50M emerging consumers accessible though entry-level products: Bain

The personal luxury goods market will likely continue to sustain its growth through the end of the decade, according to a new report by Bain & Company.

The report predicts 2-3 percent growth through 2020, but notes that the rate is dependent on China continuing to grow at its current pace. In China as well as elsewhere, this growth will come from emerging middle class shoppers and the Y and Z generations.

"The future market scenario will be inevitably shaped by luxury brands' strategic decisions across various levels," said Claudia D'Arpizio, a Bain partner and lead author of the study. "While customer strategy, branding and story-telling, omnichannel distribution and pricing remain at the top of the CEO agenda for luxury companies, the best brands also implement 'locally global' value propositions and develop, grow and retain best-in-class talents to win in a more sluggish market."

A growing market

In the next four years, Chinese shoppers alone are expected to comprise more than one-third of global luxury consumers, a proportion higher than either the North American or European continent. An additional 50 million new consumers will enter the market, largely from China’s middle class and the millennial generation, while Gen X spending continues to increase.

Additionally, Generation Z will enter the luxury market for the first time, helping to edge the composition of generations X, Y and Z in the market to 75 percent.

Image courtesy of Luxury Aircraft Solutions

Ecommerce has a projected CAGR of 15 percent, while outlet and airport channels are not expected to take off as soon and suddenly as some have predicted. They will account for about 15 percent of the market combined, while retail channels will constitute 40 percent.

Of course, realizing this growth and bringing the personal luxury goods market to the projected $313-330 billion level will require effective marketing from brands. Bain suggests a handful of key actions for luxury brands that will help to capitalize on the wave of new consumers.

First, brands should invest in personalized in-store experiences for customers and locally tailor a value proposition, which will help both in reeling in new consumers and in maintaining or reinstating former customers.

Second, brands need to re-think their distribution methods with an eye toward growing ecommerce. Bain suggests more vertical pricing strategies, with high-priced brand-building products creating desire among the emerging middle class, who are then served by less expensive, smaller items to initiate them into the brand.

Chanel ecommerce

Third, rather than relying on China’s affluents to find the brand overseas, brands need to democratize pricing internationally to encourage local spending.

In March 2015, French fashion house Chanel became the first to align global pricing for its signature handbags, an action that allowed the brand to move toward ecommerce.

The fashion house created equal pricing for three of its handbags, which significantly raised the prices in certain regions and dropped them in others. The harmonization helps reach consumers in their home markets rather than requiring them to travel to a country where the brand is prominent (see story).

Entry-level
Bain foresees incremental drops in bricks-and-mortar sales, but reframing the conversation around new in-store concepts can help the channel thrive.

Physical retail is not dying, but brands need to adjust to consumers’ digitally informed expectations.

“Architecture: Building and Brand Extension” panelists at Financial Times’ Business of Luxury Summit 2016 May 23 focused on the shift in physical retail into an experiential and lifestyle component unique to each location, a shift from the uniform, more identifiable layout that many still associate with retail. Listening to and monitoring consumers will allow brands to maintain focus on the customer experience, which can then manifest itself in an in-store environment conducive to shopping (see story).

Additionally, markdown goods are projected to make up a smaller percentage of sales in 2020 than they did in 2015. Currently, discounting is seen as a way of bringing in new customers, who will ideally “graduate” to the full-price store as their income increases.

Department stores have been aggressively expanding their outlet retail footprints to capture discount sales from aspirational consumers, but are these off-price stores doing more harm than good?

Discount stores enable a retailer to reach more consumers at varying price points, but a growth strategy that favors off-price bricks-and-mortar may in time hurt the full-line store’s luxury image. This requires a delicate balancing act for retailers to retain their branding, positioning and pricing strategy (see story).

As distribution channels are recalibrated to match the growth of the digital economy and as unified commerce enables optimal management of inventory and wholesale purchasing for department stores, mass discounting should gradually slow. The emerging middle class can then be won over through entry-level products, which will have the same introductory effect without diminishing brand reputation.