The changing luxury market

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Olivier Abtan

An Associate Director at the Boston Consulting Group, Olivier Abtan specialises in the luxury market, picking apart its trends and shifts for institutional players. As the sector enters a new era, he explains how it is changing and what brands need to do to adjust.

Being is more important than owning: experiential luxury comes to the fore

Luxury is changing. “The market has been reinventing itself in recent years, with impetus from several key trends”, begins Olivier. He cites rapid growth in “experiential” luxury, as contrasted with material products, as a pivotal factor. “Nowadays, when we ask consumers what luxury is, they spontaneously think of experiences, like hotels, trips and restaurants, rather than watches and handbags.”

He offers two reasons for this shift. First, a growing number of Western consumers – now joined by more and more Chinese consumers – are losing interest in traditional luxury products. “By now, the baby boomers who created this industry and backed its growth for decades have acquired plenty of luxury goods. So now they’re on the hunt for something different, a new kind of exclusiveness, which in some cases may be intangible.” Second, he points to the arrival of millennials on the market, who are increasingly acting as the engine for growth. “Millennials are used to having everything right away. For them, usage is more important than the product per se, and they are ready to pay whatever they have to, especially in Asia.” Reflecting this situation, purchases of luxury goods account for “just” $320 billion of a global market estimated at $860 billion. Olivier adds: “As they say in the States, ‘being is more important than owning’.”

Meanwhile, over the last ten years the sector has witnessed the emergence of three major trends: segmentation, casualisation and customisation are shaping luxury as we know it today.

Segmentation can be traced back to the swift rise of affordable luxury as a reaction to consistently high pricing in the established luxury segment. “Over the space of a few years, luxury brands jacked up their prices, leaving behind more accessible pricing brands in different product categories. This enabled many brands to position themselves successfully on the segment, including Coach, Michael Kors, Isabel Marant and Alexander Wang.” Casualisation is about the emergence of a more relaxed style of luxury, which has become huge in the ready-to-wear category. “Amidst a crisis in formal wear, brands such as Moncler and Golden Goose quickly carved out a place with luxury down jackets, jeans and sneakers. Even established brands like Dior and Gucci have launched down-to-earth streetwear-inspired lifestyle collections.” Customisation, meanwhile, has become a core trend across all luxury sectors: “Whether you’re talking apparel, cosmetics or services, people are looking for something unique; they want products that are tailored to them and no-one else, which explains the success of brands that are ramping up their bespoke solutions.” A prime example is Fred, whose Force 10 bracelets and accessories can be personalised to match whatever the customer wants. “You can choose the colour of the clasp, the type of material used, the length of the cable and even the design. Force 10 has been one of the brand’s biggest successes to date”, Olivier points out.

Digital is king in a tailor-made land

While the luxury market is driven by multiple dynamics, it has nevertheless come to a turning point: “For a long time, growth was powered by baby-boomers, then Japanese consumers and, more recently and spectacularly, by Chinese buyers. With these markets reaching maturity, growth is still robust but has cooled, and brands must constantly reinvent themselves to stay appealing and impose themselves.”

To do that, digital is critical, observes Olivier. “The luxury industry used to steer clear of e-commerce, viewing it as synonymous with mass distribution – the very antithesis of exclusiveness and rarity, which are core luxury values.” But now e-commerce has become a preferred buying channel for consumers: “Online sales are rising by more than 20% every year, and we expect them to account for 40% of market growth in luxury products in the coming years.” Which makes investing in digital vital not only to boost sales overall but also to capture and hold onto new consumers. “A full 70% of the customers of luxury companies are new every year, but just 10-15% of these new faces stay on as customers the following year. So as natural store traffic starts to dwindle significantly, brands need to promote themselves online, notably though social media, recruit online and drive qualified traffic to stores through click & collect programmes, e-reservations and e-appointments.”

Another key factor in brand success is personalising customer relationships. “The luxury market has become volatile, with brands lurching from roaring success to steep decline. This explains the importance of having stable and sustainable customer relationships on which to build loyalty.” Digital can offer a decisive edge here as well. “Brands can use digital to gather large volumes of data on consumers and personalise relationships with each individual customer.” Olivier gives the example of Sephora, which has made customer relationship management (CRM) a central component of its online and offline strategies. “The website uses an algorithm, powerful recommendation engines and customised messages to match customer tastes. In-store sales staff have great knowledge of their customers’ histories, which they use to provide outstanding assistance.”

“The pace is picking up”

While he cannot predict what lies ahead for luxury, Olivier is sure of one thing: brands, whether newcomers or established players, global or local, will have to continually renew themselves to survive and thrive. “The pace is picking up on the luxury market. Fashions come and go all the time, amplified by the internet and social media, which is why some brands do very well for a few years and then suddenly nosedive.” What is the common denominator in such performances? “A failure to ask questions of themselves, particularly on the creative front, and a lack of innovation. The days when a CEO and Artistic Director would work together as a team for decades are over. Luxury brands have to adapt to keep up with the ever-quickening pace. That is the only way they can secure their long-term future.”

Innovation | December 2017