The global luxury goods sector is set for a powerful rebound and will outperform pre-pandemic levels this year, but Europe lags behind in the absence of tourists’ purses, consultancy Bain has said.
Global sales of personal luxury goods – which include fashion, cosmetics, perfumes, watches, handbags and jewellery – are set to reach €283bn (£242bn) this year, up 31 per cent, at constant exchange rates, from their pandemic dip of €220bn last year.
This also represents a 4 per cent increase on 2019, before the pandemic hit, reflecting consumers’ pent-up demand for luxury goods to showcase as they emerge from forced periods indoors.
During the height of the pandemic, overall sales in the luxury sector dropped by 23 per cent in 2020 – their largest-ever fall and their first decline since 2009, according to Bain’s analysis.
But the consultancy was confident about the sector’s profitability recovery, and forecast the industry average margin before tax (EBIT) will almost double in 2021 to 21 per cent – in line with pre-pandemic levels in 2019.
“The changes in the luxury industry over the past 20 years have been remarkable, and the emergence from the Covid crisis comes as a renaissance for luxury brands,” said Bain partner and lead author of the study Claudia D’Arpizio.
“Where once it was all about status, logos and exclusivity, luxury brands are now actors in social conversations, driven by a renewed sense of purpose and responsibility.”
Globally, younger customers (Gen Y and Gen Z) are the key drivers behind the growth of the luxury sector and the increased focus on brand stories and sustainability credentials. Bain forecasts they will make up 70 per cent of the market by 2025.
Meanwhile, the personal luxury goods market could reach between €360 and €380bn by 2025, with a sustained annual growth of 6-8 per cent, according to Bain’s estimates.
Europe struggles without tourist spend
Europe was overtaken by the United States this year as the largest luxury goods market, fuelled by a surge of consumers shopping locally for luxury goods while international travel curbs remained in place.
Bain values the American luxury market size at €89bn this year after growing 13 per cent, outsprinting Europe’s €71bn luxury market value.
European luxury sales are yet to return to pre-Covid levels and could take until 2024 to fully rebound, Bain forecast, despite some tourism resuming over the summer.
The consultancy predicts the European luxury market value will decrease by 19 per cent by the end of the year, as the lack of tourist cash erodes fairly strong domestic spending.
Taking into consideration the overseas spending of Chinese tourists abroad pre-Covid – which represented around 17-20 per cent of global luxury sales in 2019, according to Citi Research – it’s easy to see how European recovery has suffered in the absence of their buying power.
Analysts at UBS expect a return of overseas spending in Europe “as soon as the Chinese consumer can travel again – the latest in the next 2-3 years.”
Burberry struggles to keep up with competition
This trend was reflected in Burberry’s first half results this morning, which sent shares tumbling almost 5 per cent today after the UK’s only large luxury goods group failed to upgrade its full-year sales forecasts.
It was a disappointing reception after Burberry’s first half profits beat forecasts and the group reinstated its interim dividend, having posted an adjusted operating profit of £196m – ahead of its previous forecast of £181m.
But the group’s sales have underperformed compared to brands belonging to rival major European luxury groups during the period.
Sales in Europe were still down 31 per cent on pre-Covid levels in the absence of tourists, and sales in the Asia Pacific region were down 5 per cent in the second quarter, beneath consensus estimates of 3 per cent growth.
This has a significant impact on the company’s market share, Bernstein analyst Luca Solca told City AM, as the group ranks lower on the “consumer desirability league” than other mega-brands.
“It was easier for brands like Louis Vuitton, Hermès or Chanel to recapture all of the Chinese demand [in their home market] than it was for brands like Burberry. De facto, buying in China is tantamount to a price increase, because prices in China are higher than in Europe,” Solca said.
“Hence, Chinese consumers concentrated their luxury dollars on “must have” brands, rather than on second tier brands like Burberry,” he added.
Big in China
Industry heavyweights LVMH, Hermes and Kering have recently reported a powerful rebound from the pandemic, with sales overtaking 2019 levels.
Although their investors have been wary of imminent curbs on conspicuous consumption in China, these groups largely cited in their latest results calls that their sales are driven by upper middle class Chinese consumers, rather than billionaires.
This made them relatively bullish about their resilience in the face of President Xi Jinping’s “common prosperity” policy decisions going forward.
And from a brand strategy perspective, analysts at UBS believe: “The key ingredient for luxury brands to succeed in the Chinese market remains the ability to tailor their story telling to resonate with the local culture.”
They point to Kering’s biggest brand, Gucci, as having boosted sales by spearheading strong communication with millennial Chinese consumers – a trend its rivals are now catching up with.