Monday, January 10, 2022

There are three underlying themes that are fundamentally reshaping the global dynamics and the business playbook for luxury brands

1- Online will soon surpass all other luxury sales channels

Global lockdowns in 2020 and 2021 were the perfect stepping stones for online luxury sales channels to prove their worth. Early digital adopters saw exponential growth, while latecomers were forced to rapidly adapt and (finally) embrace digital. The share of online sales nearly doubled for personal luxury goods, growing from 12% in 2019 to 22% in 2021, reaching $70.1 billion.

In 2022, online luxury sales will continue to outpace most other channels across all industries. Even the luxury car category will see online sales growth. It’s now not a question of if but when will online sales surpass all the other luxury sales channels to drive the most revenue for the industry.

Global consultancy group Bain & Company forecasts that online sales will indeed become the single biggest channel for personal luxury goods by 2025, making up 30% of the global market, followed by monobrand physical retail stores (28%), outlet stores (14%), specialty stores (11%), department stores (11%), and travel retail (6%).

Websites and mobile apps are indeed the new dominant sales channels for most brands. Considerable work has been done to improve user experience online and build trust by reassuring customers that returns and exchanges can be done seamlessly.

Interestingly, we also see brands increasingly driving sales through their own websites. Gucci, for example, is increasingly empowering customers to purchase goods from their directly operated stores, with a focus on ecommerce, instead of relying too heavily on online multibrand retailers like FARFETCH and NET-A-PORTER, reflecting the luxury House’s strategy of gradually enhancing the exclusivity of its distribution network.

Luxury brands’ direct online sales now account for 40% of the online segment, compared to 30% in 2019, driven by improvements in ecommerce, exclusive collections, and more marketing budget allocated to the category.

The online channel growth also shows how important the younger customer demographic has become for the global luxury industry. Gen Z and Millennials are indeed the industry’s growth engine.

2- Millennials and Gen Z Drive Luxury Growth at Accelerating Rates

Without a doubt, Millennials (Gen Y) and Gen Z customers will continue to assert their position as critical growth levers for the luxury sector in 2022. And this generational shift will only accelerate in the coming years.

Together, these younger generations of affluent consumers are set to account for 70% of the luxury market by 2025 and contribute 130% of luxury market growth. Yet, they are still underserved by many luxury brands.

Collaborations such as Gucci x Balenciaga, Fendi x Versace, and Tiffany x Supreme are testaments to some level of realisation of the importance of these younger cohorts by legacy luxury brands and proof that brand collaborations haven’t reached oversaturation yet.

As the largest segment of luxury buyers, these next-gen affluent consumers are already rewriting the luxury rulebook with their value-driven expectations and digital-infused lifestyles.

To grow, luxury brands must understand how to relate to and win over these younger generations. It’s not just a question of pivoting at speed in an ever-evolving market but also a capacity to shift their business mindset.

Indeed, these younger cohorts are digital natives and both creators (they want to co-create with brands) and critics: they love to seamlessly engage with online content and are expecting luxury brands to operate at their high standard.

With a vested interest in giving back and being among the most vocal and socially active consumers, younger generations (Gen Zers perhaps even more so than Millennials) also value authenticity and integrity from brands. Sustainability, in particular, cannot be an afterthought; it must be honest, transparent and backed by action.

Thus, for luxury brands to remain in sync with younger global luxury consumers, they need to communicate their stances on environmental, ethical and social issues and most importantly deliver on these goals.

3- The $725 Billion question: What Will China Do?

Chinese affluent consumers will come back to driving the majority of worldwide luxury sales between 2022 and 2023, but things might be about to change.

In 2020 and 2021, we saw for the first time domestic luxury sales in China surpassing international sales due to travel restrictions. Domestic sales accounted for 21% of global sales in 2021 versus just 11% in 2019. In parallel, we also saw US domestic sales surpassing Chinese domestic sales, growing from 22% in 2019 to 31% of worldwide sales in 2021.

Bain expects Chinese consumers to surpass their previous share of global luxury goods sales to reach 40% to 45% by 2025. Based on our projections, that would represent $725 billion worth of sales being driven by Chinese consumers, out of a total market of $1.69 trillion.

The consultancy group predicts that the growing middle-class desire to purchase luxury goods will be sufficient to drive that growth. We think the market is facing significant headwinds, however. Particularly with China’s political focus on “Common Prosperity” goals and the resulting pressure exercised on affluent consumers to minimize external signs of wealth.

Add to the political changes the growing desire by Chinese consumers to buy from local brands and you have a challenging scenario for global luxury brands that rely too heavily on China to generate sales. The rebound in the US and European sales offer a hint of optimism for a more balanced outlook on worldwide sales between the three regions, however.