The luxury-goods industry is poised to recover strongly as new opportunities arise, according to the three world experts speaking at this year’s BASELWORLD Forum held today (April 6) in Switzerland. The title of the Forum debate was “When Diamonds Shine Through Fog: The Challenges for Luxury Goods in a Difficult Environment.”
Having been hit by the global economic downturn of the past two years, experts say luxury-goods companies can expect their fortunes to improve significantly as the global economy embraces a long-awaited recovery in the latter part of 2003. And companies whose products offer emotional security and increased relevance to the needs of the luxury consumer will succeed best of all.
To beat the competition and thrive as the global economy picks up, luxury brands must be well managed and financially strong, innovate on the back of market research, and not lose sight of their core business and the established values of their products—all while responding to changing consumer dynamics. Companies that do so can expect to spearhead the recovery in the luxury goods market and will be well placed to grasp the new opportunities that are now emerging as economies recover. Among these new growth opportunities is the concept of “New Luxury,” a phenomenon that sees middle-market consumers trading up and paying premium prices for remarkable goods.
The outlook for 2003 will remain challenging but, by 2005, the luxury sector should see sales growth of 5%, according to the Forum’s first speaker, Paola Durante, chief analyst of luxury goods at Merrill Lynch in Italy. “Looking at the key OECD indicators for global economic growth, we expect to see a turning point in the second half of 2003, followed by a recovery in the last quarter of the year,” she said. Durante noted that the expected post-war rally will witness a more progressive recovery than in the period leading up to 2000.
The other sector drivers that will continue to impact and determine sales of luxury-goods companies are currency fluctuations, the feel-good factor among consumers, and international travel. The majority of luxury brands produce their goods in Europe, but on average sell only 20% of their goods in their own market, explained Durante. Some companies generate 33%-40% of their sales in the Japanese market alone. Therefore, currency fluctuation among the euro, the dollar, and the yen remain crucial: A depreciating euro will bring benefits, but it’s likely to remain strong this year. Durante expects no short-term improvement in international travel, which can account for 12% of sales for some luxury brands. And while the feel-good factor remains depressed, companies should remember that consumers don’t usually cancel purchases of luxury goods—they merely postpone them. Overall, Durante expects that “luxury goods will continue to grow above GDP growth, and the potential returns for the sector remain significant.”
The “New Luxury” phenomenon will bring enormous benefits to luxury-goods companies, but they must understand the essential drivers behind it, commented the second speaker, Michael J. Silverstein, vice president of the Boston Consulting Group (BCG) in Chicago. “New Luxury consumers are driven primarily by the interplay of emotional and functional benefits,” explained Silverstein. “Luxury goods must not only sell at a high price, they have to offer distinct and relevant emotional and functional benefits to the consumer.”
The “New Luxury” segment shatters the belief that high-priced goods are always sold in smaller volumes compared with other sectors. However, Silverstein warned against complacency, and said that the “New Luxury” market would be exploited by those who understand the needs of the dissatisfied luxury consumer. Also, he said, the role of women in purchasing decisions needs particular attention—they are a key factor boosting the “New Luxury” economy through their spending behavior, which is akin to “splurging.” “Women today want to spend more—they feel they deserve it,” said Silverstein.
The final speaker, Stéphane Truchi, managing director of the French-based market research company, IPSOS (the new partner of the BASELWORLD Forum), stressed the importance of understanding consumer confidence levels—and the emotional needs of consumers—in troubled times. “Consumer confidence remains low, and will be like this for at least another six months,” said Truchi. However, the overriding desire of consumers for products that offer security and “make them dream” will provide luxury-goods companies with huge opportunities as the global economy recovers.
IPSOS research shows that among the key targets for companies in the luxury sector are a group they call “Masters”—people in the 45- to 65-year-old group who have large discretionary incomes, are living longer, consider themselves to be young, and want to live life to the fullest. Other potential markets include people in the 25- to 35-year-old age group, but companies must target this group carefully, offering products representing security, stability, and realism against the backdrop of a rapidly changing world. A third key opportunity is the emerging Chinese market, which for luxury goods may represent a minimum market size of 10 million people.
The new partnership between BASELWORLD Forum and IPSOS aims to provide valuable, exclusive market information for decision-makers involved in the luxury-goods sector, via an annual international survey conducted among industry experts. The results of the industry research project will form the basis for the BASELWORLD Trend Report, to be released in Fall 2003 at a series of three international press conferences in Europe, Asia, and the United States.