Heavily impacted by the covid-19 crisis, the luxury goods industry will have seen a double-digit sales decline in 2020 with profitability hard hit, highlights a report from Bain & Company published this month. However, the market is set to bounce back by 2022-2023 thanks to online sales, the China market and a new generation of “activist” consumers encouraging brands to rethink how they do luxury.
The personal luxury goods market will have contracted 23% to €217bn this year, the largest drop on record, according to the 19th edition of the Bain & Company Luxury Study released with Italian luxury goods manufacturers’ association Altagamma. The overall luxury market, meanwhile, which encompasses both luxury goods and experiences, will have seen a similar decline and is now estimated to stand at around €1 trillion.
The second quarter of 2020 was the worst-ever for the sector, although signs of recovery were seen in the third quarter. While heavily dependent on how the health crisis plays out and additional government restrictions, Bain says that the most likely outcome is a -10% year-on-year drop in the fourth quarter.
Profitability has been disproportionately impacted, highlights Bain, with operating profit expected to decline by 60% in 2020 compared with 2019, from an average margin of 21% down to 12%.
A bright spot, online shopping is to become the leading channel for luxury purchases by 2025. It now accounts for 23% of the market, almost double the 12% registered in 2019, increasing from €33bn in 2019 to €49bn this year.
By region, China will have been the only market to have ended the year in positive territory – sales are forcecast to grow 43% to reach €44bn, with local consumption seeing a strong uptick across all channels, categories, price points and generations. At the opposite end of the scale, Europe will have seen consumption fall 36% to €57bn, the Americas down 27% to €62bn, and Japan decreasing 24% to €18bn.
But it’s not all doom and gloom: the global market is forecast to return to 2019 levels by the end of 2022/2023. Experienced-based goods, which include fine wines & spirits and fine foods, are expected to see a quicker recovery than personal luxury goods. Local consumption is also expected to remain high. While the share of purchases reached 80-85% in 2020, going forward it is expected to represent between 65% and 70% as domestic purchases retain relevance, especially in China and the wider Asia region.
The market’s current woes represent accelerated potential for the industry’s transformation, highlights Bain. Consumers are increasingly looking for luxury brands to demonstrate “real and sustained” commitment to sustainability, inclusion and diversity. These are hot topics for the younger generation, who are set to drive the lion's share of market growth from 2019 to 2025.
“By 2030, this industry will be drastically transformed. We will not talk about luxury industry anymore, but of the market for insurgent cultural and creative excellence,” comments Federica Levato, a Bain & Company partner and co-author of the study. “The winning brands will be those that build on their excellence while reimagining the future with an insurgent mindset. Luxury players will need to think boldly to rewrite the rules of the game.”
