The Future of Luxury Retail

“Living in the lap of luxury isn't bad except that you never know when luxury is going to stand up.” (Orson Welles)

Faced with a global collapse driven by lockdowns and the shutdown of tourism in all key markets, the luxury industry faces a challenge like never before. After falling by an estimated 25 percent in the first quarter of 2020, the slowdown should accelerate in the second quarter and could lead to an estimated contraction of between 20 percent to 35 percent for the full year.

China has begun to lead the way toward a recovery and Chinese consumers are set to cement their status as crucial drivers of the industry, accounting for nearly 50 percent of the market by 2025. Luxury purchases made online have increased throughout the crisis and the online channel could represent up to 30 percent of the market by 2025.

The global personal luxury goods market will need years to recover from a Covid-19 induced downturn. This year alone could see €100 billion wiped off face of market, which will take up until 2022 to recover.

The results paint a gloomy picture for the market. Barring the financial crisis, personal luxury goods is an economic segment that has been on a steady growth trajectory for decades now, surpassing €281 billion over the course of last year. Thriving luxury markets in the Americas and Europe, combined with a rapidly advancing Asian luxury goods market have all been responsible for this growth.

The Bain and Altagamma report finds that the first quarter of this year has already generated 25% less value than the first quarter of last year, amounting to a cut of €20 billion. “A strong start to the year in all key regions (Mainland China, Europe, America) was quickly offset by the imposition of lockdowns and the collapse of tourism, which amplified the decline in Europe. Luxury sales in Japan and the rest of Asia also declined, albeit at a slightly slower pace and the consumer mood globally remains subdued,” write the authors.

It will take time for the market to recover. Bain & Company anticipates that a recovery to 2019 levels will not occur until 2022 or 2023. Market growth will resume gradually from then on, reaching an estimated €320-330 billion by 2025.

Chinese consumers are set to confirm their place as the most important buyers of luxury, accounting for nearly half of all purchases worldwide by 2025. As a region, mainland China will account for 28 percent of the luxury market, up from 11 percent in 2019.

The online channel, already experiencing double-digit growth in 2019, will continue to gain share and account for up to 30 percent of the market by 2025. This goes hand-in-hand with the younger generations (Gen Y and Gen Z) becoming the majority of the luxury market.

These are some promising indicators for the market. However, the sector that was previously being touted for glittering growth in the near future is now tasked with steadying the ship and staying afloat.

According to Federica Levato, Bain & Company partner and report co-author, personal luxury goods companies must take charge of their survival and recovery. “The speed of future market growth will depend on luxury players’ strategic responses to the current crisis and their ability to transform the industry on behalf of the customer.”

What will the luxury market look like in 2025?

Faced with a crisis like never before, luxury players will need to act now to create their future. Every aspect of the market, from creation to distribution, marketing to supply chain, and crucially the interaction with the final customers will need to be re-imagined to suit a changed world.

Even though online sales of luxury goods are expected to cannibalize the brick-and-mortar share over the next few years, the importance of the physical store continues to increase.

Companies are following different strategies to augment their retail experience in the days of eCommerce.

Interestingly, digital-born luxury companies are now opening physical stores to increase traffic to their eCommerce stores, enhance brand legitimacy, provide the touch-and-feel lacking in an online store, and improve local community engagement.

An overall Luxury 4.0 model is emerging, which is characterized not only by the growth of the online sales channel but also by the digitalization of a consumer’s entire luxury shopping journey.

The luxury industry has been associated with excessive consumerism and a general lack of respect for the environment. However, with the growing influence of millennials and Generation Z, who deeply consider the social impact of their luxury purchase, the industry is gradually moving towards ethical and sustainable products and experiences. The increasing popularity of casual apparel, the growing demand for experiential luxury, rentals, and the rising share of online sales and accessories are other important market trends.

Spending by millennials from Mainland China, both at home and overseas, is one of the main drivers of the global luxury market. Mainland China currently has around 400 million millennials, five times more than the U.S., and they are expected to make up around 65% of the region’s consumption growth by the end of 2020. International tourism is another driver, with a 2017 Deloitte study showing that global tourists account for almost 47% of luxury goods purchases. The recent rise in luxury menswear has resulted in brands such as Prada, Gucci, and Dolce & Gabbana, which traditionally have not been known for their menswear lines, opening stores focused only on men.

Revenue in the Luxury Goods market amounts to US$4,598m in 2020. The market is expected to grow annually by 7.6% (CAGR 2020-2025). The market's largest segment is the Luxury Fashion with a market volume of US$2,649m in 2020.

In the Luxury Goods market, 9% of total revenue will be generated through online sales by 2020.

Brian Walker is founder and CEO of Retail Doctor Group, a retail advisory and consultancy group and the Australian elected partner member of the global retail expert’s alliance Ebeltoft Group.