A Bain & Co. recent study concluded that while spending on luxury goods is forecasted to slow in 2023 following two strong recovery years, the overall sector is “more resilient to recession” versus the recession in 2009.

Among the reasons, the share of top customers expanded and accounted for 40 percent of market value in 2022 compared with 35 percent in 2021. The report states, “These consumers are hungry for unique products and experiences, putting brands’ Very Important Clients (VIC) strategies into overdrive.”

Luxury tends to fare better than other retail channels during downturns because of its exposure to high-income consumers.

A heightened focus on customer-centricity in recent years was cited as “another source of resilience for the industry, as is the multi-touchpoint ecosystem that luxury has developed.”

The study noted that many luxury players, both stores and brands, are investing in “modernizing their operations, especially through more robust information technology infrastructure to support the ongoing digitalization of the industry, and through a reconfiguration of their store networks, primarily through renovation and relocation projects.

Finally, a third factor is expected to bolster luxury’s growth over the next decade is its appeal to an ever-younger consumer, tied to a surge in wealth creation over the past few years, along with social media. 

Luxury spending among Gen Z and Generation Alpha is expected to grow three times faster than other generations through 2030, making up a third of the market, according to the study. 

Bain observed, “This reflects a more precocious attitude toward luxury, with Gen Z consumers starting to buy luxury items three to five years earlier than millennials did (at 15 versus at 18-to-20); Gen Alpha is expected to behave in a similar way.”

Luxury Goods Recover Strong In 2021/22
The 21st edition of the study, conducted in collaboration with Fondazione Altagamma, the trade association of Italian luxury goods manufacturers, found that the market for personal luxury goods saw healthy growth in 2022, building on what was a “V-shaped” rebound in 2021. 

The luxury sector was hit hard during the first year of the pandemic by restrictions on social events, travel and a shift toward casual dressing.

Bain estimated that global sales of personal luxury goods reached €353 billion in retail sales value in 2022, marking an advance of 22 percent at current exchange rates or 15 percent at constant exchange rates, year-over-year. Bain estimated that in 2022, 95 percent of luxury brands experienced positive growth.

The gains were boosted by the continued return to socializing, travel and the office that ushered in the return to dressing up. Growth in goods also benefited as spending on services (i.e., hospitality, fine dining) continued to see more moderate growth due to a slow recovery in international tourism and business travel.

Profit levels recovered post-COVID to an average growth of 21 percent in 2021 for personal luxury goods but is estimated to have declined in the range of 19 percent to 21 percent in 2022 due to investments focused in large part on digital transformations. 

Bain wrote, “While the industry has benefited from increased prices and a continued shift to higher-margin direct channels, the lower profit levels reflect luxury brands’ investment in future growth, particularly through increased marketing spending and ambitious transformation programs. However, the profit erosion also reflects higher energy prices and increased labor costs.”

Regional Highlights
Given China’s challenges, the Americas region regained the top position for personal luxury goods sales, with Asia, excluding Japan, dropping to the second position, followed by Europe.

The personal luxury goods market reached an estimated €113 billion in the Americas, growing 25 percent over 2021. Bain wrote in the study, “Performance was particularly robust in the first half of the year. In the United States, traditional luxury hubs gradually returned to growth while suburban areas retained their new prominence as a source of luxury sales. Latin America experienced solid growth, especially in Mexico and Brazil.”

In Asia, excluding Japan, spending on personal luxury goods grew 15 percent on a currency-neutral basis. Spending eased by 1 percent in Mainland China, with COVID lockdowns most prominent in the second quarter. A rebound was seen in the second half in China as restrictions were lifted, but not enough to offset the second-quarter performance. 

Excluding Mainland China and Japan, spending on personal luxury goods in Asia grew 43 percent, reflecting strength in Thailand and other Southeast Asian countries, as well South Korea.

In Europe, spending on personal luxury goods advanced 27 percent on a currency-neutral basis, aided by healthy domestic demand and the return of tourists from the U.S. and the Middle East. Italy and France were the 2022 growth champions, followed by Turkey, the UK and Spain, while Germany softened. Japan grew by 18 percent at current exchange rates, catching up to its pre-COVID level.

Category Performance
All personal luxury goods categories performed well in 2022, with double-digit growth rates across the board. All categories are estimated to have recovered to 2019 levels or better, with hard luxury (i.e., jewelry and watches), leather and apparel leading the resurgence following the pandemic.

Among key categories, apparel is estimated to have grown in the range of 22 percent to 24 percent in 2022, aided by wardrobe restocking after the casual-dressing phase in the early stages of the pandemic. 

Womenswear and menswear grew at about the same pace. Bain wrote in the study, “‘ Post-streetwear’ is emerging as the new look. It maintains some elements of streetwear (such as gender fluidity, a disregard for occasion, inclusiveness and sports-driven inspiration) but goes beyond its style codes through new and enhanced techniques, materials, and functions.”

Footwear grew in the range of 20 percent to 22 percent year-over-year. Bain wrote, “Heels and formal shoes are now back to their 2019 levels. Casual categories, such as fussbett sandals and Wellington boots, are on the rise.”

Accessories remained the largest personal luxury goods category and grew by 21 percent to 23 percent. Within accessories, leather goods grew by 23 percent to 25 percent, surpassing its pre-COVID levels, up 39 percent and 41 percent compared with 2019. Leather goods’ growth was boosted by a “deliberate and effective” elevation strategy that increased prices across the leather category without damaging volume growth.

Among other luxury categories, beauty sales advanced 14 percent to 16 percent, still held back by the slow recovery in travel retail. High-end watch sales jumped 22 percent to 24 percent in 2022 despite low product availability. Jewelry sales are estimated to have expanded 23 percent to 25 percent in 2022.

Luxury Outlook
Bain said the “robust performance in 2022 suggests that growth should stay healthy for the personal luxury goods market in the medium term.” Also helping are infrastructure investments in recent years.

In 2023, sales growth in personal luxury goods is seen embracing two scenarios, growth in the range of 3 percent to 5 percent in the base case and up to 6 percent to 8 percent, at constant exchange rates, in a more positive case. The outcome depends “on the strength of the economic recovery in China and the ability of the U.S. and Europe to withstand economic headwinds.”

Over the longer term, the personal luxury goods market is expected to deliver annual growth rates between 5 percent and 7 percent until 2030, reaching between €540 billion and €580 billion by the end of the present decade, from an estimated €353 billion in 2022, a jump of more than 50 percent.

Four growth engines were identified to “profoundly reshape” the luxury market by 2030:

  • Chinese consumers should regain their pre-COVID status as the dominant nationality for luxury, growing to represent 38 percent to 40 percent of global purchases;
  • Mainland China should overcome the Americas and Europe to become the largest luxury market globally (25 percent to 27 percent of global purchases);
  • Younger generations (Generations Y, Z and Alpha) will become the biggest buyers of luxury, representing 80 percent of global purchases; and
  • Online should become the leading channel for luxury purchases with an estimated 32 percent to 34 percent market share, followed by monobrand stores (30 percent to 32 percent market share).

Bain also said that by 2030, luxury should have expanded beyond its traditional business model, typically defined by sales of products, as the growth of new types of activities, often powered by technology, will result in an additional €60 billion to €120 billion of luxury industry sales.

These new revenue streams could be generated by:

  • the metaverse and NFTs, such as collectibles and other new products and services;
  • the monetization of communities through virtual events and data monetization, for example;
  • brand-related media content, including movies, music and art)
  • secondhand luxury goods, by bringing more secondhand sales in-house; and
  • “3.0 experiences,” including virtual stores, digital shopping assistants, ultra-luxury travel, and hospitality.

Photo courtesy Giorgio Armani