CURRENCY FLUCTUATIONS AND LUXURY GLOBE-TROTTERS BOOST GLOBAL PERSONAL LUXURY GOODS TO OVER A QUARTER TRILLION EUROS

According to Bain & Company's 2015 worldwide luxury report, luxury brands will need the right pricing model to win against hard-to-predict currency volatility

Milan – October 29, 2015 – The overall luxury industry – which as tracked by Bain & Company comprises 10 segments, led by luxury cars, luxury hospitality and personal luxury goods accounting for 80 percent of the total market – surpassed €1 trillion in retail sales value in 2015. The market delivered healthy growth of 5 percent year-over-year (at constant exchange rates), driven primarily by luxury cars (8 percent), luxury hospitality (7 percent) and fine arts (6 percent). Aided by global currency fluctuations and continued jet-setting of "borderless consumers," the personal luxury goods market ballooned to over a quarter trillion euros. While global tourists flocked to Europe and Japan to capitalize on a weak Euro and Yen, the Americas region, stagnant in real terms, was strongly inflated by the super dollar, thus capturing more than a third (34 percent) of the global market in 2015E. Meanwhile, Asia registered the worst historical performance (at constant exchange rates), driven by the lackluster trend of Mainland China and the sharp drop in sales in Hong Kong and Macau. These are key findings from Bain in the14^th edition of its "Luxury Goods Worldwide Market Monitor," released today in Milan in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers industry foundation.

The personal luxury goods market – including leather accessories, fashion, hard luxury and fragrance & cosmetics – reached €253 billion in 2015. This represents 13 percent growth at current exchange rates, while real growth is significantly slowing to 1-2 percent.

"For the last several years, we've referenced ‘luxury's new normal' with a deceleration of the personal luxury goods market. Now, we are starting to feel the impact of that slow-down," said Claudia D'Arpizio, a Bain partner in Milan and lead author of the study. "The challenge for luxury brands in this environment is how to successfully navigate through hard-to-predict volatility."

Regional Trends: The Great Mall of China

According to Bain's research, Chinese consumers continue to make up the largest portion of luxury purchases (31 percent) globally, followed closely by Americans (24 percent) and Europeans (18 percent).

Chinese consumers are flocking to mature markets in droves, especially Europe, where an analysis of European tax-free shopping data, conducted in partnership with Global Blue, shows Chinese tax-free purchases increased by 64 percent, particularly among the accessible and aspirational luxury segments, thanks to a weak Euro. Americans also increased their tax-free spending in Europe by 67 percent, aimed largely at the high end of the luxury spectrum. Meanwhile, Russians cut their European spending by 37 percent, and spending among the Japanese in Europe also withered by 16 percent.

"Undoubtedly, Chinese consumers play a primary role in the growth of luxury spending worldwide," said Federica Levato, a principal at Bain and co-author of the study. "For years, we have known that they spend far more abroad than in Mainland China, but what's changing is that they're spending little money in historically popular destinations, such as Hong Kong and Macau, and are instead gravitating to new locales, such as Europe, South Korea or Japan, to benefit from currency fluctuations that drive favorable price gaps."

In terms of constant exchange rates, the U.S. market did not deliver.  The "super dollar" was too expensive for many global tourists and though local consumption is growing, it was barely sufficient to offset the lost tourism revenue. Nevertheless, the U.S. is the confirmed largest luxury market in terms of global luxury value, reaching €79 billion; New York City alone outweighed all of Japan.

Japan has proven to be a consistent champion in both real and nominal terms, driven by a sound base of local consumers and the emergence of Chinese shoppers looking to capitalize on currency fluctuations.

The personal luxury goods market in Hong Kong and Macau has fallen victim to a number of government measures aimed at regulating the grey market in China, creating a 25 percent contraction in real terms.

While local spending in China continued to slightly contract, the appreciation of the local currency has boosted the country to the number three spot in terms of global luxury value, overtaking Italy and France and trailing only the U.S. and Japan.

Distribution trends

Wholesale is still the dominant selling channel within the personal luxury goods market, capturing 66 percent of market share. However, retail continues to gain share, despite a slowdown in network expansion (+600 directly operated stores opened globally in 2015 vs. 750 in 2014) and growth in like-for-like sales (+13 percent at current exchange rates).

Simultaneously, e-commerce grew to 7 percent market share in 2015, nearly doubling its penetration since 2012. Luxury globe-trotters have also fueled the performance of airport retail, which posted a +29 percent growth rate in current exchange rates (+18 percent in constant exchange rates) and now accounts for 6 percent of the global luxury market.

With the growing middle class in economies such as China seeking good quality and good value, the off-price channel has more than doubled to nearly €26 billion. Mark-downs are also increasing in prevalence across more than 35 percent of the luxury market, with a strong relevance in department and specialty stores, as well as online.

The Price of Luxury

According to Bain, the number one challenge facing most luxury brands is establishing the right pricing model. The rise of e-commerce and global tourism growth create greater transparency around international price differentials. Additionally, price-conscious luxury shoppers are struggling to reconcile the price of luxury products with their real value. As a result, luxury brands must assess how to mitigate volatility and how best to deliver at local and global levels. This includes managing inventory to accommodate fluctuations in tourism and coordinating pricing and mark-downs across markets and channels.  Luxury brands also face a host of tough issues such as rethinking their store footprint and the role of their stores in a world of growing digitalization, as well as figuring out how to delight local customers even as masses of tourists flock to stores in mature markets.

"Relentless price increases over the last decade,aimed at creating a more exclusive position in the market and maximizing touristic flows are now starting to backfire on luxury brands," said D'Arpizio. "They face the long-term challenge of re-building credibility and trust among consumers, rather than simply making shortsighted, tactical pricing adjustments to benefit from market fluctuations."

For more information on Bain's "Global Luxury Goods Worldwide Market Study, Fall 2015 Update," or to schedule an interview with Claudia D'Arpizio, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

Visit http://www.bain.com/luxury-report for details about the public version of the report.

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