The stellar growth of the luxury industry’s global groups slowed considerably in 2013, in the wake of dampening enthusiasm from Asian consumers, volatile exchange rates and a raging battle for customer loyalty in an ever more competitive marketplace.
Yet despite a chorus of caution from investors and executives, some bright spots are appearing. The Americas again became luxury’s largest growth market, fuelled by rebounding economic optimism and a roaring tourist trade. Emerging markets beyond the Brics, once underpenetrated and underestimated by the industry old guard, are providing a new wave of opportunities at home and abroad.
Here are a few themes that could define the industry’s agenda in the coming year.
M&A moves up a gear
After a year that saw LVMH buy Loro Piana and Kering buy Pomellato, analysts expect luxury M&A to step up in 2014 as conglomerates seek to offset slowing sales at mega-brands such as Louis Vuitton and Gucci.
The new year will start with the Versace family deciding on a sale of 20 per cent of their closely held company. Blackstone, CCMP and Italy’s state Fondo Strategico are in the running. Santo Versace, the Milanese brand’s non-executive chairman, has said a decision will be made by mid-January.
As in past years, Italy’s feted independent brands top analysts’ lists of potential targets. Armani, Dolce & Gabbana, Ermenegildo Zegna, Tod’s and Brunello Cucinelli are among those names being drawn up by industry watchers. In France, Chanel remains the most coveted elite brand.
Executives say Chopard, H Stern and David Yurman could be targets for LVMH, Kering or Richemont as they seek to beef up in the fast-growing jewellery industry.
However, translating interest in such family firms into a buyout is difficult unless there are succession problems and a dire need for outside capital. It took LVMH 10 years to woo Bulgari, which it eventually bought in 2011 when the family owners decided they needed outside capital to grow.
Brunello Cucinelli recently told the FT that his business is his passion and is not for sale, reflecting a widely held feeling among self-made fashion entrepreneurs.
For those brands intent on retaining their independence but wanting more capital to grow, a stock market listing is the more probable outcome. Raffaele Jerusalmi, chief executive of the Milan stock exchange, predicts a wave of listings in Italy’s fashion capital next year. After the record first day trading of Moncler in December – the Franco-Italian skiwear maker’s shares rose 50 per cent – industry insiders say more companies are taking a look at the bourse.
The great fall in China
2013 was the year the plug was pulled on luxury’s roaring run in China. According to a study released this month by Bain & Company, Chinese luxury growth over the previous 12 months slipped to just 2.5 per cent – a sharp slowdown from the 7 per cent recorded in 2012.
With a now cooling macroeconomic climate, the industry’s great fall in China looks set to continue. The government’s crackdown on ostentatious gift-giving has weighed heavily on watches and menswear sales, both of which were once important drivers of double-digit growth.
Despite significant investment by some of the world’s leading brands in glossy stores and staff training, mainland Chinese consumers continue to spend heavily outside their home nation; Bain reported that 67 per cent of all Chinese luxury purchases this year were made overseas.
The country’s overall clout in the sector is not diminishing – Greater China now accounts for a quarter of Louis Vuitton’s revenue, 35 per cent of Cartier’s, and a whopping 45 per cent of Omega’s, according to Exane BNP Paribas. But as customers develop a more sophisticated awareness of luxury, many have become more selective about the products they are buying, causing headaches for established kingpins.
LVMH was stung in its latest quarterly earnings by Chinese brand fatigue for flagship label Louis Vuitton, while Prada attributed weaker than expected third-quarter profits to “moderated growth, notably in Greater China”.
Many companies are looking to 2014 as a year of stabilisation with a conservative outlook on expansion, raising product prices and focusing on the maintenance of current retail operations. The exceptions lie on opposite ends of the market spectrum; ultra-luxe labels such as Bottega Veneta will increase their presence, as will more players from the “accessible luxury” field, such as US accessories group Coach.
America: land of the free spending
For many, the return to form of the US luxury market in 2013 was a shock, after several years flailing in the wake of the 2008 financial crisis. The US remains the world’s number one nation for luxury goods consumption.
An October study by Altagamma and Bain & Company said luxury spending in the Americas had risen 4 per cent this year to €69bn, boosted by brand expansion in many of the US’s largest cities, strong online sales and renewed consumer confidence.
Euromonitor International reported that the highest-grossing category was premium clothing, with Americans spending $29.5bn on apparel in the past 12 months.
Unlike their mass-market counterparts, luxury brands including Prada, Tiffany and Burberry have been reporting accelerated sales in the Americas, with many expecting continued strength over the critical 2013-14 holiday period.
“Many of these companies are providing big beats, and these results show that the upscale shopper from mature markets continues to power on globally, particularly in North America,” noted Rahul Sharma, analyst at Neev Capital.
There will be several key battlegrounds in the coming year. Some of the fiercest competition will come online, where companies will continue to compete for ecommerce market share and social media visibility as services such as Facebook and Instagram increase advertising opportunities. Discount and factory outlets will provide a healthy sales backbone for several domestic premium retailers including Coach and J Crew, especially from tourists hailing from Asia and Brazil.
The year ahead will showcase the latest round of the US department store wars. In January, former Harrods chief merchant Marigay McKee will take up her post at the helm of Saks, with a $250m refit of the flagship Fifth Avenue store first on her agenda. Meanwhile, Neiman Marcus, under new owners Ares Management, says it will invest $100m in developing “omnichannel” operations.
‘Accessible luxury’ takes a larger piece of the pie
After two decades of seeing luxury as a monolithic and highly profitable sector, many investors began realising in 2012 that a brand-by-brand approach was required. Throughout 2013, the “hi-lo” divide between the industry’s key groups became more pronounced.
High-luxe yet ubiquitous European brands such as Louis Vuitton and Gucci have struggled to maintain sales momentum in the slowing Asian market, while so-called “accessible luxury” labels – many hailing from the US – have soared to new heights. This looks set to continue.
Michael Kors – welcomed last month into the S&P 500 – has produced consistently strong global returns, though rivals including Ralph Lauren, Tory Burch and J Crew have also recorded steady growth, particularly in newer markets. These companies share a “pyramid” business model: a luxury collection at the top that rests on a base of less expensive diffusion or outlet lines providing the bulk of profits.
Particularly in recession-hit Europe, this mix has proved popular. Michael Kors’ European sales doubled in the last quarter, with comparable growth expected in 2014. These companies plan to expand their retail presence in the region next year, capitalising on the gap in the market left by traditional upmarket European brands who, as they eyed up Asia, lost the loyalty of local shoppers.
UK high street retailer Karen Millen announced it was moving into accessible luxury territory next year, while smaller brands such as rag & bone, flush with investor cash, are attracting attention from the all-powerful Asian consumer looking for new ways to present a cooler, more individualistic look than those offered by luxury’s old guard.
Countries to watch
As traditional markets struggle out of the global recession and the Brics experience fresh turmoil, brands and investors alike have their eyes fixed on the latest economies emerging as luxury’s latest sales hothouses for 2014, writes Elizabeth Paton.
Thailand, Malaysia and Vietnam are fast becoming core drivers of domestic and tourist spending growth in southeast Asia as national birth rates fall and discretionary spending ticks up.
As China sales slacken, many brands are looking to Africa as the next region for double-digit growth, although many markets remain small.
Tax-free shopping specialists Global Blue noted that Nigerians would be the UK’s fourth-largest luxury spenders during the Christmas season. MAC, Ermenegildo Zegna and Hugo Boss are looking to be early movers on the ground, with recent openings in Lagos.
There are some surprises in the mix too. Australia – with the ninth-largest concentration of wealthy individuals globally – is proving highly lucrative, and brands are expanding their retail operations accordingly.
Canada, not a nation traditionally associated with flashy luxury spending, has proved economically resilient in the years since the downturn. Canadian retailer Hudson Bay acquired Saks Fifth Avenue for $2.9bn in July with the intention of rolling out the premium department store brand on home turf.
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