There are three underlying themes that are fundamentally reshaping the global dynamics and the business playbook for luxury brands
1- Online will soon surpass all other luxury sales channels
Global lockdowns in 2020 and 2021 were the perfect stepping
stones for online luxury sales channels to prove their worth. Early digital
adopters saw exponential growth, while latecomers were forced to rapidly adapt
and (finally) embrace digital. The share of online sales nearly doubled for
personal luxury goods, growing from 12% in 2019 to 22% in 2021, reaching $70.1
billion.
In 2022, online luxury sales will continue to outpace most
other channels across all industries. Even the luxury car category will see
online sales growth. It’s now not a question of if but when will online sales
surpass all the other luxury sales channels to drive the most revenue for the
industry.
Global consultancy group Bain & Company forecasts that
online sales will indeed become the single biggest channel for personal luxury
goods by 2025, making up 30% of the global market, followed by monobrand
physical retail stores (28%), outlet stores (14%), specialty stores (11%),
department stores (11%), and travel retail (6%).
Websites and mobile apps are indeed the new dominant sales
channels for most brands. Considerable work has been done to improve user
experience online and build trust by reassuring customers that returns and
exchanges can be done seamlessly.
Interestingly, we also see brands increasingly driving sales
through their own websites. Gucci, for example, is increasingly empowering
customers to purchase goods from their directly operated stores, with a focus
on ecommerce, instead of relying too heavily on online multibrand retailers
like FARFETCH and NET-A-PORTER, reflecting the luxury House’s strategy of
gradually enhancing the exclusivity of its distribution network.
Luxury brands’ direct online sales now account for 40% of
the online segment, compared to 30% in 2019, driven by improvements in
ecommerce, exclusive collections, and more marketing budget allocated to the
category.
The online channel growth also shows how important the
younger customer demographic has become for the global luxury industry. Gen Z
and Millennials are indeed the industry’s growth engine.
2- Millennials and Gen Z Drive Luxury Growth at Accelerating Rates
Without a doubt, Millennials (Gen Y) and Gen Z customers
will continue to assert their position as critical growth levers for the luxury
sector in 2022. And this generational shift will only accelerate in the coming
years.
Together, these younger generations of affluent consumers
are set to account for 70% of the luxury market by 2025 and contribute 130% of
luxury market growth. Yet, they are still underserved by many luxury brands.
Collaborations such as Gucci x Balenciaga, Fendi x Versace,
and Tiffany x Supreme are testaments to some level of realisation of the
importance of these younger cohorts by legacy luxury brands and proof that
brand collaborations haven’t reached oversaturation yet.
As the largest segment of luxury buyers, these next-gen
affluent consumers are already rewriting the luxury rulebook with their
value-driven expectations and digital-infused lifestyles.
To grow, luxury brands must understand how to relate to and
win over these younger generations. It’s not just a question of pivoting at
speed in an ever-evolving market but also a capacity to shift their business
mindset.
Indeed, these younger cohorts are digital natives and both
creators (they want to co-create with brands) and critics: they love to seamlessly
engage with online content and are expecting luxury brands to operate at their
high standard.
With a vested interest in giving back and being among the
most vocal and socially active consumers, younger generations (Gen Zers perhaps
even more so than Millennials) also value authenticity and integrity from
brands. Sustainability, in particular, cannot be an afterthought; it must be
honest, transparent and backed by action.
Thus, for luxury brands to remain in sync with younger
global luxury consumers, they need to communicate their stances on
environmental, ethical and social issues and most importantly deliver on these
goals.
3- The $725 Billion question: What Will China Do?
Chinese affluent consumers will come back to driving the
majority of worldwide luxury sales between 2022 and 2023, but things might be
about to change.
In 2020 and 2021, we saw for the first time domestic luxury
sales in China surpassing international sales due to travel restrictions.
Domestic sales accounted for 21% of global sales in 2021 versus just 11% in
2019. In parallel, we also saw US domestic sales surpassing Chinese domestic
sales, growing from 22% in 2019 to 31% of worldwide sales in 2021.
Bain expects Chinese consumers to surpass their previous
share of global luxury goods sales to reach 40% to 45% by 2025. Based on our
projections, that would represent $725 billion worth of sales being driven by
Chinese consumers, out of a total market of $1.69 trillion.
The consultancy group predicts that the growing middle-class
desire to purchase luxury goods will be sufficient to drive that growth. We
think the market is facing significant headwinds, however. Particularly with
China’s political focus on “Common Prosperity” goals and the resulting pressure
exercised on affluent consumers to minimize external signs of wealth.
Add to the political changes the growing desire by Chinese
consumers to buy from local brands and you have a challenging scenario for
global luxury brands that rely too heavily on China to generate sales. The
rebound in the US and European sales offer a hint of optimism for a more
balanced outlook on worldwide sales between the three regions, however.