Luxury sector representatives discussed the state of the market - with international topping the agenda.
Now in its third year of consecutive growth, the luxury fashion sector has been an oasis of calm in what has otherwise been a trying few years for an industry beset with challenges and administrations.
Bucking trends elsewhere, the global luxury sector has experienced double-digit growth for the past three years, with a 10% lift in 2012, according to figures from consultancy Bain & Company. However, with large amounts of that spend coming from newly wealthy populations overseas, international retail is having to take precedence for luxury retailers, whether that involves selling into foreign markets or to tourists visiting the UK.
This was the overwhelming message at Drapers’ luxury roundtable, held in association with retail software supplier Infor at The Savoy hotel in London last month, where delegates from retailers and brands such as Burberry, Jaeger, Temperley London and Browns also discussed the pressures of shifting sourcing bases and the effects of the rise of multichannel on their businesses.
Bain & Company partner Gyorgy Konda presented the firm’s Market Trends & Emerging Capabilities in Luxury report, which estimates the current value of the global luxury goods market at €212bn (£184.5bn). Europe still represents the largest chunk at 35%, followed by the Americas at 31%, and then Asia-Pacific at 20%, largely accounted for by China.
Looking at specific countries, the report shows that the US remains the country with the largest luxury market, with 13% growth last year and a value of €59bn (£51.3bn). However, China is booming, with 20% growth and €15bn (£13.1bn) in luxury sales last year, rivalling those of France. Japan, which has seen flat rates of growth for a number of years, still accounts for 5% of the market.
Overall, Bain & Company estimates that between 30% and 40% of luxury sales are linked to tourists, and the Chinese make up the largest luxury consumer group, at 25%. However, only 7% of their total spend is made in China. In the US, Chinese consumers account for 10% of luxury spend, while in Europe it’s as high as 20% to 30%.
“What this means is that most of the spending that Chinese consumers do today is still outside of China. If you walk around many of the touristic luxury destinations such as Bond Street, you will see that in the consumer databases of the big luxury firms [there are] a substantial portion of Chinese consumers,” said Konda.
Robert McKee, global fashion industry strategy director at Infor, suggested this was the result of a lack of maturity in the Chinese market: “If you go to most of the major cities you’ll find spots, but realistically you’ll have a city like Shanghai with millions of people and you have relatively little luxury retail. They have to go somewhere else to buy it.”
Konda agreed and added that the new battleground for luxury players is tier two, tier three, and even tier four cities, where the potential is relatively untapped. Noting that there are more than 100 million people in a total of about 100 to 150 cities in China, he added that luxury is very much driven by cities, and this is where businesses should be focusing.
However, he cautioned that some luxury players have seen declining like-for-like sales in the region after opening too many stores. “There is a limit to how many stores you can open,” he said.
Addressing the other BRIC nations, Konda said the Russian market, which is worth €5bn (£4.4bn), is largely limited to Moscow and St Petersburg, and import duties hinder the potential of trade in Brazil. Poor infrastructure, a lack of good available space for stores, and a population less ready to take on Western forms of dress have limited India’s market, despite it “having the most potential”.
McKee argued that India has “always acted as an anomaly” and suggested that retailers will need to figure out a new way of doing business there to crack the luxury market.
The delegates also discussed the issue of origin and its importance to consumers. Konda argued that this only holds true for “absolute luxury brands” such as Hermès and Chanel, and is less important for “accessible luxury brands” such as Hugo Boss.
Simon Burstein, chief executive of London designer indie Browns, said it depends on the brand and offered up designer labels Balenciaga and Céline as examples: “They are both now sourcing from China. I look at the product and it’s beautifully made, and then I look at the price and it’s expensive. When I look at the label and it says ‘Made in China’, I then question the price. So would it have an impact on the consumer? I think it comes down to the power of the brand.”
Konda argued that the difference between manufacturing in Europe compared with China is “marginal”, hence the return of some manufacturing to these shores: “We’re talking about a few euros per piece and the reason for that is quite simple. In Italy the labour costs have been flat for about 15 years in real terms, as opposed to China where labour costs have been rising by 10% per year for many years.
In five years from now, unless there is a huge efficiency/productivity increase, the actual benefit of producing in China or in Turkey will not be huge.”
However, with the well-documented skills gap in the UK and wider Europe, there was concern among the delegates that large-scale European manufacturing is no longer possible. Sailing and sports brand Musto has moved its production from Europe to China for this reason. The brand’s production and development director Philip Worrall said: “We can’t make the volumes and quality in Europe that we need any more. The factory makes far better quality in China, the standards are far better, and yes, we’re seeing [the cost of] labour going up, but they’re investing in efficiencies now.”
For Burstein the answer is British designers and brands investing back into the manufacturing industry in this country to improve production know-how, as has been done in France. He cited Burberry’s Castleford factory in West Yorkshire as a prime example [one of the brand’s two remaining UK factories].
McKee agreed, and argued that it’s not a question of competence: “China didn’t have the competence when [manufacturing] moved to China. Bangladesh didn’t have the competence when it moved to Bangladesh.
We don’t have the competence here any more but we could regain it.”
The other big topic of conversation was ecommerce, with Bain & Company estimating that the channel, which saw a year-on-year growth rate of 25% for 2010 and 2011, accounts for €7bn (£6.1bn) as of 2012.
However, he cautioned that delegates should be wary of low levels of penetration in certain markets internationally, noting that online still only accounts for 3% of total global luxury sales.
McKee stressed that greater efficiency, innovation and ecommerce would be central to the success of the luxury sector. “We have to break ourselves from the mould of constantly focusing on the unit cost and the price of labour, and recognise that getting the right product to the right consumer at the right time is the key to making money in this industry,” he said.