As we start the new year we thought we’d do a deep dive into the luxury market as many economists think it’s a good barometer of where economies are going. When consumers feel confident they spend on luxuries, when they’re worried they don’t. It’s also helpful to know who is actually buying all of these luxury purses, cars and jewelry. The big news here is that they’re often Asian but also that luxury buyers are getting younger.
In response, the luxury market is evolving and innovating to adapt to their preferences when it comes to product offerings, communications channels and their engagement with media. For example, Generation Z, despite being a smaller proportion of the market (2 percent in 2018, but increasing to 10 percent in 2025) is already demonstrating highly differentiated preferences from previous generations. They are more “individualist;” more willing to shop in physical stores (but expect a digitally enhanced experience); and more logo-driven, though they exhibit less brand loyalty.
In 2018, the second-hand market for luxury goods surged as a result of strong growth in Europe, which made up more than half of this market, as well as growth of highly specialized platforms online. Hard luxury (watches and jewelry) led second-hand purchases.
Overall, shoes and jewelry were the top luxury growth categories at 7 percent each, followed by bags and beauty. Watches remained flat while apparel suffered mainly due to lackluster sales in the menswear segment.
Luxury in 2025 – 7 Macro Trends
- More Chinese-driven purchases…happening in China – Chinese consumers will make up at least 45 percent of the market (up from an estimated 32 percent in 2018), and they will make half of their luxury purchases at home in China.
- Ecommerce, online digital will permeate every single purchase – Bain & Company expects that by 2025 online will represent 25 percent of market value – up from 10 percent today – cannibalizing more “traditional” channels, and 100 percent of luxury purchases will be influenced by online. Further, 50 percent of luxury purchases in the future will be digitally enabled as a result of new technologies along the value chain, such as virtual reality and mobile payments.
- Footprint consolidation will reshape the store of the future – The reduction of foot traffic in physical stores, induced by digital, will drive a footprint consolidation, similar to what has already happened in other retail sectors (e.g. music, books). Consequently, the role of the store as it is today will inevitably change: from a simple point of sale to a true “touch point” with consumers.
- A more youthful market will disrupt luxury’s growth path – New generations will be the primary engine of growth in the coming years. Generation Z and Millennials (i.e. Gen Y) will represent approximately 55 percent of the 2025 market and will contribute 130 percent of market growth over the period.
- Cultures and subcultures will take over consumption trends – Evolving cultures (religion, ethnicity) and subcultures (minorities) will shape fashion and luxury in 2025. Cultural and subculture groups will increasingly gain influence over consumer trends. Luxury brands will have to acknowledge and address them to remain relevant.
- One market to serve markets of one – Brands in 2025 will experience a cross-over of typical competitive boundaries. The standard model where brands grow to become either the specialist in a category or diversified towards lifestyle positioning will be taken to the extremes.
- Nimble is the new black – This year confirmed the recent trend of higher profitability – from 19 percent EBIT margin in 2017 to 20 percent in 2018. However, the digital disruption will continue to shift the profiles of key expenditures in brands’ P&L. Profitability will stabilize assuming brands adopt a more “nimble” approach across the value chain.
“All signs point to significant changes afoot for luxury brands over the next several years,” said D’Arpizio. “They can weather these disruptions by keeping in mind three key strategies: be proactive in developing approaches to serve new customers and address market trends; be distinctive in designing a winning formula; and be next-gen minded. The underpinning of all of these strategies is the emergence of new technologies, which will play a crucial role as a fundamental enabler for brands through 2025.”
Luxury buyers are getting younger and that’s good for the industry in the long run.