After briefly falling lower in favor last year, the luxury market has reached a “new normal” pattern of growth thanks to more spendy Chinese consumers and the age of Millennialism.
We now know that experiences are winning over things when it comes to consumer spending, but as Bain & Company notes in its fall 2017 luxury study, experimenting with experiences will be key to succeeding in the personal luxury sector.
To put some numbers behind the notion that experiences have outpaced personal goods when it comes to designating disposable income, the compound annual growth rate (CAGR) of personal goods between 2010 and today is just 6 percent, compared to 11 percent growth for experiences.
The focus for growth going forward will be the youth—who have been the main growth engines for restoring luxury shopping to healthier standing. Millennials and Gen Z have fueled roughly 85 percent of luxury market growth in 2017, according to Bain.
“Millennials are entering the market with clear tastes and behaviors, influencing other generations,” the report noted, adding that the market that’s making up 30 percent of consumer spending on luxury is, “responsive and engaged beyond expectations, amplifying their spending and advocacy.”
[Read more about luxury: Luxury Retail is Tapping Into a New Secret Weapon to Defeat Amazon: Women]
Volume has also helped drive luxury market growth, which is expected up 7 percent by the end of this year. Readjustments in price mixes have offset increases in unit price. By category, accessories still command the bulk of the sector, accounting for 41 percent, with apparel making up 26 percent. Beauty and hard luxury, each still command less than 20 percent of the market, are witnessing the greatest growth and, according to Bain, “rapidly gaining share.”
But more than millennials and volume, a rising Chinese middle class keen to spend on life’s luxuries, are outpacing growth by more than double in every other part of the world.
By the time 2017 comes to a close, Bain estimates that growth in luxury spending in China will have grown 15 percent over last year, while the rest of Asia and Europe will see 6 percent growth, Japan 4 percent, 2 percent for the Americas, and 1 percent in the rest of the world. By value, the Americas still remain luxury’s largest market, with spend expected to hit 84 billion euros ($97.7 billion) this year, whereas despite its sizeable growth, the luxury market in China still fetches a much lower 20 billion euro ($23.3 billion).
“Chinese consumers [are] continuing to grow, both as enthusiast international shoppers and as local consumers,” Bain’s report noted, adding that consumption has been particularly booming this year with renewed consumer confidence and healthier fundamentals, like lower price differentials from one market to the next.
This year, Chinese consumers will account for 32 percent of global luxury consumption, up from 30 percent last year, while U.S. consumers will account for 22 percent, down from 23 percent last year.
To capitalize on these young and indulgent shoppers, companies will have to consider their stores as “episodes of the brand narrative, to impress and reassure the customer simultaneously,” the report noted. Channels are starting to come together to form integrated ecosystems around the consumer, to do things like leverage online as a 360-degree support platform for physical channels.
And those physical channels will need the support as online continues its exponential growth, because the number of physical stores will shrink from 91 percent of the market to 75 percent by 2025, while online moves in much the opposite direction.
The online luxury sector is having its moment, with growth estimates pegged at 24 percent by the end of the year, and online’s market share in retail will reach 25 percent by 2025, up from 9 percent this year.
The physical store will have to become the epicenter of the brand—but it will also have to be curated to the consumer, it should allow them to experience their passions, and it should feel like a shared community with shared values.
Brands and retailers should take the “insider abroad, stranger at home” approach to reaching customers in stores. Shop concepts should be adjusted to include location-specific product offerings, and the exchange should be an experience rather than a transaction, so that the customer can feel welcomed and recognized everywhere. For the “tourist at home” side of the equation, multiple store formats across the city should have frequently refreshed assortments in a relaxed environment that lets the shopper feel like they’re in a different place, though they haven’t left home.
“Consumers don’t want to just listen to brand stories, but want to live the story,” the report noted.
Looking ahead, Bain expects a 4 percent to 5 percent annual growth rate for luxury by 2020.
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