China, U.S. Rebound, Online Driving Luxury Goods Market Recovery
MILAN — The appetite of China and Chinese nationals for luxury, which remains “insatiable,” together with a “robust” online business and the “unexpected” rebound of the U.S. market, are driving a recovery in the luxury goods market, according to the Bain & Company Luxury Study 2021 Spring Update released today in collaboration with Fondazione Altagamma.
The luxury market has started to recover from the impact of the COVID-19 pandemic last year, returning to growth in the first quarter of 2021, reporting a flat to 1 percent gain in revenues compared with 2019, viewed as the last comparable year, stated the study. At constant exchange rates, sales grew 2 to 3 percent.
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However, the outlook for 2021 remains uncertain, based on two possible scenarios playing out, which would drive sales to amount to between 250 billion euros and 295 billion euros.
The first scenario, which has a 30 percent probability according to the study, sees the recovery path to continue throughout 2021, winning back the 2019 market level as early as this year, forecasting a flat to 5 percent gain for the year compared with 2019. This would translate into sales of between 280 billion euros and 295 billion euros in 2021.
In the more probable scenario, despite the strong momentum of the first quarter, full-year growth is seen stifled by slower domestic luxury purchases and limited intra-regional tourism. In this case, the full recovery to 2019 levels and sales of between 265 billion euros and 295 billion euros are expected only in 2022. In 2021, sales are forecast to reach between 250 billion euros and 265 billion euros, down 5 to 10 percent compared with 2019.
“It’s clear that consumers still want to buy luxury goods, and this, along with the brands’ ability to adapt and innovate, is driving a return to growth in the market,” said Claudia D’Arpizio, a Bain & Company partner and lead author of the study.
“This is an extraordinary moment and luxury goods brands have shown great resilience and the ability to react in a strong and dynamic way to this moment of change and improvement,” said D’Arpizio. “It’s a more difficult business than before but it is more exciting, as brands are selling emotions. It’s a business of connections and culture, and these are strengths of Italian companies, so let’s hope they can catch this new wave of dynamism and growth.”
“Brands have been forced to rip up the playbook and innovate rapidly in light of the crisis, as the pandemic drove luxury brands into the age of digital at an unforeseen pace over the past 15 months,” concurred Bain & Company partner and report coauthor Federica Levato in an interview with WWD.
Bain estimated that more than 85 percent of luxury purchases were digitally influenced in 2021. Luxury customers are more knowledgeable in the use of digital tools, which has caused a spike in transactions but also in the conversation with the brands, said Levato, who underscored that “the human touch in luxury remains needed and, whether in store or remotely, these interactions will play a critical part in maintaining customer loyalty.”
A rebalance with physical will continue, but the mind-set has evolved, she explained. “Digital tools are the new normal but only if enabled by the human touch and interaction. Winning brands will need to stay closely in touch with the key trends shaping the new normal lifestyle — all while remaining differentiated and creating a narrative that is true to their own culture.”
Levato also pointed to what Bain defined as the “Roaring 20s” in the U.S. — an unforeseen rebound in that market due to a renewed consumer confidence, a dynamic stock market, a multitrillion-dollar investment plan to upgrade infrastructure and increase employment, and a rapid vaccine rollout. Bain pointed to the rise of new shopping hubs as people move to suburban areas, and seek more diverse and inclusive cultural exchanges, in tune with the next generation’s mind-set.
“These shifts are impacting the channel mix, with a more diverse and active customer base with a clear voice and point of view as department stores are rethinking their formula,” said Levato.
Europe is still lagging, dented by a slower vaccination campaign and the lack of international tourism.
China will lead growth in the next decade through key luxury hubs in cities as Shanghai and Beijing, but also tier-two and tier-three cities and local resort venues such as the island of Hainan. Bain also underscored the arrival on the scene of the Alpha female — not only in China — who is independent, has an increased purchasing power and a strong influence on other women, Millennials and Gen Z.
Shoes, bags, jewelry and accessories led the growth in 2020, as apparel shifted more into leisure wear, and Bain expects “dynamism in apparel as people want to dress up again. Levato cautioned that it was too early to predict the performance of this category.
She did underscore, however, that “the hero product is overtaking the brand, you can have the best brand ever but you are missing out if you don’t have a strong hero product. Customers are more driven to a single product. A single model of a sneaker, for example, can be stronger than the brand itself.”
Brands are also widening their price ranges with more entry-level products but also more high-end items and new categories to reach more customers. “Our lifestyles have changed and pet accessories, for example, have become a strong category because people have been buying more pets [during the pandemic],” said Levato.
Brand ethics rather than aesthetics have also emerged as key for customers. “Sustainability, affiliation and belonging are pillars now more than before the pandemic,” continued Levato. “Gen Z is the most severe in how to evaluate a brand and much more aware of how a company behaves toward equality and environment, so this is a call to action to companies. Customers are watching you and comparing you with other industries, which have been working on these pillars for more years.”
This also leads to efforts to curb waste and Bain estimated that the secondhand market for luxury was worth 28 billion euros in 2020, up from 26 billion euros in 2019. The market for preworn luxury items comprises not only entry-level younger consumers who are mainly buying aspirational categories and products, but also top spenders and collectors who are searching for high-end or collectible products.
Matteo Lunelli, president of Altagamma, said luxury companies have “not only contained the damages but also set the basis for a recovery.” Investments on digital and the rationalization of management and business models are bringing rewards, and, especially because of the strong recovery of China and China, he believes Italian high-end companies can look to the future with “moderate optimism.”
Stefania Lazzaroni, general manager of Altagamma, presented the Altagamma Consensus 2021 study, which also sees 2021 as a year of improvements, although a full recovery to pre-COVID-19 levels is expected to take place between 2021 and 2022. Sales of personal luxury goods are forecast to grow 18 percent in 2021, according to the Consensus.
The study forecasts 2021 earnings before interest, taxes, depreciation and amortization to grow 30 percent, “led by local consumer spending, in particular in China and the U.S. and the surge of online sales, whose quota is estimated to represent 30 percent of total, up from 23 percent of the total forecast in November last year,” said Lazzaroni.
Accessories and apparel are seen growing and brands that have succeeded in investing in digitalization and a better control of pricing will show a better performance, in “a distribution ecosystem that is increasingly fluid and evolving,” continued Lazzaroni.
Comparing the 2021 Consensus elaborated in November last year to the one presented on Monday, sales of luxury goods in North America are seen growing 20 percent versus an earlier 14 percent forecast. Asia is expected to grow 6 percentage points to 23 percent and the Middle East is forecast to gain 5 percentage points to 14 percent. Europe was seen growing 12 percent and now it is expected to gain 14 percent.
Chinese consumers in November were expected to grow 20 percent in 2021, but now they are seen increasing 27 percent and North American consumers were forecast to grow 12 percent, while now they are seen gaining 20 percent.
By category, apparel is forecast to grow 19 percent, up 5 percentage points; leather goods are seen growing 22 percent, up 6 percentage points, and shoes are expected to gain 4 percentage points to 18 percent.
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