Bain: Millennials Are Lifting—and Challenging—Luxury Brands

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Gucci - fashion week - Gucci Ghost leather tote bag 2016

The shine is back on the global market for luxury goods, fueled largely by Gen Y and Gen Z who provided 85% of growth in that sector this year, rising to an estimated €1.2 trillion globally in 2017.

That’s according to the 2017 Bain & Company Luxury Study, the 16th annual report in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers’ industry foundation.

The report’s authors concluded that the most successful brands are tailoring strategies to specific categories while creating ecosystems that tell their story at every consumer touchpoint.

“It’s an interesting time in the world of luxury—the millennial state of mind has changed the way purchases are made across generations and has pushed luxury brands to redefine what they deliver to customers,” said Claudia D’Arpizio, a Bain partner and lead author of the study. “For brands that manage to get this right, there is significant potential growth in the market for personal luxury goods in the years ahead.”

“There is a powerful point made in the statement ‘the brands who manage to get this right’ as it acknowledges the power of the brand in getting it right—or indeed wrong,” said Interbrand Global Director Rebecca Robins, co-author of the book Meta-luxury.

“As we have seen from Interbrand’s recently released 2017 Best Global Brands, there is a clear and distinct polarization in the brands who are growing and showing a substantial increase in brand value (Hermès at $14.2bn in brand value, Gucci at $9.96bn), and those whose value continues to decline (from Burberry and Prada to Ralph Lauren, who didn’t appear in the Top 100 this year).”

D’Arpizio further noted, “We started to see stronger momentum in the first half of the year, and this has continued in recent months allowing the market for personal luxury goods to really regain its luster. The growth in this market is more robust, driven by increases in volumes rather than prices and a rediscovered balance between tourist purchases and re-ignited local consumption.”

Overall, Bain estimates online sales for personal luxury goods will account for 25 percent of the market by 2025, with stores delivering 75 percent of purchases.

“The role of the store is definitely changing,” said Federica Levato, a Bain partner and co-author of the study. “The growth of the online channel is remarkable, boosted by the ‘millennial state of mind’ that has permeated the luxury industry. But this doesn’t mean stores have lost their purpose – brands need to reinvent them to create an on-going engagement with customers that transcends channels.”

“For the brands who are getting it right, there is clarity and confidence in their point of view; their product is relevant, resonating across both loyal consumers and newcomers to their brand; and they are authentic in how they are connecting to culture,” noted Robins.

“The news that has been announced of the leadership evolution at Dior and Fendi is yet another confirmation of the imperative for businesses to be relentless in their investment in the holy trinity of people, technology and brand.”

LUXURY CONSUMERS BY GENERATION:

The report is subtitled, “Millennial state of mind: The tailwind behind consumer behaviors and winning strategies.” Bain’s research found that younger generations will be the main drivers for growth across luxury goods industries. About 85% of the annual increase in 2017 will be fuelled by millennials.

Bain luxury study - October 2017

FINDINGS BY SECTOR:

This year’s report found that luxury car sales saw 6% growth (to €489 billion), while sales of high-end food and wine were both up 6% from 2016. Luxury cruises jumped to 14 percent annual growth.

Shoes, jewelry and bags ranked as the three fastest-growing categories, while apparel, beauty and watches still account for the bulk of the market.

High-end fashion designers are reinterpreting streetwear to woo younger consumers to their designs, particularly when it comes to T-shirts, sneakers and down jackets.

This upward trend is projected to continue at an estimated 4 to 5 percent annual growth rate in the next three years, with the market for personal luxury goods reaching €295-305 billion by 2020.

Nearly two-thirds of brands (65%) grew in 2017, up from only 50% in 2016.

SALES CHANNELS: 

As for sales channels, retail grew 8% in 2017, fueled by new store openings (3%) and like-for-like sales (5%).

Online sales blossomed as sales jumping by 24% with the U.S. market accounting for €23 billion in total, followed by Asia and Europe.

Wholesale channels grew just 3%, driven by a strong performance of specialty stores, but offset by disappointing global performance of department stores.

Accessories remain the top category sold online, with beauty and hard luxury (jewelry and watches), both on the rise. Brands are proactively establishing dedicated websites which now account for 31 percent of sales.

REGIONAL SNAPSHOTS:

• Europe, rebounding by 6 percent to reach €87 billion in retail sales and reclaiming position as the top region for luxury sales by value.

• China, the core market for personal luxury goods reached a record high of €262 billion, as increasingly fashion-savvy Chinese customers boosted sales by 15 percent to a total market size of €20 billion.

• The Americas (both North and South America) grew by just 2 percent reaching
€84 billion, with Canada and Mexico bright spots across the region as department stores struggle to thrive.

• The rest of Asia (excluding Mainland China and Japan) has also had a strong showing, growing by 6 percent.

• Hong Kong and Macau reached market size of €36 billion this year, while increased Chinese spending and a currency-driven boost in the second half of 2017 propelled Japan to 4 percent growth resulting in €22 billion this year.

• Middle East growth was flat at 1 percent, with the region plagued by economic uncertainty.

Founded in 1973, Bain has 55 offices in 36 countries, and their clients have outperformed the stock market 4 to 1. The firm aligns its incentives with clients by linking its fees to their results.

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