U.S., Europe Help Drive Resilience of Luxury Goods Market
MILAN — The luxury goods market continues to show resilience and is expected to reach revenues of between 360 billion and 380 billion euros by 2025.
Despite the challenges and disruptions that took place in early 2022, from the war in Ukraine to inflation and the zero-tolerance COVID-19 restrictions in China, the midterm direction of the luxury market remains unchanged, according to Bain & Company, which on Tuesday presented the spring update of its Luxury Goods Worldwide Market Study 2022, “Rerouting the Future” in collaboration with Fondazione Altagamma.
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The study presents two scenarios. An optimistic one that sees the growth path experienced in the first half of 2022 continuing throughout the year, closing 2022 with revenues of around 320 billion to 330 billion euros, growing 10 to 15 percent over 2021. Another scenario forecasts a slower recovery of mainland China and challenged spending in mature markets caused by inflationary pressure and a macroeconomic slowdown, with sales reaching 305 billion to 320 billion euros by the end of 2022, growing 5 to 10 percent over 2021.
“Luxury goods brands started this year showing especially strong growth while also playing a leading role in the world’s ongoing sustainable and digital transformation,” said Claudia D’Arpizio, a Bain & Company partner and lead author of the study.
After its worst dip in history, the personal luxury goods market in 2021 experienced a V-shaped rebound, reaching 288 billion euros in value and it registered “a remarkable performance” in the first quarter of 2022, growing by 17 to 19 percent at current exchange rates or 13 to 15 percent at constant exchange rates over the same period in 2021. The appreciation of currencies compared with the euro and a very strong Chinese New Year as well as a successful vaccination campaign also boosted the first quarter.
The U.S. and Europe led the growth in the first quarter of the year, with a surprising recovery of the latter, admitted D’Arpizio, underscoring the “enormous potential of local consumers,” which were likely neglected by luxury brands before the pandemic, and are now enticed by more marketing initiatives, events, promotions and communication.
The market benefited from a “flamboyant” 2021 holiday shopping season across the regions, said D’Arpizio, with a 7 percent increase over the same period in 2019. Additionally, China continued to see double-digit growth last year and the U.S. maintained momentum, even after the end of the federal stimulus. China’s local consumer appetite remains strong and will potentially lead the country to recover between late 2022 and early 2023, she offered.
The impact of the Russia-Ukraine conflict has so far been restricted to local markets, showing limited consequences on global luxury customer sentiment and spending. The weight of Russian and Ukrainian spending is around 2 percent so it did not really impact business, and “compared to other crises, it’s as if consumers got used to turbulence,” said D’Arpizio, although “there’s been a lot of reaction to the war, but there’s also been a strong desire to return to life,” she said characterizing this trend as YOLO — the “you only live once” effect.
While she admitted there may be a recession in the second half of the year, Europe is accelerating its recovery, despite the war. The region is on the path to recover 2019 levels of sales one year before expectations, thanks to booming local demand driven by a fierce “back to normal” attitude and a rebound in intra-regional tourism.
The U.S. is “tapping into the power of diversity and inclusion” discovering an expanded American customer base and second-tier cities.
South Korea is undergoing a profound transformation, increasing its size and cultural relevance, defined as “the new Japan,” by the study, replacing in the last two years tourist spending with local demand.
In terms of categories, iconic bags are driving the accessories segment, and high jewelry is at its peak. A recovery of social life and a return to the office are pushing new formalwear.
The virtual world is offering new opportunities for luxury brands, including the metaverse, social media and gaming. By the end of 2030, the estimated weight of digital assets and the metaverse will account for between 5 and 10 percent of the luxury market. “There are 3 billion people involved in gaming and 300 million in luxury, and the potential connection for luxury brands is huge,” D’Arpizio said.
The growing relevance of direct-to-consumer channels and responding to the call of sustainability are also key, she said.
“In the last few months, luxury brands have been forced to reroute their futures,” said Federica Levato, a Bain & Company partner and coauthor of the report. “Winners will rapidly embrace the changes, ensuring they fully understand the implications of new geopolitical dynamics and cultural trends for all of their stakeholders: consumers, investors, employees and society at large. Those that come out ahead will take advantage of the opportunities presented by the virtual world, the sustainability transformation and preferences of younger generations.”
Matteo Lunelli, president of Altagamma, and Stefania Lazzaroni, general manager of the association, also presented an update of its Consensus 2022 study. The year 2021 saw a post-COVID-19 recovery, and 2022, despite the impact of the war and the lockdowns in China, began with a very positive first quarter, showing a 17 to 19 percent growth compared with the same period in 2021.
“The confidence of American and European consumers is solid,” Lazzaroni said. As per the update, Europe is seen growing 12 percent in the year compared with a Consensus forecast of 8 percent made in November. North America is expected to grow 10 percent compared with a 7 percent growth estimated in November. Asia was expected to grow 9 percent, but the update forecasts a 5 percent gain. The Middle East is expected to grow 10 percent compared with the 7 percent gain forecast in November. Hard luxury is the category seen growing the most, up 9 percent, driven by branded jewelry, while watches have slowed down, seen growing 6.5 percent.
Lunelli said the “long-term trends remain somewhat constant” and, while admitting the existence of “strong macroeconomic uncertainties,” he said that the Consensus estimates an average 9 percent growth in earnings before interest, taxes, depreciation and amortization for the companies in the segment, driven by a strong demand of the American consumer and an acceleration of Europe.
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