Contrary to popular belief, the luxury sector does not perform badly when the economy is in a downturn. It is recession-proof and does better. Sales CAGR for the 2007-11 period for Hermes has been at 15%, Gruppo Prada at 16% and LMVH at 9%. The luxury market is highly correlated with the demand from Chinese customers (the largest growth market) and currency fluctuation. With air travel becoming affordable year on year and over 400 million citizens from developing economies expected to enter the middle class in the next three years, opportunities for Luxury brands to tap into new markets in Asia looks even more feasible.
Jet fuel prices dropped by 20.4% in July 2016 compared to the same period a year ago. Airlines are likely to come up with special travel packages for global luxury goods shoppers. On top of the low flying cost, Euro has been plunging in value from 2015, dropping to a low of 1.05 against the dollar in March 2015, and continuing to hold low at 1.11 in July 2016.
The Fall-Winter 2015 Worldwide study on Luxury Goods confirms the trend. In Europe, there was a 64% increase in purchase for high-end luxury goods courtesy of the Chinese shoppers while the Americans dominated even the Chinese with a 67% growth in spending. Japanese customers, who cut their spending by 16%, and Russians, who with less disposable incomes, froze the spending by 37%, were the only two exceptions.
What happened to the Chinese Shoppers?
From the high of 30% growth in 2012, the Chinese spending in Luxury goods dropped to 7% in 2013, primarily driven by a change in consumer spending habits, a slowdown in Chinese economy and a nationwide campaign to discourage officials from accepting luxury goods as bribes. Underneath all the reasons, there was a bigger factor. The Chinese government eased visa restrictions from 2012, and the results were immediate. In 2012, China led the charts in the number of outbound travelers with double-digit growth ever since, reaching 109 million in 2015. With the ease of travel and low jet fuel cost, Chinese shoppers found luxury products in Europe to be 30-40% cheaper than the ones in Hong Kong or even tier-2 and tier-3 cities in mainland China. The multi-brand online retailers with free shipping and a liberal exchange policy captured a loyal customer base. The ‘Single’ brand stores are slowly turning irrelevant.
What is the future for the Luxury Goods and Services sector?
USA is facing a general slowdown in Luxury Market since most customers are taking advantage of the weak Euro and dodging the strong US $ surge that we have seen since early 2015. Other than a weak Euro, Europe is reeling with the after-effects of Brexit and increased terrorist incidence. Nothing scares the tourist more than events of violence. With just 3% growth rate in 2015 for the region, primarily from local demand, expect the growth to be shakier in 2016. After three years of slowdown, China is finally making a comeback with a growth of 4% at fixed exchange rate for 2015. The big surprise was from Japan with a 7% growth, but 2016 would reverse the trends with Yen getting stronger and pushing the Chinese tourists to more affordable luxury markets and even to Hong Kong that saw its dollar falling below the Yen in April 2015.
Considering the important role that marketing message and strategy would play in the future, an MBA in Luxury Management would position applicants effectively in this lucrative Business. As Europe is the epicenter of the luxury goods industry, most of the top programs are located there. The region offers experiential learning and industry contacts for fresh graduates.
Here are our top four picks for Luxury Management Program + Long-Term Growth Potential for Luxury Industry
Reference: Bain & Company
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