debt crisis of major banks and economies of Europe, in which the Dow Jones lost about 50 percent of its value. Other such crises that affected the world include the South American debt crisis of the 1980s, known as the “lost decade”; the Asian financial crisis of 1997; the Russian crisis of 1998; and the European debt crisis that started in 2010 and has taken an enormous toll until the present moment.
Like financial crisis, political crisis may affect the economy and have an effect on industries, including the luxury industry. Examples of political crises are the Cuban Missile crisis, the Falkland crisis, the Iraqi invasion of Kuwait and the following intervention by the United States in 1990, and the terrorist attack in 2001. In 2011, the governments of Tunisia and Egypt were overthrown by revolutions and Libya saw a regime change after a civil war that was supported mainly by France and the United Kingdom. More recently in 2013, the election results of Beppe Grillo's Five Star movement in Italy combined with the EU's decision on tax issues in Cyprus have fueled disbelief in the democratic problem-solving capacity of the EU and its members.
Natural disasters such as the tsunami in Asia in 2004, the Tōhoku earthquake and tsunami that caused a meltdown at the Fukushima nuclear plant in Japan in 2011, and the typhoon Bhopa in the Philippines in 2012 had devastating effects on the local economies.
The Luxury Industry
Past crises have had different impacts on varied groups (be it luxury conglomerates or independent luxury houses) at different times; this could be attributed to the exogenous and endogenous characters of the economic cycles. Nonetheless, the 2009 financial crisis was global in nature; it ultimately evolved into the Eurozone crisis and in 2014 is still continuing to affect the major countries in both Europe and America.
To understand the effect of crisis in the luxury industry, luxury must first be divided into (1) hard luxury, such as watches and jewelry; and (2) soft luxury, such as fashion. A more comprehensive definition of the luxury industry includes products and services such as wine and spirits, food, travel, hotels and spas, technology, and cars. Among the most well-known luxury brands are Louis Vuitton, Hermès, Gucci, Cartier, Porsche, Ralph Lauren, Rolex, Tiffany, Armani, Burberry, and Ferrari. In 2012 the worldwide market for luxury grew more than 4 percent over 2011 to a massive €212 billion. In 2013 the worldwide market for luxury grew over 2 percent over 2012 to a massive €217 billion.1
During 2009–2013, this industry felt the impact of the crises. Luxury consumers changed, and so did the industry, with the rise of luxury multibrand conglomerates such as LVMH of Bernard Arnault, Kering of Francois Pinault, and Richemont of Johann Rupert, which were formed by the acquisitions of traditional family-run brands. Other luxury brands (usually family-owned) that resisted being taken over by the aforementioned conglomerates also grew alongside the conglomerates. The family brands protected their brand heritage and DNA; in addition, they purchased their suppliers and integrated vertically. They focused on brand equity, investing heavily in international expansion while repurchasing franchises and licenses to gain more control over their retail operations. Figure 1.2 depicts conglomerates that have a portfolio of brands selling different product categories (LVMH), conglomerates with many brands on one product category (Estée Lauder), companies with one brand and only one product category (Rolex), and houses with one brand with many product categories (Chanel).
Figure 1.2 Where Conglomerates Fall in Different Brand and Product Categories
Due to the oligopolistic nature of the luxury industry, there arose intense competition among the handful of competitors. The most important driver for luxury brands to succeed was, thus, dependent on the disposal income of its clientele, which translated to consumer buying power. The disposable income of high-net-worth individuals had increased during the preceding 10 years. As society become relatively more affluent, consumers with disposal income were “created” through advertising to create an artificial demand for products beyond the individual's basic needs.
Reaction to the Crisis of Global Markets
On one hand, the luxury industry is said to be recession-proof2 due to the noncyclical nature of the industry. This belief may be attributed in part to the change of consumer behavior in the United States and the broadening of the luxury consumer base, fueled by an increase in the disposal income of high-net-worth consumers. Another argument in favor of noncyclicality was the fact that luxury customers are generally the happy few who are not affected by economic crises and continue spending at the same levels.3 Both arguments, to a certain extent, are supported by the quick recovery of the luxury industry after the financial crises of 2001 and 2009. Figure 1.3 illustrates that over a 14-year period, the main players in the luxury industry could weather the effects of crises.
Figure 1.3 Revenues of the Main Players of the Luxury Industry, 2000–2013
On the other hand, democratization of the luxury goods industry whereby companies created accessible products, the noncyclicality of the luxury industry, is a questionable proposition. In the recent recession that started in 2007, the picture looked grim for the luxury industry. Bain & Company estimated that the sector lost 10 percent of its revenues in 2009. Reports from Bain & Company and Italian luxury goods traders Altagamma after a close watch indicated that luxury sales slumped to 5 percent in 2013 as compared to 13 percent in 2011 due to the debt crisis, which has currently gripped Europe since 2010. The growth of foreign tourism shopping in Europe slowed down to 18 percent in 2013, compared to 28 percent in 2012. Figure 1.4 depicts the effects of these two recessions, showing that the luxury firms are not immune to the slowdown in growth and revenue that follow each crisis.
Figure 1.4 Revenues of the Main Players of the Luxury Industry as a Percentage of the Previous Year, 2000–2013
The economic crisis had deeply affected the luxury world, but in a way that was somewhat predictable. For many years, the luxury brands were undergoing constant growth, and no one thought they could be affected by a world financial crisis. They thought quite the opposite, in fact. The general opinion was that these losses would soon be overshadowed by the perennial story of growth and profitability.
The sales figures from countries across the globe were interesting to observe in the light of the above discussion. In fact, the crises of 2009 and 2010–2013 helped us to better understand the luxury world. Most interesting was the behavior of consumers. Countries that were considered to be the homes and strongholds of the luxury planet were affected.
Japan
Japan was a star of luxury for 25 years, beginning in the 1980s. It represented 30 percent of sales for Hermès in 2005, at least 35–40 percent for Louis Vuitton, and up to 41 percent of the worldwide luxury goods market. Japan had been always a place where luxury shopping was considered to be an occasion. At the time of the global financial crisis, Japan represented about 50 percent of the clients of all key luxury brands. Up until 2005, luxury companies forged their futures with Japanese consumers in mind. For example, 94 percent of Japanese women in their twenties owned a Louis Vuitton handbag; 92 percent owned products from Gucci; more than 58 percent owned a Prada item, and over 51 percent possessed a product with a Chanel label on it. Traditionally, this market had been impervious to recession. Most major companies like LVMH, Hermès, Richemont, Kering, and Coach made supernormal profits in Japan until 2009. Two local crises hit the Japanese economy: the earthquake and resulting tsunami and the Fukushima nuclear meltdown.4 Since Japan accounted
Compared to the size of the luxury industry in 2014, no formal industry existed even during the 1980s. The luxury industry was an island where a happy few dwelled, unaffected by the worries of life.
Forbes, “Luxury Is in Crisis, Yet Luxury Brands, Tiffany's, LVHM Still Report Sales Growth,” 2011.
