The luxury industry is currently on a remarkable journey defying the gloomy economic outlook quarter after quarter. Seven trends are currently shaping this industry: emergence of Chinese clients, localizing marketing strategies, digital everywhere, dealing with the happy few, sustainability goes mainstream, consolidation versus niche opportunities, and luxury coming from made in emerging economies luxury.
The luxury industry is currently on a remarkable journey: quarter after quarter, Hermès, Louis Vuitton, Gucci and their counterparts announce record sales in a growing market with profits in double digits.
Luxury companies, nevertheless, affirm unanimously that this journey is as challenging as it is exciting: the acceleration imposed by globalized markets, stock markets and digital technologies, to name but a few, demand velocity, agility and continuous adaptation. Indeed, leaders should keep a close eye on the changing business landscape and reframe their mental models to develop capabilities for purposeful emergence.
What trends are currently shaping the luxury industry?
We can identify seven: the emergence of Chinese clients, the localization of marketing strategies, global digitalization, dealing with the happy few, sustainability going mainstream, consolidation versus niche opportunities, and made in emerging economies luxury.
1. Emergence of Chinese clients
According to Bain & Co and Altagamma1, last year, mainland Chinese became last year the first consumers of luxury goods, representing 25% of the world consumption. As observed in other sectors in China, the speed with which the market took off is impressive. Companies are now expanding their footprint to 2nd and 3rd cities. Chengdu, the capital of the Sichuan, is a particular hot spot in the West of China, due to consumers’ impulsive behavior and a flourishing economy.
Interestingly, the Chinese buy more than 70% of these luxury goods abroad, firstly in Hong Kong, but more and more elsewhere. A quick tour of clients queuing these days to enter luxury boutiques at Avenue Montaigne in Paris or Via Montenapoleone in Milan proves this fact. Tax is the main reason for purchasing outside mainland China, demanding that companies have a global view on their P&L: it is very likely that operations in some emerging countries are, for the time being, investments in brand notoriety, rather than profitable operations.
Travelling is part of a growing movement of sophistication amongst affluent Chinese: the phase where they buy bought symbols, be it from a logo or a label, is no longer enough. Experiential luxury is on all lips for the coming years. Wine tasting courses pop up around China and clients come to wine-producing regions in France, Italy and the US to learn firsthand how wines are produced and tasted. A definitive and everlasting quest is then to be able to balance a full mimetic desire and an acute and sharp affinity driven cross-melted fashion and services package. Numerous complaints about after-sales service in China show that much has yet to be developed on that respect.
Can ‘logo fatigue’ be an issue due to over-presence in China? The fact that Louis Vuitton and Gucci are slowing down the pace of store openings in China is evidence that exclusivity is coming first for brands’ values, a strategy followed for a long time by Hermès.
2. Localizing marketing strategies
It is not just China that emerged as a major centre for luxury consumption. Asia as a whole is booming, as are Brazil and the Middle East. For example, Ermengildo Zegna, CEO of Italian luxury menswear house, commented during the inauguration of the Zegnart project in Mumbai that he expects India to reach a similar level of luxury consumption to China within the next 10 to 15 years.
Showing off through logos is important in emerging countries because of the central role of the ‘group’: family and friends. In addition, akin to India’s Bollywood, there is a strong celebrity culture related to Brazil’s entertainment industry, the so-called telenovelas (soap operas). And those celebs are central to the image construction of luxury brands, supported by a dedicated ‘celebs’ media industry, like Brazil’s “People” magazine, Caras (“Faces”).
Similarly, South Korean clients symbolize how emergent luxury consumption appears to have a tribal element. These luxury tribes allow their members to know about luxury events such as private sales and fashion shows.
It is therefore central to grasp country specificities and localize several marketing activities.
3. Digital everywhere
After some hesitation, companies fully embraced the digital world in all its possibilities. This was a logical answer to a world where smart devices pop up everywhere. Smartphones, tablets, and the like have become the first touch point for a luxury brand, especially amongst youngsters. Early movers like Burberry have gained a solid reputation among the young crowd and their recently opened London flagship store is an example of seamless online/offline integration. Indeed, the challenge ahead for retailing is substantial.
It is also important to remember than clients in emerging markets like China, Brazil or India are younger than the traditional luxury clientele, and are hungry for novelty. Correctly operating online social networks like Sina Weibo in China can be a powerful vector of differentiation or a great mimetic catalyst. However, problems may lie ahead for brands from the damaging effects of an increasing ‘mass-tisation’ over the vital ‘underground’ approach of ‘real’ luxury.
The Internet also gave birth to a new generation of opinion leaders in the luxury fashion industry, for example bloggers like Brian Boy or street photographers like Scott Schuman.
4. Dealing with the happy few
One of the effects of globalization was the rise of a category drawn from the new international social class of the hyper-rich, which has quickly swelled the ranks of the exclusive ‘Billionaires’ Club,’ a group that has increased tenfold during the last twenty-five years. These Ultra-High Net Worth (UHNW) individuals, with a net worth of more than US$ 1 billion, have specific consumption patterns and represent a goldmine for bespoke absolute luxury offers.
Indeed, Maslow may have been wrong as we see a new dynamic stretching the pyramid. Everywhere we turn, we see examples of hyperluxury. From private bizzjets, like the Dassault Falcon FX, to Richard Mille’s racing machines on wristwatches, passing by Reuge musical boxes and anti-gravity flights, hyperluxury is rocketing. ‘Supplements of soul’ are exploding, making the sky a moving, unreachable limit.
5. Sustainability goes mainstream
At the image of PPR/Kering or LVMH, companies have integrated sustainable considerations in their operations. Luxury brands are seen as role models, and clients, celebrities and NGOs are vigilant on how they address environmental and social issues.
For example, Osklen, a Brazilian clothing company, partnered with the Instituto-e to champion the TRACES project, which assesses the social and environmental footprint of six Osklen fabric product life cycles. The company’s deep commitment to sustainability led the WWF-UK to name it a “Future Maker.”
Another interesting initiative is the 1.618 sustainable luxury movement in France that is exploring paths for the emergence of a new, more ethical luxury based on art, creativity, innovation and sustainability.
6. Consolidation versus niche opportunities
It seems to be a hard time for independents in the luxury industry. Luxury conglomerates have continued their acquisition policy (PPR/Kering buying Christopher Kane and Qeelin; Swatch buying Harry Winston, to name just a few) and are increasingly integrating vertically. This may run a considerable amount of small companies in trouble; for example, the Swiss watch makers that have long relied on Swatch to supply their mechanisms.
At the same time, niche opportunities abound. Luxury trends can be split so that each country, each state, each cluster of consumers can create a ‘contestable market’2 on its own. From ivory to vegetal ivory, from diamonds to synthetic ones sold for 30% less, every new additional sub-segment can be creating a new niche market.
7. Made in emerging economies luxury
Given the important role of emerging markets in the luxury industry, can we expect local players to take a major role? The answer depends on the luxury sector: this is already a reality in the hospitality sector where Shangri-la and Mandarin Oriental have gone global. For personal goods, it is going to take a little longer. Which paths can accelerate this emergence? Given the strong focus of luxury incumbents on heritage, a meaningful frame for newcomers is to differentiate three orientations of luxury value propositions: ‘looking to the past,’ ‘looking to the present,’ and ‘looking to the future.’
‘Looking to the past’ value propositions are those that draw inspiration from history, revitalizing refined craftsmanship and heritage. For example, China has been an economic superpower for most of its history and this opulence has given birth to numerous refined crafts: silk, tea, porcelain, jade, bamboo, tailoring, tea, liquors, to name but a few. Shang Xia exemplifies this path.
‘Looking to the present’ value propositions build bridges between east and west, and focuses mainly a luxury lifestyle. Luxury hospitality is a sector where this approach has found fertile ground, as the Emirates hospitality approach (e.g. the Burj al Arab 7 star hotel in Dubai), or the overseas expansion of the Mandarin Oriental luxury hotels bear witness.
‘Looking to the future’ value propositions propose a viable future view for a certain luxury category, reframing the meanings associated with a certain luxury product. Richard Mille watches or Osklen symbolize this approach.
Although ‘looking to the past’ and ‘looking to the present’ value propositions can eventually lead companies to become global players, this will probably be a long process. Perception inertia and cultural framing of made in will take time to evolve. ‘Looking to the past’ value propositions in particular face issues of legitimacy vis-à-vis Western luxury incumbents: Europe has a long and strong luxury heritage, associated with refined craftsmanship; from the consumer’s perspective, the label bearing made in France, Italy or Switzerland is associated with ‘true’ luxury goods. Therefore, following a ‘looking to the future’ value proposition is a promising path for newcomers.
How can this fascinating luxury industry be navigated? Yacht racing provides an appropriate metaphor to describe the current market situation. As in the America’s Cup, there are competitors and capital flows from around the world in the market, technological breakthroughs emerge from time to time, regulations may be influenced by actors to a certain extent, and weather conditions are akin to the ever-changing facet of the market in its economic, regulatory and demand components.
Some competitors are more powerful than others, but each team has a chance of winning a race if it makes the best use of its equipment and skills and if it has a little bit of luck on its side. People are what will ultimately define who achieves lasting success.
About the Authors
Dr. Jonas Hoffmann is Professor of Luxury Marketing at SKEMA Business School. He has extensive experience in consulting, executive training and has been a regular panellist at international luxury events. He has written several articles about marketing and innovation in the luxury industry. He is co-editor of Global Luxury Trends and Luxury Strategy in Action (Palgrave-Macmillan).
Dr. Ivan Coste-Manière has extensive experience in the luxury industry; he has founded eight companies in the fragrance, watch and marketing sectors. He is Professor of Marketing at SKEMA Business School and Head of SKEMA’s Master of Science in Luxury and Fashion Management. He is co-editor of Global Luxury Trends and Luxury Strategy in Action (Palgrave-Macmillan).
1. Altagamma Worlwide Markets Monitor 2012.
2. Baumol, W. J. (1982), Contestable Markets: An Uprising in the Theory of Industry Structure, The American Economic Review, Vol. 72, No. 1, (Mar., 1982), pp. 1-15.