Balance of Power in the Luxury Market Shifts To Favor Only Seven Brands
Bain and Company and the Italian trade association Fondazione Altagamma are out with their 2021 study of the global luxury market.
Based on a preliminary assessment covering both sales in the luxury goods and experiences market in nine major categories, it reports total revenues will increase between 13% to 15% over the 2020 pandemic year to end at €1.14 trillion ($1.3 trillion).
However, the report also states the total market remains 9% to 11% below 2019 levels, owing largely to a shortfall in experiences.
Luxury hospitality, gourmet food and fine dining, fine art, private jets and yachts will remain below 2019 levels, though up compared to 2020. Only luxury cruises are down relative to both 2019 and 2020.
On the other hand, luxury cars – the largest single category at €551 billion ($626 billion) – will end the year at or slightly above 2019 levels. Only fine wines and spirits (€77 or $88 billion) and high-end furniture and housewares (€45 or $51 billion) will exceed 2019 levels, up between 12% to 14% and 13% to 15% respectively.
Personal luxury will squeak by 2019
The report reserves the most ink to the personal luxury market, the second largest at €283 billion ($322 billion) in sales, up 29% over 2020 to end the year +1% ahead of 2019.
Globally the Americas (31% SOM) and China (21% share) will top 2019, up 12% and 3% respectively, but Europe (-10% with 25% share) and Japan (-9% with 7% share) will remain underwater.
Described as the “core of the core” in the luxury market, personal luxury came “roaring back” after experiencing a V-shaped recovery.
Within the personal luxury segment, only shoes (€23 or $26 billion), jewelry (€22 or $25 billion), and leather accessories (€62 or $70 billion) will beat 2019 results, up 5%, 3% and 4% respectively.
Beauty (€60 or $68 billion) and watches (€40 or $45 billion) will be flat and apparel (€57 or $65 billion) will remain -5% down relative to 2019.
Despite the uneven recovery in personal luxury goods, it is projected to post CAGR between 6% to 8% and reach sales of €360 to €380 billion ( $409 to $432 billion) by 2025.
That concludes the study’s breathless reporting of the topline findings of the past year in luxury, saying, “it has never seen a year of surging performance to match 2021.”
And yet, underneath the topline results are other findings that should give one pause, specifically how the balance of power in the luxury market is now firmly in the hands of the “power” brands, as Steve Sadove, former CEO of Saks and currently advisor to Mastercard, describes them.
To the victor go the spoils
The “surging recovery” Bain speaks about only applies to the power brands. Two-percent share of market is all that small brands (<€200 or $277 million) commanded in 2021. And even more troubling, only seven brands control one-third of the personal luxury goods market.
While the report states, “there is still a place for ‘rising stars’ in the industry,” one wonders where?
Before Covid, emerging luxury brands had hope to find traction online where the power brands were reluctant to venture, but that’s all changed. The major brands moved aggressively into the online space over the past two years, which grew from 12% share of the personal luxury market in 2019 to 22% in 2021, a stunning 38% uptick since 2019.
Further, some 40% of the online segment is now controlled by websites devoted to a single brand, rather than multi-brand marketplaces. Monobrand websites’ share grew from 30% in 2019.
Success online at least partly depends on the amount of advertising dollars pumped into online channels. With digital advertising expenses growing and more power brands moving into the space – Magna reports global digital media grew by nearly one-third year-over-year in 2021 – smaller brands can’t begin to match the online marketing muscle of the major brands.
The pandemic literally closed the doors in physical retail and they’ve only partly opened in 2021. Specialty retailers went from 20% share of the personal luxury goods market in 2019 to 16% in 2021, a 10% decline in sales. Department stores declined by 8% and went from 18% SOM to 15% in 2021.
More troubling is they are expected to continue on a downward curve through 2025 when they will hold only between a 10% to 12% share each.
Sadove suggests these numbers may not be as stark as they first appear. “The customer wants a seamless experience to shop anywhere, anytime. Physical stores are distribution centers for online. It’s not an either-or question but both. Distribution is a complex discussion.”
What Sadove sees shifting in distribution is a move toward more concession models in retail from traditional wholesale-to-retail distribution. But that too will favor power brands that have long practiced concessions, leaving emerging brands out in the cold.
Restructuring the luxury retail ecosystem
“High-end brands want to control their own destiny and how they appear and are presented in the store,” he says, adding, “So we are not going to move away from department stores but change the economic relationship they have with them to concessions.”
Rather than selling into stores wholesale and lose margin, power brands are going to pay rent instead, as they are already doing in their mono-brand stores which advanced 3% from 2019 to capture 32% share of market.
Over the past twenty years, wholesale’s share of the market dropped by 72% in 2010 to 51% in 2021, with the biggest drop from 2019 when it declined from 60%. Now distribution is split virtually down the middle, half through wholesale and half through retail.
While Bain doesn’t predict where wholesale and retail will end up by 2025, it’s pretty certain that the twenty-year trend away from wholesale will continue.
“The economic model will continue to evolve. The customer is going to shop and going to shop in different ways,” Sadove affirms.
Secondhand luxury goods sales are not included in Bain’s personal luxury goods market size estimate, but in 2021, Bain reports they will account for €33 billion or $38 billion in sales, up 27% from 2019.
Already it is about half the size of each of the three leading personal luxury goods categories – leather accessories, beauty and apparel – and its 27% growth from 2019 leaves every other personal luxury goods category in the dust.
One can argue that the secondhand luxury goods buyer isn’t the same as the primary market buyer. But with the future of the luxury market now on the shoulders of next-generation customers, expected to represent 70% of global purchases by 2025, and these customers keen on sustainability, a shift from firsthand to secondhand luxury goods can be expected.
And finally, Bain’s positive growth projections hinge on Chinese consumers and their continued appetite for luxury brands. They are expected to account for between 40% to 45% of purchases by 2025 when the China mainland will overcome the Americas and Europe as the world’s largest market.
But because of its vast cultural and geo-political differences, China can be a risky bet for Western luxury brands. Daniel Langer, founder of luxury consultancy Équité and contributor to Jing Daily, warns of “China chic.”
“Young and affluent Chinese Gen Z consumers find local brands much more aspirational and desirable than millennials or Gen Xers,” he wrote, as he observes the native Gen Z consumers are exceptionally proud of their Chinese culture heritage and its future potential.
While he believes that Chinese luxury brands will not suddenly replace aspiration for Western luxury brands, he cautioned, “There are clear signs that a fundamental shift is happening, and — like so many disruptions in the luxury space — it is being driven by Gen Z.”
“China chic is only trouble for brands that continue doing what they always did. The competition will heat up, new players will rise, and consumer preferences will shift rapidly. Agile and proactive brands that are radically customer-centric have a chance to win,” he advised.
These wildcards – secondhand luxury, next-gen consumers and China – may continue to test the “strength, resilience and agility” that Bain observes has enabled luxury brands to overcome the “tremendous turbulence” of the past two years. But with more turbulence ahead, the power luxury brands are best positioned to power on through.