngestluxurymarketintheworld

Source:Thespreadofluxurymodel,thecultoftheluxurybrand: InsideAsiasloveaffairwithluxury,London,2006

IfyouforgetallthenumbersaboveandtakealookintotheChineseconsumers,you canfindtherelaysfundamentaldifferentneedsforluxurygoodsamongthemandWestern consumers.WhileinEurope,luxurybrandsrepresenthighquality,nobleclass,cultural heritage,personalizedlifestyle,inChina,thesameproductsorbrandsmayonlyservethe functionofshowingoffrichness,loveforvanity,culturalemptinessandsometimeseven rentseekingbehavior. However,theyoungluxuryconsumersofemergingmarkets(mostlyfrom1sttier cities)aremoreeducatedthantheirparentgeneration.Comparedwiththeirparents,they havelessconcernaboutwhattoeatorwear.Thebasicphysiologicalandsafetyneedsare metinnatelyastheywerebornmainlyafterthe1980s.Unliketheirpeersin2nd,3rdtiercities oreveninruralareas,theytooktheadvantageofbeingexposedtocapitalismand consumptionculturemuchearlierandthereforearemorewillingtospend.Bornasasingle childinafamily,theyarementallyindependentasconsumerswhowillmakedecisionsbase ontheirownjudgment.SurroundedbyWesterncultureanddigitalmedia,theyoung generationsalsoshowgreatpotentialinpurchasingproductsthathighlightpersonalityand senseofbelonging.ThegaphasnarrowedbetweenhowEuropean(alsoAmerican)young consumersandthosefromemergingmarketsviewluxurygoods.Lifestyleisnolongera symbolicwordbutatangibletagfromwhichluxurygoodscanestablishstrongbinding betweentheirbrandsandconsumers.CompanieslikeLMVH,Hermsmayfindthistarget groupremote,butApple(ifcountedasaluxurybrand)isaperfectexampleofcatchingthe needsofthedigitalgeneration.WecanalsofindBurberryuseteenagecelebritystarEmma Watsonasbrandspokesmen.Theearlierthesebigbrandssetouttoreachthesefuture uppermiddleclass,thesoonertheywillseetheirdollarsworthspending. ViewingAsiaasastrategicmarket,Italianluxurycompanieshaveevenplannedto listintheHongKongstockmarket.PradalistedinJune2011inHongKong,raising2billion USdollars.EmenegildoZegnaalsoplanstoissuestocksinHongKongthisyear.Zegna recorded40%revenuefromChina,HongKong,Brazil,IndiaandRussiain2010.Halfofthe newstoreopeningsarefromemergingmarketslikeChinaandVietnam.

Thenextbattlefield:Men Manythinkthatluxurygoodsareforwomenbutnotformenwhoonlyneedsexcept forwatchesandcars,butthatsnottruetoday.Since2009,mensluxurycategoryCAGRhas been14%,almostdoublingwomens8%.Mensluxurymarkethasreachedover7billion Euros,accountingfor40%ofthetotalmarket. ThistrendfirstemergedinEuropeasBurberry,HugoBossandEmenegildoZegnaall boostedtheirmensshare.LVMHhasreactedbyrelaunchingmensshoesbrandBerluti whilePPRacquiredanotherItalianmenssuitbrandBrioni.Targetinghighendmale customers,bothbrandsintroduceproductspricingoverseveralthousandEuros.LVMHalso startedprovidingtailormadeshoesforitscustomersinViaMontenapoleoneinMilan.In France,HermsandPrintempsincreasedtheirinvestmentinthemensectorbyincreasing spaceandbringingintailormadeservicesforgentlemen.Unlikewomenwhoaremore impulsiveinpurchasingluxurygoods,menvaluemorethebrandequity,qualityand technicalsideoftheproducts,especiallyintraditionalmensproductslikewatch,carand outdoorequipment.Whenlookingatsuits,shoesandleathergoods,mostofthemstillkeep thesamecriteria.Asmostmenspurchasefrequencyofluxurygoodsislowerthanwomens, theyhavebeenincreasinglypreferredtailormadeluxuryproducts. Inemergingmarkets,mensconsumptionofluxurygoodsalsocatchupinall categories.However,mostmaleconsumersonlyconsiderwellknownbrands.Accordingto theluxuryreportfromBain&Companyin2010,thetopfivebrandsformeninmainland ChinaareZegna,HugoBoss,Dunhill,ArmaniandBurberry.

LuxuryGoodsGoDigital Someonesaysthatthemoststrikingdifferencebetweennowandtenyearsagois thetimewespentonsocialnetwork.AccordingtotheSocialnetworkresearchreport2011 bycomScore,1outof5minuteswhenwesurfontheinternetisspentonsocialnetwork websites.Facebookalonehasrecordedover1.2billionusersworldwide.InNorthAmerica andEurope,womenaveragelyspend30%moretimeonsocialnetworksthanmen.Butthis gapisnarrowingsince2010asmoreyoungpeoplejointhenetwork.Thereseemsthatlittle disparityexistsontheusagetimebetweengenders.

 Luxurycompaniesundoubtedlyhavenoticedthismove.ThesurveyonSocial networkinghabitsandpracticesofthewealthypublishedrecentlybyLuxuryInstitute showsthatsevenoutof10wealthyconsumersarenowmembersofsocialnetworks. AlthoughprintandTVstillremainsthemainmediachannelsforluxurygoods,websites, forums,fanpageshavesprungupinthewakeofthesocialnetworks. Nowondertheadoptionofsocialnetworkswillgeneratenoiseamongfansand potentialbuyers.Alsowilltheseonlinemarketingpracticesincreasebrandstickiness.But cantheyhelptoplinegrowth? Thosewhoareengagedinonlineluxurycommunityarebynomeansfashionoutliers. Mostofthemcanbeindustryinsidersordiehardfanswhoknowfromheadtotoeabout luxurybrandsandproducts.Brandwebsitesandsocialnetworksshouldbeequippedto engagecustomersinlearningmoreaboutthebrandwithoutphysicalshoppingexperience, increasinginteractionwithcertainexclusiveofferingsinthevirtualenvironment. TakingItalyforexample,GiorgioArmanilaunchedArmani.com,offeringdeliveryto 27countriesinEurope,aswellastheUS,JapanandChina.Partneringwithonlineretail providerYoox,ArmanioffersEmporioArmani,ArmaniCollezioniandArmaniJeans,except itsmostpremiumproducts.SimilartransactionalwebsitescanbefoundareDolceGabbana, MiuMiuandBalenciaga.However,thebigplayersarestillquitecautiousaboutselling productsthroughonlinechannel.Theybelievethatafancywebsitedoesnotequatetoa luxuryexperienceandsalesreturn.Withoutfurtherenhancementincustomerservice, logisticsupportandaddedvalue,itshardtolureluxuryfansawayfromtherealstorewhere theycansee,touchtheproductsandenjoythehighendshoppingambience.Although whetherthewebsitesorsocialnetworkswillboostsalesstillremainsaquestion,thetransfer ofluxuriousshoppingexperiencefromstoretothecomputerscreen(orsmartphones)is promisingandfruitful. Conclusion

TheEuropeaneconomyisexperiencinganotherdownturn.Historicaldatahasshown thattheluxuryindustrycansurvivethetoughtimes.Thepouringtouristsfromemerging marketsaresweepingtheluxurystoresinParisandMilan. Newmarketsandsegmentsaregivingtheindustrygrowthpoints.Onechallengefor theluxurycompaniesistomaintainthebrandequityandcultivateonthecustomer relationships.Theecommercewilldefinitelyescalatethebattlebetweenluxurygoodsand fashionbrands.TherecentcollaborationbetweenH&MandVersacemightbeanother solution. Asluxuryexpandsintomoreindustries,weshallexpectamorematureand segmentedmarket,asaresult,theconsumersshouldalsobecomemorerational. Reference: 1. 2. 3. 4. 5. 6. 7. 8. WealthandLuxuryTrendsin2010andbeyond,LuxuryInstitute Europeanluxurygoodssectorreport,September2011,CheuvreuxGroup LuxuryinChina,2009,JWT(J.WalterThompson) "LuxuryGoodsWorldwideMarketStudy,2011",Bain&Company Socialnetworkinghabitsandpracticesofthewealthy,2010,LuxuryInstitute Socialnetworkresearchreport2011,comScore Luxurymarket,themasculinewave",www.bwchinese.com/article/1024480.html Industrynewswww.fashionmag.com