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Report: Luxury goods face first recession
November 03, 2008
New York—The luxury goods market, once thought immune to the ebbs and flows of economic fluctuations, has begun to feel the effects of the worldwide economic slowdown and will likely enter a recession in 2009, according to a new report by business consulting firm Bain and Co.
The firm's Luxury Goods Worldwide Market Study finds that the growth of luxury goods sales globally will slow sharply to 3 percent in 2008, compared with a 9 percent growth rate in 2006 and a 6.5 percent growth rate in 2007.
Looking ahead to 2009, the luxury goods market is expected to face its first recession in six years, as exchange rate fluctuations and economic turbulence eat into the confidence of many luxury consumers in mature markets. The study predicts as much as a 7 percent decline in global luxury sales for 2009 using constant exchange rates, in contrast to a possible 2 percent decline when using current exchange rates.
"The impact of the financial crisis will bring some sectors into a recession," said Claudia D'Arpizio, a Bain partner based in Milan, Italy, and lead author of the study. "How much and how long depends in part on how companies react. The most resilient will be those with strong international and diversified brands."
Since mature markets contribute nearly 80 percent of worldwide luxury sales, soft spending in each region is already taking a toll:
—The Americas, which saw 4 percent growth in luxury sales in 2007, will be flat year-over-year in 2008. This will be the first year of stagnation since spending retreated after Sept. 11, 2001. The impact of the "super euro" combined with the sub-prime crisis is taking consumers out of the more accessible segments of the market, which includes brands such as Tiffany and Coach.
—Europe remains the "first market" of luxury, representing 38 percent of the global market and turning in a record-setting 10 percent growth rate in 2007; however, the region can expect its growth to slow to 5 percent in 2008. Much of the region's growth both this year and next will be propped up by Eastern Europe.
—Japan's luxury market, 12 percent of the global total, is already in a luxury goods recession, decreasing by 2 percent in 2007 and by 7 percent in 2008. A weak yen versus the euro in 2007 has pushed Japanese luxury consumers toward smaller-ticket items such as fragrances and shoes, which drives down average ticket prices. The consumption crisis deepened in 2008, although the yen recovered versus the euro, showing a real recession.
Other findings of the study include:
—Jewelry sector growth has dropped from 9 percent in 2007 to 2.5 percent in 2008 as jewelry sales in both Europe and the Americas have cooled.
—Watches (9 percent growth) seem to be the only category resilient to the economic downturn, largely due to emerging markets that are driving growth (watches are usually the first luxury item to be purchased in emerging economies).
—Apparel growth will slow to near 0 percent in both menswear and womenswear.
—Accessories are still the kings and queens of the luxury market. Growth in shoes (8 percent) and leather goods (4 percent) will show strong growth in 2008. The "accessorization" process is ongoing: Consumers show strong willingness to concentrate their luxury spending on accessories that differentiate their look as fashion-conscious, now focusing more on shoes than on leather goods.
Despite a slower 2008 and the prospect of declines in 2009, Bain predicts that the luxury market will return to growth quickly as more and more consumers enter the luxury segment worldwide.
D'Arpizio suggests luxury goods players follow three rules to capture additional growth during the industry's upswing:
—Improve consumer targeting: Re-think the shopping experience and drive growth through localized marketing activities.
—Push for organic growth: Slow down retail expansion and strengthen entry price offer while selectively increasing other prices. Avoid increasing prices across the entire product offering.
—Build a smart cost culture: Hunt for profits (in working capital, G and A, supply chain), but avoid cutting strategic costs (marketing, creativity). Don't under-spend versus competitors.
"Brands have to resist the temptation to cut back on things like creativity and developing a premium shopping experience," D'Arpizio said. "As with the downturn at the beginning of this decade, brands that cut overhead costs while investing in their customers and products will be in the best position to recover strong year-over-year growth once the economy improves."
Bain and Co., in cooperation with Altagamma, the flagship trade association for the Italian luxury goods industry, analyzed the market and financial performance of 220 of the world's leading luxury goods companies and brands for the study. The methodology is based on a bottom-up development of brand retail turnover and market evaluation.
For more information about Bain and Co. visit its Web site, Bain.com.
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