OBSERVER NEWS

Luxury Goods: A Global Outlook for 2016

BY TEA IVANOVIC

As we are steadily moving into 2016, there are three global macro trends that are of major importance to the industry, and they have been evolving rapidly in the past couple of months. These are not style trends, but rather tectonic shifts that will undoubtedly influence the way we view fashion and the luxury good industry in the coming months and years.

As a multi-billion dollar industry, luxury goods make up a significant portion of many countries’ gross domestic products and gross national products (according to some reports, luxury goods account for 3% of total European GDP). The effects of digital marketing and e-commerce are huge. Increasingly, more companies are investing in their social media presences and expanding or establishing product lines that cater to the online shopper. Secondly, creative designers are leaving their posts, with a never-before-seen series of firings and hirings in recent months. The companies that can establish long-lasting working relationships will likely be able to increase their revenues amidst a global economic slowdown. Asian retail in particular has been problematic, and the region is expected to experience slower economic growth compared to last year. The luxury goods industry is not immune to global economic malaise, and especially Europe’s cyclical stagnation. However, on a more positive note, the changing global environment opens up possibilities for creative investment as well as opportunities to attract a new consumer, especially in Asia: the emerging middle class.

The industry is experiencing a dramatic shift towards digital media, highlighting the importance of technological advancement. Even a couple of years ago, social media platforms such as Twitter, Instagram and Snapchat, were either non-existent or simply considered irrelevant. Today, they have become prime portals for consumer engagement and celebrity advertisement. In the first half of 2015 alone, the luxury industry saw a 9 percent increase in online presence according to a report by Exane Paribas. The competition to stay ahead is fierce, with several brands upgrading their e-commerce platforms noticeably in the last year. Overall, Burberry, Fendi, Loro Piana and Dior have made the greatest improvements in terms of digital marketing and strategy. LVMH brands, with the exception of Céline, are slowly catching up with early adopters, while Kering’s brands have shown more consistency in performance, perhaps due to its e-commerce partnership with Yoox.

Certain brands are still offering a traditional customer experience Louis Vuitton and Prada still don’t sell ready-to-wear via e-commerce, and Chanel has traditionally limited its e-commerce to fragrance and beauty. While Asia in general, and China in particular, are the new hotspots for luxury goods revenues, many traditional sellers have not yet expanded their e-commerce business into China, a move that is likely in the future. The issue is that a move into China is a huge leap, which cannot be done in any marginal manner. Overall, online geographical coverage has grown 13 percent, but brands are on average reaching only 36 percent of their potential. Important countries currently being ignored include South Korea, Russia, India, the United Arab Emirates and Brazil.

There is a discernible trend of designers leaving either getting fired or voluntarily departing their posts as the creative faces of highly regarded fashion brands, and it is affecting sales. Brands such as Versace are exceptions in the industry, as an international fashion powerhouse largely family-owned and operated. Founder Gianni Versace, who unveiled his first fashion collection in 1978, was murdered in 1997. His sister Donatella and brother Santo took over. Donatella’s daughter Allegra owns a 50 percent stake in the company. According to a news report in The Wall Street Journal, revenues rose 17 percent to €548.7 million ($595.9 million), while net profit grew 27 percent to €26.3 million in 2014. Chief executive officer Gian Giacomo Ferraris, under whom profits have risen nearly 28%, has said that the secret of Versace’s growth model lies in the fact that “both in emerging and mature markets, we are often under-penetrated.”

One of the reasons for Versace’s stable growth despite difficult macroeconomic conditions lies in the stability of its creative leadership. While the trend of changing creative directors has haunted the fashion industry in recent times, Versace remains true to its family roots. Elsewhere, in the last six months alone, head designers have departed from Balenciaga, Berluti, Dior, Lanvin and Zegna. The marriage of the creative end to the corporate headquarters is too important to underestimate. Under Hedi Slimane, Saint Laurent revenues grew more than 20% each year from 2012 to 2014, according to a report by Sanford C. Bernstein. Reports by the Business of Fashion have indicated that a true long-term collaboration between a designer and a house such as Phoebe Philo at Céline (eight years), Tomas Maier at Bottega Veneta (15 years) and Riccardo Tisci at Givenchy (11 years), usually yields a much higher chance of creative and commercial impact.

A faltering economy has prompted several international retailers to rethink their strategies in Asia, even though many are staying put with their investments. However, not all reports seem gloomy. Goldman Sachs analysts have upgraded their recommendations on Louis Vuitton owner LVMH, and Kering, the group behind Gucci and Saint Laurent. LVMH went to “buy” from “neutral,, and Kering has been upgraded to “neutral” from “sell.” Goldman is still expecting luxury sales growth to slow down in China, but analysts are forecasting Chinese luxury spending to grow at 6 percent in 2016, despite being down from 10 percent in 2015. Even though the Asian market is becoming more difficult to penetrate, new strategies are likely to pay off. The emerging middle class in China has a strong desire for “status” luxury brands, even though their ability to spend is less than the country’s ultra rich. Therefore, companies will have to look at selling “affordable luxuries” to this class of consumers. The industry is rapidly changing, but change is not always a bad thing, especially for those who are willing to adapt.

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