THE GLOBAL PERSONAL LUXURY GOODS MARKET HOLDS STEADY AT €249 BILLION AMID GEOPOLITICAL UNCERTAINTY

Bain & Company’s annual global luxury study finds that under the surface of the market’s increasing stability lies meaningful dynamism with a clear separation of winners and losers

Milan – Oct. 20, 2016 – The global luxury market is collectively growing at 4 percent to an estimated €1.08 trillion in 2016. Sales of luxury cars (up 8 percent) helped steer that growth. There is also evidence that luxury consumers are redirecting their spending toward new and more personal high-end experiences, such as luxury travel, food and wine, and even fine art. Meanwhile, the personal luxury goods industry managed to hold steady amid global geopolitical uncertainty. Despite China's re-emergence after three years of stagnation, the U.S. decline prevailed as the stronger force, dragging down worldwide performance to €249 billion (-1 percent at current rates, stable at constant exchange rates). These are the top-line findings from the 15th edition of the "Bain & Company Luxury Study" released today in Milan in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers' industry foundation.

"The luxury market has reached a maturation point. Brands can no longer rely on low-hanging fruit. Instead, they really need to implement differentiating strategies to succeed going forward," said Claudia D’Arpizio, a Bain partner in Milan and lead author of the study. "We are already starting to see clear polarization when it comes to performance with winners and losers emerging across product categories and segments."

Luxury Around the World

As the global luxury market settles into this new pattern, selected currency movements are affecting consumption in 2016. Brexit, the U.S. presidential election and European terrorism all impacted consumer confidence and touristic flows.

Mainland China is increasingly outperforming the market as Chinese consumption at home increases. However, the rise in local spending does not offset decreased purchases among Chinese tourists, especially in Europe:

• For the first time in history, Chinese consumers have decreased their contribution to the total luxury market from 31 percent in 2015 to 30 percent in 2016. Local factors such as price differentials, lower levels of service, and overall incomparable shopping experiences are driving down volumes and average ticket sales at home compared to Chinese consumers' purchases overseas.
• Over the longer-term, Chinese luxury spending and the country's contribution to total personal luxury goods consumption are expected to trend upward, due in large part to a growing middle class with more disposable income to spend on luxury purchases.

While luxury spending among tourists contracted across Europe, local spending rebounded to rescue personal luxury goods performance across the continent, up 1 percent at constant rates (-1 percent at current):

• Depreciation of the pound drove touristic shopping growth in the U.K. – a bright spot in an otherwise depressed pan-European market.
• On the other hand, Germany and France were negatively impacted by terrorism. Spain and Northern Europe fared better, due to a perceived lower threat risk.

The Americas turned in an uneven performance, down 2 percent at constant exchange rates (-3 percent at current):

• Luxury brands in the U.S. continue to struggle due to the decline of tourism as a result of a strong dollar and weak local spending.
• In Latin America, luxury shoppers are focused on local spending, which is helping to turn the tide in Brazil and maintain last year's positive trend in Mexico.
• Luxury spending in Canada remained steady.

Across Asia:

• Hong Kong and Macau continue to decline, down 15 percent at constant (-16 percent at current).
• Chinese flows have returned to South Korea, following MERS concerns last year, up 13 percent at constant (9 percent at current).
• Southeast Asia has been positive overall, up 3 percent at constant (1 percent at current). Singapore is attracting spending from China's Tier 2 and 3 cities. Chinese spending is also boosting Thailand and Malaysia's performance.

Among the other findings from the report:

• E-commerce leads among luxury shopping channels - Around the world, retail, which continued to gain share as recently as last year, drastically slowed with the first footprints of rationalization in the market. E-commerce is the leading channel in terms of growth, reaching 7 percent penetration in 2016, which makes it the third largest luxury 'market' globally after the U.S. and Japan and a key driver in luxury's digital revolution.
• The Discounted Market: growing, yet increasingly under brands' control – Today, discounted luxury goods represent more than 35 percent of the personal luxury goods market, versus full-price; off-price stores comprise more than 30 percent of the market. These numbers are expected to increase as consumers continue to push for value for money. Luxury brands that can strategically, rather than tactically, manage the outlet channel while reducing discounts in stores will reap the rewards.
• "Accessorization" and Polarization are prevailing market trends – Soft accessories and jewelry continue to be consistent outperformers, surpassed only by beauty, despite variable trends from brand to brand. The ongoing polarization trend (i.e., outperformance of Absolute and Accessible segments) is also blurring, with a wide dispersion of performance in each segment. Unlike in previous years, where luxury market growth was merely an index and brand performance was largely even among the major players, the current era more clearly reveals brands with a strong lead and those that are falling behind.

2016: A year of discontinuity and new opportunities (for those able to seize them)

Digital continues be a democratizing force on the global luxury market. Previously high barriers to entry have all but been destroyed, enabling emerging brands to compete directly with more established players.

"Naturally, an influx of new market entrants is concerning to incumbents, who are worried about losing market share," said Federica Levato, a Bain partner based in Milan and co-author of the study. "But, we anticipate big opportunities for the brands that are willing to think and act more like their up-and-coming counterparts."

Looking ahead, D’Arpizio anticipates the personal luxury market will reach €280-285 billion by 2020 (compound annual growth revenue of +3 to +4 percent, beginning in 2017), but cautions that it will not be an easy road.

"Luxury brands need to adjust their expectations and their strategies as we enter an era in which growth is no longer a given," she said. "We’re now on a level playing field. Brands that adapt their business and take an omni-channel, customer-centric approach will rise to the top. Those that lag behind are sure to lose market share."

For a copy of the Bain Luxury Study or to schedule an interview with Claudia D’Arpizio or Federica Levato, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

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