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The business of luxury: Wealthy Chinese and Millenialls drive the market

posted onJune 7, 2018
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The historically conservative luxury goods industry is attracting a more diverse and younger client base. Casual luxury is driving global sales of high-end apparel, footwear and handbags a new study by Boston-based consultancy Bain & Co. finds.

Driven by millennial shoppers, “with help also from their comfort-seeking parents and the next generation of consumers, teens,” said Bain partner Claudia D’Arpizio, sales of personal luxury items have been boosted upwards of $329 billion, up 8 percent from $308 billion in 2017. 

Younger consumers who had long been “detached” from the luxury market are now buying individual elements that appeal to them — T-shirts, sneakers. Unlike “absolute luxurers,” who buy luxury items exclusively, young consumers do not hesitate to mix and match— and thereby, participating in the luxury market more readily than ever before. 

"The really-growing brands now beating the market are the ones already hooking these teenagers. This is the first time this is happening in the history of luxury, that some brands are becoming so appealing to young consumers," D'Arpizio who is based in the firm's Milan office and led the study for Fondazione Altagamma, the trade association of Italian luxury goods manufacturers, said. 

Focus on China
China is forecast to post stunning growth of 20-22 percent this year, as traditionally higher prices there come more into line with prices overseas, D'Arpizio said. At the same time, the Chinese customer base is growing. 

Another Bain report, titled “The New Luxury Consumer: Why Responding to the Millennial Mindset Will Be Key” found that the luxury market grew by 5% to an estimated €1.2 trillion globally in 2017 with China being a clear top performer. 

The market for personal luxury goods reached a record high of €262 billion, boosted by a revival of purchasing by Chinese customers both at home and abroad, as well as strong trends within other customer groups and in other regions.

Of note, fashion powerhouses such as Louis Vuitton and Hermes have more than tripled the number of their stores in China since 2005, scrambling to take a bite out of the pie that is China’s luxury goods market. 

Sales in mainland China grew by a remarkable 15% at current exchange rates, to a total market size of €20 billion. Buying abroad also increased. Globally, the share of personal luxury goods purchased by Chinese nationals reached 32%.

Luxury industry

Personal luxury goods market across regions
Japan registered  4% growth in personal luxury goods spending, at current exchange rates, to €22 billion. In the rest of Asia (excluding mainland China and Japan) sales increased by 6% at current exchange rates while in Hong Kong and Macau the market for personal luxury goods reached €36 billion. India, becoming one of the world’s major economic growth engines, has also a rapidly growing population that is eager to spend. 

In Europe, retail sales grew by 6% at current exchange rates and reached €87 billion. Tourist flows continued to support the market in the UK, Spain and France, and local consumption strengthened as well, particularly in Germany.

In the Americas (including both North and South America) sales grew by 2% with Canada and Mexico among the bright spots in the region. At €84 billion, the region remains a crucial market for luxury brands, the report noted despite the challenging environment for department stores. 

In other regions, growth was flat at 1%, with the Middle East restrained by economic uncertainty.

How Millenials Are Disrupting Luxury

Millennials are the generation that contributes the most to the market’s growth with with 85% of luxury growth in 2017 fueled by Generations Y and Z. Millennials account for approximately 30% of the world’s population, and represent $2.5 trillion in spending power.

But a broader "millennial state of mind" is permeating the luxury industry and changing the purchasing habits of all generations. This shift in mindset is pushing luxury brands to redefine what they deliver to customers, and how they deliver it. As an illustration, luxury brands are reinterpreting streetwear to appeal to younger consumers. T-shirts, down jackets and sneakers were among the standout categories in 2017, growing by 25%, 15% and 10%, respectively.

Louis Vuitton shop

Outlook for the future of luxury
Bain estimates that growth will continue at a 4%–5% compound annual rate over the next three years (at constant exchange rates), with the market for personal luxury goods reaching €295–€305 billion by 2020.
Management consultants McKinsey also found that luxury fashion is expected to grow four to five percent this year, compared with 3.5-4.5 percent rise for fashion as a whole. 

Over the next decade, Bain expects that the luxury market's distribution footprint will evolve significantly. Physical stores will still account for 75% of purchases, but the mix of store formats will shift toward off-price stores and airport stores, to the detriment of monobrand stores, department stores and specialty stores. In addition, Bain estimates that online sales of personal luxury goods will make up 25% of the market by 2025. For brands that respond to the ongoing "millennialization" of the luxury industry, there is significant growth potential in the years ahead, concludes the report Millennials also want their brands to behave responsibly. 

Although, many of the world's biggest fashion houses pay virtually no regard to corporate ethics and have yet to take even the first steps on reporting on the social and environmental impact of their operations, they are starting waking up to ethical and environmental responsibilities as consumers' demands today are no longer limited to purchasing high-quality products.