The Changing Landscape of the Luxury Goods Industry

The Changing Landscape of the Luxury Goods Industry

How do we define luxury? By price? A particular set of attributes? Or by distribution and exclusivity? Though its characterisation may be ambiguous, one thing is for certain; luxury has made its way into the hands of the masses. This is partly due to corporations taking ownership of luxury brands and lowering price points of the products as well as the implementation of broader distribution channels.

Global economic outlook

The global luxury industry is growing, most notably (and unsurprisingly) in the Asia Pacific region. Due to the disproportionate rise in income inequality in the region, the income available in upper class households is growing at a faster rate than overall income. Though the future of the luxury market will not just depend on the economy of this region, but rather on how the global economy evolves.

Though China is the world’s fifth largest luxury market, the country’s economy has slowed considerably. The export industry has been affected by slow overseas growth, the rising value of the Yuan, and rising wages. In response the government proposed a range of reforms to stabilise the economy in an effort to shift growth away from investment and toward consumer spending, though whether this will have the desired effort for the luxury market, remains to be seen.

Staying in the Asia Pacific region we take a look at Japan; the world’s second largest luxury market after the United States. Though Japan has seen a slower growth rate in the luxury sales market over the last five years than any other Asian market. The implementation of the ‘Abenomics’ economic policy in 2013 however managed to improve economic performance, as did the depreciation of the Yen, which increased export competitiveness and helped to revive Japan’s manufacturing sector. Additionally there was a sizeable increase in wealth, due to higher equity prices, which in turn boosted consumer spending.

However, sustained growth of consumer spending will require increases in wages and whilst prices have risen, wages have not. Thus consumers have seen a decline in purchasing power. Though if wages continue to stagnate, economic growth will suffer.

Meanwhile the Eurozone is in the process of recovering from a prolonged recession. Following the decline in the value of the Euro as well as wage restraints and productivity gains, there has been a growth in exports in the region. As a result, government finances in Europe are in better shape than a few years ago.

Though the biggest obstacle to better economic performance in Europe is the absence of financial market integration. As European banks are supervised by their national governments, there is no strong central authority with the resources to support and resolve troubled banks.

The United States remains to be the largest luxury market in the world, with luxury spending more than twice that of second place Japan. Luxury sales in the US account for roughly one quarter of global sales of luxury goods. Furthermore the economy has shown signs of strength due to factors such as; a rise in overseas demand, increasing investment in energy production, demand for household formation, and improvements in the functioning of credit markets. Additionally this has also been shown in the form of continued growth of consumer spending, particularly on automobiles. There has also been a sizeable rebound in the US housing market.

Within the emerging markets Colombia, Mexico, Philippines and much of Sub-Saharan Africa will prove to be promising markets. This is due to improved governance, competitive industries, and favourable demographics, all of which will lead to strong economic growth in the coming decade. As such, the number of upper income households in these countries will rise quickly, leading to the growth of the luxury market.

Additionally, an expanding global middle class in emerging markets has supported growth in the luxury sector and is projected to continue fuelling growth through to 2018. Euromonitor has revealed that the emerging markets of Asia Pacific, Latin America, and the Middle East and Africa accounted for a combined 9 percent of the luxury market in 2008 and is projected to grow to 25 percent in 2025. This will be due to the forces of urbanization, economic development and the love of luxury.
The developed economies of the U.S. and Europe stand to benefit from the emerging markets’ expanding middle classes, who are travelling to the world’s capitals and boosting sales of luxury products.

Global trends affecting the luxury industry

The hallmark of luxury brands is that they control all aspects of business. From product design to sourcing raw materials, to distribution and marketing, keeping a tight control of the process enables luxury brands to guarantee brand-appropriate quality and levels of service. Meanwhile companies serving the mass channel took to outsourcing manufacturing and sourcing of materials so as to incur more rapid growth. However there has been a shift in this process as products now developed for the mass market are garnering new caché as they adopt the marketing/branding and retail techniques of luxury brands.

Additionally the internet has changed the luxury goods landscape by putting more power in the hands of the consumer. The internet has provided consumers with increased information access, such as price transparency, and this ubiquitous access undermines one of luxury’s core tenets – exclusivity.
Thus the lack of intimacy in the virtual world, along with the ease of comparison shopping, could diminish brand loyalty.

Though e-commerce is the fastest growing retail channel, luxury brands were late to the market as many assumed that the aesthetics of their brand experience would be difficult to replicate online. Though some brands have clearly embraced technology such as fashion heavyweight Louis Vuitton. Ultimately luxury brands need to deliver an interactive, exciting and efficient shopping experience to all their customers, regardless of channel, from flagship to mobile and everything in between.

Furthermore social media has given consumers a new voice, increasing their individual and collective power. Though this erodes message control for luxury brands, the internet, along with mobility and e-commerce, is one of the most effective means to introduce new products globally and provide instant gratification to shoppers in any part of the world. Additionally social media can be used effectively as a vibrant storytelling medium for luxury brands, communicating brand heritage and iconography to a new audience of potential clients.

A fitting social media platform for luxury and fashion brands is Instagram. The visual nature of the platform, along with the capability for sponsored advertising, allows users to track their favourite brands.

In order for luxury brands to remain relevant they have to go where the consuming audiences are – social communities. Consumers have extremely high expectations for luxury brand sites, from design layout, functionality and ease of navigation, to brand iconography and strength of overall brand presence. Thus the internet has created new distribution channels for luxury fashion brands so that they are able to keep up with consumer demand for the latest fashion products at a value price.