Even the rich cut back during tough economic times, a new report from Bain & Company underscores.
Growth in the worldwide luxury goods market is expected to slow substantially by year-end, to 3 percent, a steep fall from 6.5 percent in 2007 and 9 percent in 2006, according to Bain’s annual Luxury Goods Worldwide Market Study.
What’s more, in 2009 the luxury market faces its first recession in six years. Bain forecasts as much as a 7 percent decline in global luxury sales next year using constant exchange rates, or a possible 2 percent decline when using current exchange rates. (This may be the first time in history that currency fluctuations have a positive impact on luxury market growth, said Bain.)
“The impact of the financial crisis will bring some sectors into a recession,” said Claudia D’Arpizio, a Bain partner based in Milan and lead author of the study, commissioned by Altagamma, the Italian association of Italian luxury goods companies. “How much and how long depends in part on how companies react. The most resilient will be those with strong international and diversified brands.”
Looking further out, however, Bain is very upbeat. It predicts a surge in spending by high-net-worth individuals on luxury goods over the next five years, ranging between 20 percent and 35 percent growth in emerging markets, including Brazil, Russia, China, and India, due to increasing personal wealth, growth expectations for global GDP, and increasing tourist flows.
Japan, which accounts for 12 percent of the global luxury market, is already in a luxury goods recession, with demand for luxury goods retracting by 7 percent this year following a 2 percent decline in 2007, according to Bain. “A weak Yen versus the Euro has pushed Japanese luxury consumers toward smaller-ticket items such as fragrances and shoes, which drives down average ticket prices,” the firm explained.
Europe, which represents 38 percent of the global market, racked up 10 percent growth in 2007 but is expected to see that rate cut in half this year. “Much of the region’s growth both this year and next will be propped up by Eastern Europe,” Bain noted.
In the Americas, luxury sales are expected to be flat this year after climbing 4 percent in 2007. This will be the first year of stagnation since spending retreated after September 11, 2001, according to Bain.
Bain also noted that there is a big difference between luxury brand segments based on price points.
For example, it says sales of “Accessible” brands (characterized by affordability, status, and membership, and represented by such brands as Coach and Ralph Lauren) is expected to be flat in 2008 after growing by 4 percent in 2007.
Growth of “Aspirational” brands, such as Gucci and Louis Vuitton, is predicted to slow to 3 percent in 2008 from a strong 9 percent in 2007. “Absolute” luxury brands, like Hermes and Loro Piana, are expected to hold up the best. Growth is expected to “slow” to 8 percent from 10 percent in 2007.
Broken down by category of goods, Bain predicted that apparel growth will be just about flat in 2008 and 2009 in both menswear and womenswear.
Bain said it expects jewelry growth to slow to 2.5 percent in 2008, from 9 percent growth in 2007.
Fragrance growth is expected to be cut in half in 2008 to 2.6 percent, while cosmetics will be less affected by the weak 2008 holiday season. Year-over-year growth for cosmetics in 2007 and 2008 remains steady at 3 percent, according to Bain.