Luxury businesses are looking overseas for growth.
When Burberry posted its profit warning in September, the brand blamed in part the slowdown in the Chinese economy. Bain & Company’s annual report also attributed the decline in growth of the luxury goods market to Chinese consumers spending less at home and giving fewer gifts. Clearly, luxury businesses have been relying heavily on thriving international markets, notably China, to drive overall growth.
In the UK, according to our survey’s respondents, international sales will continue to be important to overall growth, but these businesses have far from saturated their sales opportunities abroad. Although 81.8% of respondents sell to international markets, 37% of businesses (the highest percentage) said less than 10% of their turnover comes from international sales, with 18.5% (the second highest percentage) claiming international sales make up between 10% and 20% of turnover.
“The luxury sector has seen solid growth in economically emerging Asia with the rapid evolution of the Chinese and other economies,” says Robert McKee, director, fashion industry strategy at Infor. “The recent slowing in the rate of that rapid economic evolution will have an obvious impact on that rate of growth – but it doesn’t have to impact profitability. Of equal concern has to be the dilution of luxury brand equity stemming from counterfeit luxury merchandise making its way into all the markets globally. Are luxury brands doing all they can to combat this dilution to both brand equity and revenue? It would seem that a key to combatting luxury counterfeiting comes through the use of technology to verify product pedigree. From serialisation to the use of embedded RFID [radio-frequency identification] through the entire supply chain – from concept to consumer – the products and all their components have to be traceable throughout the value chain.”
Of those who sell to international markets, 85.7% do so via a website. Other methods such as licensing agreements, via multi-brand stores and own stores, remain relatively low, with less than 20% of respondents choosing each model, thereby highlighting potential new sales channels.
Drilling into these numbers, we found that 57% of brands and all multiple retailers sell to international markets, and 32% of indies do so. Andrew Robb, chief operating officer at Farfetch.com, which facilitates independent retailers’ online businesses, says 32% is actually quite high. “It’s really difficult for independents to sell online internationally because they have to deal with the complexities of pricing, returns and marketing,” he explains. “To be both a great online and offline retailer you need to invest, but most boutiques are small. Matches and Browns have put serious online teams in place and investment. But if you don’t have an online channel, you’ll suffer. The boutiques that do it well will be fewer [in the future]. It comes down to the owners having a passion and intuitive understanding of the online space, and in particular, online marketing. You need massive international appeal.”
In terms of specific international territories, Western Europe gets the top spot, with 44% of respondents saying it was their best-performing market. The US topped the list for 36% of businesses. Other territories were more balanced, with 28% placing China fourth in the rankings, the same percentage putting Brazil in fifth place while 36% said Australia was their eighth best-performing market.
Looking ahead, 60% of businesses expect the above mix to change over the next five years. What is interesting from the results is the way that different territories will, on the whole, be on a more level playing field. For example, Western Europe is still predicted to be the number one international market for the respondents, but only 30%, rather than 44%, believe so. There could be two reasons for this. Either the respondents are simply unsure or, as growth in emerging markets slows, businesses are more reluctant to put all their eggs in one Chinese basket and are, instead, spreading themselves across territories depending on their business type and those territories’ different demographics. Having said that, 53% of respondents said China is having the biggest impact on the global fashion industry, followed (far behind) by the US at 13%.
China also leads the way in tourism – 40% of businesses said between 10% and 20% of their sales in the UK come from tourists, with 46% of businesses ranking the Chinese top of their tourist table. 31% said Western Europeans were their second biggest tourist group. Further down the list, 23% said Russians were at number six and 46% said Brazilians were ranked seventh.
“Non-EU international spend in the UK has shown continual growth year on year – with China leading this growth, reporting spend increases of 29% year on year between January and September,” says Richard Brown, vice-president of tax-free shopping operator Global Blue UK. “Europe is seen as the world’s leading destination for luxury shopping, especially among those who make shopping a priority when travelling. Products are becoming more diversified and the demand for high-end, luxury products and tailor-made services is increasing among international shoppers. Due to the tax refund policy and exchange rate, many European luxury products are estimated to be up to 20% to 30% lower than in their home nations, and often overseas tourists will still choose to buy an item from London, even if it is available in their home country, so that they are able to talk about buying it from a famous London store.”
Brown adds that China and the Middle East remain the top international spenders, representing 54% of all international non-EU spend. “Chinese spend has seen steady year-on-year increases. However, it is the Middle Eastern nations who have seen the most substantial increases – 50% year on year in September, with some individual transactions exceeding £1m,” says Brown.
He believes that the top international spenders are unlikely to change dramatically in the next few years, but adds that Global Blue has seen significant increases in spend from Nigerian and Indonesian visitors. “These two countries, which account for only 9% of the total non-EU spend, have shown enormous year-on-year growth in September compared with last year – Indonesia at 54% and Nigeria at 32%,” says Brown. “For Nigerians, London has become a top shopping destination, with many visiting to purchase UK items cheaper than imported and sold in their native Lagos, and Nigerian men particularly enjoy getting suited and booted in UK designer brands.
“Nigeria is forecast to become Africa’s biggest economy by next year. Meanwhile, Indonesia is only in the 15 top international spenders in the UK, and only 1% of the population are able to travel for holiday or business reasons, but their September average monthly sales are comparable to China and the Middle East.”
32% - of indies sell internationally via their website
44% - of respondents said Western Europe is their best-performing international market
100% - of multiples sell internationally; 82% via a website; 36% via their own bricks- and-mortar stores
‘Luxury attracts a global clientele’
Guy Salter, Deputy chairman, Walpole
I am surprised that of the businesses surveyed, 40% of them noted that only 10% to 20% of their UK sales came from tourists and that 37% said international sales made up less than 10% of their turnover. I would expect those figures to be higher, with tourists and international sales accounting for a much bigger percentage of overall sales of the UK luxury businesses surveyed. But a factor in this could be the different trading patterns experienced in 2012 with the Jubilee and the Olympics.
Luxury is a global business attracting a global clientele. Perhaps some UK luxury brands need to work harder to become more commercial and more relevant in certain key overseas markets. Likewise all brands are now looking seriously at how to get better at attracting and selling to affluent visitors.
I am not surprised that the Chinese are ranked top of the tourist table and we are working closely with the Government to help further increase Chinese visitor numbers to the UK.