Now that the era of double-digit growth has passed, the luxury sector will need to adopt different, more digitally enabled strategies.
The €250 billion luxury industry is dominated by a handful of big European conglomerates, such as Paris-based LVMH, which owns numerous brands including Louis Vuitton and Dior, and Kering, the owner of Gucci. Along with a layer of medium-sized companies, the industry includes a slew of small businesses, many family-owned. Together, European manufacturers account for about 70% of all production in the industry.
Luxury firms have grown by branching into new markets wherever economic prosperity yielded crops of deep-pocketed consumers. China in particular fuelled the industry’s most recent expansion. However, this trend is reversing under President Xi Jinping, who discourages displays of wealth and has curtailed shopping sprees abroad with heavier duties. Additionally, Chinese consumers are losing their appetite for luxury goods. The market reportedly shrank last year.
Globally, the industry’s challenge now is to adapt to slower growth. A central question is whether the conglomerates, small or medium-sized luxury firms are best positioned to do so successfully. The outcomes will shape the future of the luxury sector. Conglomerates obviously have greater resources, enabling them to secure the most advantageous spots in shopping malls, invest more in marketing, and cut costs by sharing back-office services, for example.
Some analysts believe that for others, consolidation is the way to go, and that independent firms like Hermès or Prada should join big groups. The latest argument for doing so, as The Economist notes, is “the imperative to go digital”. Luxury firms have been slow to adopt digital strategies; after all, they were doing fine without them. Also the nature of luxury goods, including the shopping experience, is such that far fewer are purchased online. But inevitably, this is changing.
Michele Norsa, former CEO of Italian shoemaker Salvatore Ferragamo, says that new online shopping habits within the luxury sector are being led by young consumers. Online markets for second-hand luxury goods as well as luxury rentals, for example through websites like Rent the Runway, are a growth area. As latecomers, big luxury firms are looking for their slice of the pie.
More consolidation is expected, both because the industry is slowing and because in the online world, data is essential. Traditionally, luxury brands within groups have guarded their customer information from one another. However, LVMH is launching a shared digital platform, and also plans to adopt more omnichannel approaches, which combine online and in-store shopping.
Luxury firms are coming around to the idea that a strong online presence is now a matter of survival. Olivier Abtan of the Boston Consulting Group in Paris says big groups are probably in the best position for digitisation, since they have the means to acquire the right talent. Mid-sized firms also need to bring in digital talent, which will be harder for small firms. In every case, luxury goods firms will need to understand as much as possible about consumers and their digital habits.
