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Luxury report: Great expectations

While few expect the economic gloom to lift in the near future, many in the luxury sector are optimistic that their business will continue to grow.

Despite respondents’ earlier comments that they expect turnover and profit to grow next year, 25.9% (the joint highest percentage) do not expect the economy to pick up until 2014, while the same number think it will be even later – not until 2015. Meanwhile, 18.5% believe there could be some improvement by the end of next year, while the optimistic few – nearly 15% – think it could be early in the new year.

Over the next 12 months, 30.5% are “quite confident” that trade will pick up, with 27.1% “confident” that their business will grow. Nearly a quarter believe trading will remain the same, while 13.6% predict “it’s going to be tough”. The majority – 55.6% – believe growth next year will be driven by online sales.

The Bain report estimates that the luxury goods market will grow by 4% to 6% from 2013 to 2015, pushing the sector to between €240bn (£192.3bn) and €250bn (£200.3bn) by 2015.

Mark Henderson, chairman of the London Luxury Quarter and non-executive chairman of Gieves & Hawkes, believes the luxury sector will continue to grow “because people want the best”.

He adds: “Tourism is growing, and London’s reputation is growing. The trend at the moment is towards craftsmanship and individualism, which supports the luxury sector’s values.”

Henderson cites Harrods as a great example of the type of business that will lead growth in the luxury sector. “We seem to have particularly good department stores in this country. Harrods is an outstanding business, and [managing director] Michael Ward is a genius,” he says.

“It’s a fabulous experience of temptation as you can move from one brand to another.

Equally, walking into the Louis Vuitton store is not the same as walking into the Louis Vuitton concession. I think they [department stores and own-brand stores] live incredibly comfortably side by side. The future looks pretty good. I am hugely optimistic.”

For Infor’s Robert McKee, the success of the luxury sector lies in its analysis of information.

“At the core is business intelligence, pulling in information from different sources. The luxury industry is much more right-brained, therefore it has a great deal of difficulty in intellectualising its business models. Luxury often makes money in spite of itself, because of its prestige, but the luxury sector has huge potential, even beyond its current results; it needs to be more technology-attuned,” he explains. “Too much emphasis is put on high margins rather than efficient business practices. History is littered with luxury apparel companies that forgot to run an efficient business. Let’s not forget that when all the glamour is stripped away, you still have a business to run.

If you have to flatten growth, it doesn’t mean you have to flatten profits. You should be able to control your profitability with better operating efficiencies.”

While luxury businesses do have reason to be optimistic, the industry is likely to experience a readjustment. Recent profit warnings and slowdown in markets such as China mean that companies will need to work harder to find pockets of growth. There may be a short-term slowdown, or even short-term losses, but businesses that understand their brand’s values and adapt to a changing market will prosper.

Industry view

‘Long-term prospects are extremely good’

Guy Salter

Guy Salter

Guy Salter, Deputy chairman, Walpole

Forecasts for continued growth in luxury are positive across all markets and categories, but the next 12 months could be challenging, and sales increases are likely to be more modest than in recent years. Ongoing uncertainty in the eurozone, the muted outlook for the UK economy and concerns about China’s slowdown could have a short-term impact. However, long-term prospects look good. I’m as excited as I have ever been about the future.

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