Drapers finds out how the luxury fashion sector is faring and its expectations for the future.
Since the global recession of 2008, one sector of the fashion industry has appeared, perhaps unsurprisingly, to weather the storm. While the mid-market began to witness plummeting sales and business closures, the luxury sector boomed.
But then, this September, UK luxury fashion bellwether Burberry posted a profit warning. Admittedly, investors breathed a sigh of relief this month, as Burberry reported an 8% increase in revenues for the first half, but pre-tax profits dropped almost 30% due to a one-off payment to end its fragrance and beauty licence.
Yet last month, global consultancy Bain & Company released its annual Luxury Goods Worldwide Market Study showing a slowdown in luxury goods sales. According to the report, the value of the total luxury goods market is expected to rise by 5% at constant exchange rates to €212bn (£170bn) this year, compared with an increase of 13% last year.
In the same week, LVMH – the largest luxury goods group by sales – said organic sales growth in the third quarter had fallen to 6%, compared with 15% growth in the same period last year.
Mulberry soon followed, also posting a profit warning, which took almost one third off its market value.
So, should the luxury sector in the UK be worried? Our survey found a healthy industry, confident of further growth in the next year. But few businesses were complacent. There was an air of caution, with the majority not expecting the economy to pick up until the end of 2014.
While that overview paints a good picture of the state of the overall luxury fashion market in the UK, the most interesting nuggets lie in the details of our survey. Some 85.1% of respondents said their turnover was up in 2011 against 2010 and 77.4% echoed the sentiment in terms of profits. Splitting this down further, department stores and pure-play etailers came out on top, with 100% of respondents in each segment recording a rise in turnover over the same period. For brands, the number was 90% and for indies it was 73%. On average, turnover increased by 23.2% and profit by 18.5% across all segments.
Luca Solca, senior luxury goods analyst at investment company Exane BNP Paribas, is not surprised that independent boutiques, which had a good year nonetheless, didn’t fare as well as department stores and brands last year. “Brands are integrating their distribution more and more, particularly with mono-brand stores. The traditional independent has less of a role to play and they find it harder to finance their businesses,” he explains. “And department stores are performing more of a selection function. Look at Liberty – it has come up with an interesting selection of brands and products, with nicher brands and designers to offer consumers something different. Luxury consumers are keen to find novelty. They’re paying more attention to their spend, to differentiation and distinction.”
In terms of investment in 2012, 54.1% of respondents (the highest percentage) invested in their staff, with 51.4% also investing in digital marketing and the same figure investing in new products and brands. Digital marketing topped the investment list for brands. For multiple retailers, staff and digital marketing were most important, while department stores ploughed money into staff, new brands and digital marketing.
Looking ahead, 92% and 89% of businesses expect turnover and profits to rise respectively over the next year. Luxury brands forecast turnover to increase by an average of 27%, while indies expect a 15% rise.
Optimism is clearly in the air and, over the next few pages, we look at how luxury businesses hope to fulfil these ambitions.
‘Luxury ecommerce will continue to grow’
Guy Salter, Deputy chairman, Walpole
It seems counterintuitive to those outside the industry that the luxury sector has experienced strong growth despite the challenging economic environment. This resilience hasn’t surprised me but the level of performance has. Conditions have worsened recently, so we must be ready for a tougher ride but I remain sure our business model is well suited to continue to benefit from the type and pattern of affluent spending.
The luxury department stores and the pure-play luxury etailers have held up particularly well. Those department stores who strain every sinew to keep maximum freshness, product variety, exceptional in-store experience and service will remain appealing to the luxury consumer and international tourists.
It’s good to see that businesses have continued to invest in their online presence and digital marketing, although it would have been shortsighted not to do so, as luxury brands’ ability to produce high-quality content gives them an advantage. Luxury ecommerce will continue to grow for those that offer a truly integrated customer experience. Few are now. Simple things like user experience, navigation and checkout could be much improved.