expenditures. Direct retail operations are essential to luxury goods brands: Luxury mega-brands have an interest in “escalating the race” for direct-retail operations, in order to further leverage their scale advantage. Escalating into larger, richer, more prominent and ultimately more expensive directly operated stores (DOS) allows mega brands to awe consumers even more and to extend the distance in consumers' minds between the mega brands and everything else. Downstream integration into profitable DOS allows mega brands to push the envelope on entry price points and to lead the way in globalization.
The luxury goods industry is currently estimated to be valued at around US$320 billion, which includes jewelry, watches, leather goods, wines and spirits, perfumes, and apparel. The recent trend shows that luxury consumers are looking for brands that will help them to develop themselves through a unique and sensual experience and provide them with an emotional state of mind. These consumers wish to own something authentic, with a heritage and with personalized style. Luxury items must combine historical quality with the trendiest designs, which would also be a means of self-expression. For example, Bulgari is known for its classical chic design sensibilities, with jewelry pieces of voluminous precious stones for traditional clients and a modern, simpler, trendier line for younger clientele.
In general, luxury wines and spirits account for the largest part of luxury sales at approximately 30 percent, fashion and clothing accessories account for 20 percent, and premium fragrances and cosmetics account for 18 percent, followed by the watches and jewelry sector at 15 percent and premium handbags and travel goods at 6 percent.
One of the major trends facing the luxury goods industry was that of consolidation. Many of the major players in the industry have, since the 1980s, been transformed from small family-owned businesses into global powerhouses. This has resulted in a profound shift in the way in which many luxury companies are managed today. Such luxury conglomerates are driven by the bottom line, and the companies who dominate are able to exploit synergies across brands and product categories.
The power of the conglomerates is underscored by the struggling small independent brands, the fashion doyennes of yesteryear, such as Pierre Balmain, who filed for bankruptcy, and Ungaro, which was sold in 2005. Nevertheless, consolidation has not always been successful even for the large companies such as LVMH, whose earnings from Louis Vuitton are often eroded by the losses from the less-than-successful brands.
In the wake of September 11 and the Iraq war, the luxury goods industry faced one of the worst downturns for three decades, finally rebounding in 2004 when many companies in the industry posted a 10 to 15 percent increase, finally returning to the black. Since then, other major events such as the subprime mortgage crisis, Japanese earthquake, and Eurozone financial crisis have occurred, though the luxury market had been relatively untouched. The future outlook for the industry remains relatively positive while Mintel forecasts that the luxury goods industry will see market growth of 10 percent for 2012, although it expects growth rates to slow in the following two years to nearer 6 percent. Similarly, Bain is forecasting growth for the world market of 4–6 percent from 2013–2015 at constant exchange rates, bringing the total value of the luxury industry to US$320 billion by the middle of the decade.16
Developed Markets
The largest market for luxury goods is in Europe, which accounts for 33.7 percent of the world's expenditure, followed by Japan with 28.4 percent and North America with 24.6 percent. Yet, the Asia Pacific region accounts for the largest sales of leather goods. Although these nations are strategically important, these markets are becoming increasingly mature.
Emerging Markets
Changing conditions in the world's two most populous nations, India and China, followed by the emergence of a market in Russia present renewed growth opportunities for luxury brands. It is estimated that within 10 years these three nations will account for 30 percent of the world market. The increasing liberalization of the Chinese and Russian economies has resulted in an increase in average consumer purchasing power and the number of high-net-worth individuals. In fact, the average spending per consumer in China is on a par with Japanese spending. This has important implications for luxury brands, as the large population base can translate into a significant increase not only in consumer numbers but in revenues as well. This was the case for the Chinese market in particular.
Conclusion
In conclusion, there is no single definition of luxury. The definition is in the mind of the connoisseur of luxury goods. The definition is dynamic. What is luxury today for some may not be luxury for others and, with time, may even not be considered as luxury. For this reason, luxury goods have prospered in time. The evolution of the luxury goods market has witnessed the shifting sands of time, from the Romans, Egyptians, Chinese, and Indians to the Italians and the French through the formation of the multibrand conglomerates. With globalization and the growth of emerging markets, the markets have gone East. Hong Kong, Shanghai, Singapore, Beijing, and Tokyo have the most sizeable concentrations of luxury and affordable luxury brands. This is a distinct trend that is here to stay. Consolidation of the luxury market is also here to stay. In addition, the rise of emerging market luxury brands will be a force to reckon with in the future. The luxury market is open to new definitions and new discoveries. The rise of affordable luxury brands both from the West and the East will open new possibilities and opportunities. New brands will emerge and new markets have emerged making the industry more enigmatic than ever.
Chapter 3
Who's Who of Luxury
The top six players in the luxury industry – LVMH, Richemont, Kering, Swatch, Tiffany, and Hermès – account for 30 percent of the industry turnover.
Moreover, luxury goods have traditionally been associated with France and Italy, with Italy producing one third of all of the world's luxury goods, making it the largest luxury-goods-producing nation. Italy was the birthplace of famous brands such as Armani, Moncler, Prada, Zegna, and Ferragamo, to name just a few.
The multibrand conglomerates with revenues in excess of US$1 billion are LVMH, Richemont, Kering, Swatch, Hermès, and L'Oréal.
Similarly, there exist star monobrand companies with revenues in excess of US$1 billion, for example, Burberry, Chanel, Tiffany, Armani, Ralph Lauren, and others. While many of these companies operate under only one brand name, they compete in a variety of product sectors. Table 3.1 gives the details of the mono- and multibrands.
Table 3.1 Leaders in the Multibrand and Monobrand Luxury Sector
The Consumers
By 2005, luxury goods were no longer exclusive to high-net-worth individuals. Worldwide, 7.7 million people have the purchasing power to buy prestigious goods for themselves. Globally, women represent the largest purchasers of luxury goods; they account for 80 percent of cosmetics and 70 percent of fashion. The consumer profile is evolving. Men also are spending on luxury products that portray quality, service, prestige, and gracious style. The brands have given birth to a need that does not exist and created an image that can seduce. Middle-class consumers are increasingly seeking quality and designer clothes. For example, recent trends show luxury consumers are purchasing one Brioni suit for $3,000 rather than three ordinary suits at $1,000 each. These consumers are both quality- and price-conscious and weigh their options on pleasure and aesthetic.
The last few years have witnessed a shift from the traditional affluent target consumers to a broader and younger audience. This phenomenon was driven by the conspicuous consumption movement, influenced by celebrities' endorsements of luxury goods. This meant that younger consumers were accessing the luxury market by purchasing small price-point items like
Bain & Company press release, October 12, 2012. www.bain.com/about/press/press-releases/bain-projects-global-luxury-goods-market-will-grow-ten-percent-in-2012.aspx.
