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29 March 2024

Luxury sector feels pinch of crisis

Published
By DUBAI Staff

The world of luxury is also hit by the fiscal reality gloom around the globe, reveals a survey by Bain & Company.

The worldwide 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, revealed the seventh edition of Luxury Goods Worldwide Market Study.

The study predicts as much as a seven per cent decline in global luxury sales for 2009 using constant exchange rates, in contrast to a possible two per cent decline when using current exchange rates. Ironically, this may be the first in history, say the authors, that currency fluctuations may have a positive impact on luxury market growth.

The sector will enter a recession in 2009, but an emerging section of high net worth individuals in countries like Brazil, Russia, India and China will keep the luxury sector afloat, which would have otherwise felt a bigger dent, according to the authors of the study.

A surge in spending by these high net worth individuals on luxury goods over the next five years is ranging between 20 per cent and 35 per cent in emerging markets. Coupled with the strength of several worldwide trends, such as increasing personal wealth in all markets, growth expectations in global GDP and increasing tourist flows, fuel optimism for the long-term outlook of the worldwide luxury goods market.

The study finds that the growth of global luxury goods sales will slow sharply, to three per cent in 2008, reaching €175bn. The slower growth rate stands in stark contrast to the nine per cent growth seen in 2006 and the 6.5 per cent growth seen in 2007. Turning to 2009, luxury faces 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 impact of the financial crisis will bring some sectors into a recession," said Claudia D'Arpizio, a Bain partner 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."

Traditional luxury markets around the globe contribute to 80 per cent of the segment and have already taken a big toll to dip the luxury sector.

Japan was the first country from the region to officially announce the recession contributes to 12 per cent of the global luxury market. The country has recorded a decrease of two per cent in 2007 and further seven per cent 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, as pr the study.

Europe has always remained the "first market" of luxury, representing 38 per cent of the global market and turning in a record-setting €6bn growth (10 per cent) in 2007. Though the region can expect its growth to slow by half to five per cent in 2008. Much of the region's growth both this year and next will be propped up by Eastern Europe.

The Americas, which saw four per cent growth in luxury sales in 2007, will be flat year-over-year. This will be the first year of stagnation since spending retreated after September 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.

The study also reveals some stunning figures in product category predicting either a slowdown in some categories and even a complete halt in the growth of certain other segments.

Apparel industry is grounding to a halt by the end of 2008 as it gets hit by other segments that are eating into it. The middle fast-fashion segment is growing at aspirational levels and is eating into the high-end apparel industry.

Even while aspirational and absolute brands were best in class in 2007 (9.9 per cent and 8.5 per cent), other luxury categories are stealing share from apparel while fast-fashion steals share from all but brands' first lines. First lines are over-performing (eight per cent): fast-fashion players are stealing share from second and third lines.

Europe remains the market for womenswear, accounting for the bulk of the absolute growth in the product segment while Asia (17.6 per cent) and rest of the world (14.9 per cent) are the fastest growing.

Jewellery sector growth has dropped off from nine per cent in 2007 to 2.5 per cent in 2008 as jewellery sales in both Europe and the Americas have cooled.

Watches (nine per cent) seem to be the only category resilient to economic downturn, largely due to emerging markets which are driving growth (watches are usually the first "luxury item" to be purchased in emerging economies).

Accessories are still the kings and queens of the luxury market. Growth in shoes (eight per cent) and leather goods (four per cent) will show strong growth in 2008. The 'accessorisation' 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.

Fragrance growth will be cut in half in 2008 to 2.6 per cent, while cosmetics will be less impacted by the weak 2008 holiday season. Year-over-year growth for cosmetics in 2007 and 2008 remains steady at three per cent.

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.


Unevenness prevalent

The study reveals unevenness across brand segments:

- Consumers of 'Accessible' brands, characterised by affordability, status and membership, and represented by such brands as Coach and Ralph Lauren, are directly affected by the current global economy. The segment is significantly under-performing the market, growing only four per cent in 2007 versus 2006 and estimated to be flat in 2008.

- 'Aspirational' brands, such as Gucci and Louis Vuitton, are purchased by consumers looking to buy into the lifestyles these brands represent. Their growth remains steady in 2007 (nine per cent) as new consumers enter and leave the luxury segment, and will be aligned with market growth in 2008 (three per cent).

- 'Absolute' luxury brands, like Hermes and Loro Piana, stay resilient, as their elitism and brand heritage appeal to the wealthiest clients: 10 per cent in 2007 and eight per cent in 2008.