Bain & Company just released its predictions for the luxury market in 2017. It expects the overall luxury market, including both luxury goods and experiences, to post 5% growth this year to reach €1.2 trillion globally. After what it calls a “reboot” from 2015-2016, it sees the luxury market reaching a “new normal” of 4-5% annual growth through 2020.
Taking credit for this exuberant forecast is the rising tide of luxury-leaning millennials that luxury brands are finally starting to connect with. “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.”
Luxury cars lead the market in size, expected to total €489 billion in 2017 on 6% growth. Luxury cruises, a scant <1% of the global market, is predicted to close 2017 up 14% , while private jets and yachts (2% of total) will decline by 2% and fine art (3% SOM) will only rise 1%. All the other categories in the study – hospitality, wines and spirits, luxury food, high-quality home design – will rise 4-6%. Personal luxury goods, the second largest segment at 23% of total, will grow 5% to reach €262 billion.
In the study, Bain identifies seven key trends shaping the luxury market’s future. Here’s what you need to know:
Experi(m)ent(i)al – For “Me” about the Individual
Luxury experiences (e.g. hospitality, cruises) and what it terms “experiencing goods” (e.g. food and beverage) are the fastest growing categories in Bain’s assessment. Traditional luxury goods, on the other hand, are less relevant to millennials. As a result, personal luxury goods brands are called on to “build story-telling through inspirational conversations and experiences.”
In other words, personal luxury goods brands must transform the things they sell into experiences for these customers. Story-telling, especially through the digital channels where these customers take their cues, is one way to do that, as is offering a chance to “experiment” with the brand through lower-cost offerings, such as beauty, sunglasses, scarves, t-shirts and street wear.
Healthier – “New Normal” Return to Growth after Reboot
Since 1996, Bain identifies six ages in the personal luxury market. Throughout those ages of luxury – Sortie Du Temple (’90-’00), Democratization (’01-’07), Crisis (’08-’09), Chinese Shopping Frenzy (’10-’14), Reboot (’15-’16) and now New Normal – only four years have posted a decline in sales. Though after less than a year, it may be early to identify that the luxury market has crossed over into a new normal state, Bain expects the millennials who make up 38% of the luxury consumer market to increase their share of spending, now 30%, to match their penetration over the years ahead.
Another sign of health Bain identifies is that traffic is growing among both luxury market customers and tourists as well. In the past tourist spending contributed more heavily in certain global markets, but in the “new normal” period the spending is expected to even out.
Key for optimizing luxury brand growth in today’s “new normal” period is to develop one-on-one relationships with the next generation consumers on which their future depends.
Universal – “Local Tourist” Are the Universal Customer
In the healthier, universal “new normal” luxury market, China and other Asian markets, Europe and to a lesser extent Japan are identified as the key growth markets, while the laggards will be the Americas, predicted to grow only 2% and the Middle East, up 1%. European markets will benefit most from cross-border tourism, while Chinese consumers will fuel growth as both international shoppers and local consumers.
The universal profile of the luxury consumer market led Bain to identify “Local Tourist” as the emerging customer for branded boutiques. When luxury consumers travel abroad, they want to experience luxury brands in the stores as “locals,” specifically “feeling welcomed and recognized everywhere.” When at home, they want new, exploratory brand shopping experiences with frequently changing assortments, different store formats so that they get the “feeling” of being in different places without “moving.”
Ecosystematic – Evolving Ecosystem of Channels based on Customers
To my mind, this trend toward defining channels of distribution based upon how the customers want to engage with brands, not how the company wants to manage its operations, is one of the most important take aways in this study. They write, “Channels are now coming together in an interdependent and integrated ecosystem around the customer.”
Sageberry Consulting’s Steven Dennis, explains too many brands are substituting omnichannel tactics for customer engagement strategies. Brands, he said, “need to have a well-sequenced roadmap of digital marketing and channel integration initiatives rooted in a deep understanding of customer behavior and underlying economics.”
In the evolving omnichannel ecosystem for luxury brands, Bain calls out the complementary roles of retail and wholesale, the need to leverage online as a support platform for all physical channels, travel/airport and off-price retail as a means to widen the customer base with less intimidating ways to explore luxury brands and the vital need for e-commerce engagement.
The later, e-commerce, remains a sticking point for some luxury brands and perhaps rightly so, for Bain reports online sales represent less than 10% of luxury brand sales. But that share is expected to grow to ~25% by 2025.
With 20,000 luxury mono-branded stores worldwide, brands must manage the omnichannel “network” from human touchpoints to digital engagement. Brands that have been slow to embrace all that digital interaction offers customers, including the purchase option, must see that a complete 360⁰ digital platform is the tipping point to relevance with millennials.
Post-Aspirational – Traditional Market Segmentation Is Losing Relevance
I for one am glad to see the demise of the term “aspirational” to describe millennials. It just doesn’t apply. Millennials aren’t aspiring to join some elite group that is defined by status. They seek to stand out and define themselves as individuals who share common values. The post-aspirational customer is distinguished by “being able to make a personal statement” through style and brand choices, not the old luxury concept of exclusivity bound by purchasing brands favored by the “happy few.”
The post-aspirational consumers are finding ways to express their individuality and engage with luxury brands through new ranges of luxury streetwear offerings. These new categories, including sneakers, denim, t-shirts, parkas, down jackets and rubber slides, make the brands relevant to millennials’ casual new luxury lifestyles, rather than some idealized formal lifestyle that old luxury represents.
Curated – Inspiring Customers through All Touchpoints
Brands need to change the goals of marketing from aspiring to inspiring customers. Bain identifies the retail store as the “epicenter of the brand story-telling.” That means high-touch, not high-tech, is the way millennials will truly be inspired, with digital engagement most often concluding with the in-store experience, even as e-commerce will grow. The store, therefore, must be a place for immersion into the brand, where the service experience matches the brand promise and connects with the customer’s expectations that the brand has inspired.
Curation goes far beyond curating products for local tastes. It is about curating the brand stories for the specific interests and needs of the “local tourists” in search of a place to engage, whether online or in-store.
Polarized, Profitable, Evolving – Economics of Luxury Industry Evolving
As the report’s final trend, Bain identifies the luxury industry remains a highly profitable one, but one where revenue and profit growth is becoming more expensive. It predicts that ~65% of companies will achieve revenue growth in 2017, as compared with ~50% during the “reboot” period from 2015-2016. But only about 35% of those revenue-growth companies will also achieve profit growth this year. It predicts that “Industry P&L [is] shifting increasingly in the next years.” The solution Bain recommends is to “invest in people, competencies and become marketing-centered.”
In conclusion, as in past years, Bain & Company produced an important report on the evolving luxury market and the challenges and opportunities therein. But while it distills the market perspective down into 40+ pages, it is a complex story of industry change and transition that should be humbling for anyone competing here.
Success for players in the new luxury market will depend upon understanding these macro issues, but interpreting them internally to find unique paths to growth. Rather than focusing on the big picture, luxury leaders need to look at their own house. Is it truly aligned with the needs, expectations and desires of the next generation of customers? Does it understand that customer up-close-and-personal, not as a market segment, but as individuals.
Big data gives leaders some of the tools they need to do this, but it provides only one perspective, not the kind of understanding actually meeting and talking to customers and potential customers can give. Being truly market-centered, not industry-, competitor- or product-centered, is the answer.