Barclays Downgrades Luxury Sector Amidst Stalling Chinese Economic Revival: A European Perspective On The Path Forward

Recent downgrades of the luxury sector by Barclays and 德意志银行 were largely attributed to the stalling economic recovery in China. The article explores the resilience of brands like Hermès and Moncler, the underlying risks in the Chinese market, and the European principles of luxury communication. Summit Communication Group offers a very European perspective on how luxury brands can navigate these uncertain times while growing their inherent brand value.

The Chinese Market: A Double-Edged Sword

The Chinese luxury market has long been a cornerstone for global luxury brands. However, recent economic indicators suggest that even the most affluent spenders are becoming increasingly cautious. Barclays ' recent downgrade of the luxury sector from "positive" to "neutral" is a telling sign. The bank also lowered its guidance for 酩悦·轩尼诗-路易·威登集团 , viewing it "as a proxy for the sector."

德意志银行 followed suit, lowering the consumer products segment to "underweight" due to luxury companies' exposure to the Chinese market. The report titled "Adjusting to a new normal" by Barclays reflects the deteriorating macro indicators from China and the gradual return to more normalized growth.

The Resilient Few: Hermès and Moncler

Interestingly, Barclays maintained an "overweight" rating for Hermès and Moncler . Hermès , with its supply-constraint business model and over-indexation to Very Very Important Customers (VVICs), is expected to outperform its peers. Moncler, benefiting from a high price gap between China and Europe, is poised to gain market share as Chinese tourists return to Europe.

The power dynamics are clear: the brand is the master, and the customer is the willing servant. This is not a relationship built on arrogance but on a mutual understanding of the brand's inherent value. The brand dictates the terms of the relationship, setting the rules, and defining the boundaries. This authority creates an aura of mystery and allure around the brand, making it irresistibly attractive to those who aspire to be part of its exclusive world.

Luxury brands often employ subtle but effective strategies to differentiate between their high-value and low-value customers. Take Armani, for example, which has specialized stores for its various product lines, ranging from the ultra-luxurious Giorgio Armani to the more accessible Emporio Armani . This segmentation serves to create a hierarchy within the brand's customer base, ensuring that high-value customers receive an experience commensurate with their status.

The Underlying Risks

China's ongoing crackdown on various sectors has led to a change in consumer behaviour. Affluent shoppers are less keen on flaunting their wealth, choosing to "not stand out," as per the Barclays report. Luxury is not a mass-market commodity; it is an exclusive club. And like any exclusive club, not everyone should be allowed in. By maintaining a sense of selectivity, luxury brands enhance their allure. This doesn't mean alienating potential customers but rather ensuring that those who engage with the brand are genuinely aligned with its values and aspirations. This selective approach creates a sense of community among brand loyalists, making them feel like part of an exclusive world. However, Barclays remains optimistic about the sector's long-term growth prospects, citing the industry's resilience during past crises such as the global financial meltdown and COVID-19.

"In luxury business, you have to build on heritage." Bernard Arnault, Chairman & CEO, LVMH

The principle of scarcity is fundamental to luxury communication. Take Ferrari , for example, which deliberately limits its annual production to fewer than 6,000 cars. This self-imposed scarcity serves a dual purpose: it ensures that each car remains a coveted, hard-to-obtain item, and it drives up demand, adding to the brand's mystique. In the luxury sector, less is often more. By controlling supply, a brand can manipulate demand, turning each product into a rare and valuable asset.

The European Principles of Luxury: A Perspective by Summit Communication Group

The Art of Scarcity

The very notion of 'positioning' is anathema. Luxury brands exist in a unique space that defies comparison. Unlike mainstream brands, which often rely on comparative metrics to establish their value, luxury brands are self-sufficient entities. Their value is intrinsic, built over years or even centuries of craftsmanship, heritage, and brand storytelling. The allure of a luxury brand doesn't come from how it stacks up against competitors but from how it stands alone, unparalleled and unrivalled.

"The luxury market has changed and will continue to do so. We need to anticipate and not just respond to this transformation." Johann Rupert, Chairman, Richemont Group

In contrast to the mass-market approach, European luxury brands have long understood the power of scarcity. Limited editions, waiting lists, and exclusive previews are not just marketing gimmicks; they are strategic tools that add an aura of desirability and prestige to a brand.

The Narrative of Heritage

European luxury brands are masters of storytelling. They don't just sell products; they sell a legacy, a tradition, and a vision. This narrative is deeply rooted in European culture, where history and heritage are not just past but are living entities that shape the present. Advertising is not a tool for driving sales but a platform for brand storytelling. The focus is not on the product's features or price but on the emotions it evokes and the world it represents. Luxury advertising is often abstract, artistic, and open to interpretation, inviting the audience to become co-authors of the brand story. This nuanced approach to advertising serves to deepen the emotional connection between the brand and its audience, turning customers into brand advocates.

"Luxury is attention to detail, originality, exclusivity and above all quality." Angelo Bonati, Former CEO, Panerai

卡地亚 , often referred to as the "jeweller of kings," has a rich heritage that dates to 1847. The brand has served royalty and celebrities, and each piece of jewellery is crafted with a level of expertise that has been honed over decades. This strong sense of heritage and tradition is a key part of Cartier 's brand identity, making it a true luxury brand.

Luxury brands often have a rich history and a strong sense of tradition. This heritage is not just a marketing tool but a testament to the brand's commitment to quality and excellence. Customers are not just buying a product; they are buying a piece of history, a slice of a legacy that has been built over years, if not decades.

The Cult of Craftsmanship

The European luxury sector places an enormous emphasis on craftsmanship. The meticulous attention to detail, the hours of labour, and the artisanal skills that go into each product are not just selling points but are the very essence of the brand.

"Luxury is the balance of design, in the sense of beauty and highest quality." Domenico de Sole, Former President & CEO, Gucci Group

Counterintuitively, raising prices can actually increase demand in the luxury sector. This is because higher prices often enhance the perception of value and exclusivity. Over time, as the brand becomes more established and its products more coveted, it can afford to increase prices without alienating its customer base. This strategy not only boosts the brand's bottom line but also serves to maintain its high-end positioning.

The Power of Exclusivity

In a world awash with options, European luxury brands offer something that money alone can't buy: exclusivity. By targeting a niche audience and offering bespoke services, these brands create a sense of belonging among their customers, which is far more valuable than any product. While customer feedback is valuable, it should never dictate the direction of a luxury brand.

"Luxury is a necessity that begins where necessity ends." Coco Chanel, Founder, Chanel

The essence of luxury lies in its exclusivity and its ability to lead rather than follow. A luxury brand is built on a vision—a vision that should remain uncompromised. When customers buy a luxury product, they are buying into this vision. They are not just purchasing an item; they are acquiring a piece of the brand's world. Therefore, the brand must remain steadfast in its vision, even if it means occasionally going against customer preferences.

The Strategy of Silence

While the world screams for attention, European luxury brands understand the power of silence. They don't engage in loud advertising campaigns but let the product speak for itself. This quiet confidence is not just an aesthetic choice but a strategic one, allowing the brand to maintain its allure and mystique. While luxury brands target a niche audience, their messaging often resonates with a broader demographic. This is not accidental but a strategic move designed to create aspiration. By communicating to those who aspire to own the brand one day, luxury brands build a pipeline of future customers. This aspirational branding strategy serves to broaden the brand's appeal without diluting its exclusivity.

Summary

The luxury sector is a complex landscape, especially in the face of economic uncertainties. However, it's precisely during these times that the European principles of luxury communication come into play. These principles, which have been successfully deployed by Summit Communication Group across our client portfolios, serve as a compass for brands to maintain their desire and exclusivity. By embracing the art of scarcity, the narrative of heritage, the cult of craftsmanship, and the power of exclusivity, brands can not only survive but thrive in an ever-changing global market.

Members of the press and industry leaders frequently ask Torsten Müller-?tv?s, CEO of 劳斯莱斯汽车 , ‘Where is the next China?’, referring to this market’s size and significance within the luxury sector. Given that this expansive and diverse country represents one of the biggest regions in the world by volume and Bespoke for their brand, his answer is simple, "China is the next China".

"Quality is remembered long after the price is forgotten." Aldo Gucci, Former Chairman, Gucci

The luxury sector is not immune to economic downturns, but it has shown remarkable resilience in the face of adversity in an ever-changing social world.

Written by Gregory Gray , CEO and Founder of Summit Communication Group on 23 September 2023

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