The high-end market is growing and shoppers are still spending, despite recent setbacks of the viral and political kind.
The challenges facing fashion retail – falling sales, the shift of spend to online, high street store closures and job losses – are unrelenting and show no signs of ending soon. However, one sector seems relatively immune: luxury is quietly thriving.
Global revenue at LVMH was up 15% year on year to £45bn in 2019, while fellow luxury house Kering’s 2019 revenue rose by 16.2% to £13.3bn. High-end department store Selfridges reported a 5% boost in sales over the Christmas period.
The UK luxury market was worth £46.1bn in 2019, Euromonitor International data shows. It is predicted to grow 3.5% to £47.7bn this year.
Helen Brocklebank, CEO of luxury industry body Walpole, which counts Burberry, Selfridges and Harrods among its 250 members, observes: “Business is really robust. We’re coming off the back of 49% growth over the last four years – the luxury sector has been in an incredibly good place. We haven’t seen the same impact as high street businesses. Bricks-and-mortar retailers such as Selfridges, Harrods and Fortnum & Mason have done particularly well – outperforming the market. The international customer is really strong.
“British luxury businesses are less dependent on the domestic customer than their high street counterparts. We’re very lucky in this country, as we have a very high-spending international customer.”
Importance of China
Research by Walpole shows that Chinese customers make up 22% of the luxury spend in the UK, and 33% globally – which is why travel bans in the wake of coronavirus could have important implications for the luxury sector. At the end of January, the UK Foreign Office advised against all but non-essential travel between the UK and China. British Airways has suspended all flights to and from Beijing until 29 February and Virgin Atlantic has grounded flights from Heathrow to Shanghai until 28 March.
Coronavirus is a speed bump, but not a long-term threat
Helen Brocklebank, Walpole
Brocklebank continues: “If you’re looking at a third of your sales, then luxury is quite concerned. If almost a quarter of the shoppers in the market aren’t able to travel, sales are undoubtedly being impacted.”
However, she downplays the long-term impact on the luxury market: “It’s a speed bump, but not a long-term threat. Only about 11% of British luxury goods are exported to Greater China. It’s a relatively small market for the UK. It hasn’t impacted sales for Chinese New Year, as those who were coming to shop were already here.”
Brocklebank says the reaction of the UK and Chinese governments has been much swifter to the coronavirus outbreak than that of SARS in 2003.
“A downturn is unavoidable, but it will be much shorter than in the last outbreak of 2003 – back then it had an impact of six months. This time as the action to contain the virus has been much quicker, so we hope it will be four months.”
She concludes: “It’s a great shame. People are ill and that’s what we need to focus our thoughts on first. It will be relatively short lived, and businesses will bounce back.”
British brand Burberry warned at the start of this month that coronavirus has had a “material negative effect” on luxury demand in the Chinese market. The luxury label closed 24 of its 64 Chinese stores at the beginning of February.
One former luxury retail director says: “Burberry and other luxury brands there will be affected. It involves inbound tourists as well – the Chinese mainland customer is not going into the cities to shop.”
Before the outbreak, Burberry reported positive third-quarter results. Store sales were up 3%, and revenue rose by 1% to £719m in the 13 weeks to 28 December 2019 compared with the same period in 2018.
The importance of the Chinese shopper was cemented in its January report, when the brand attributed some of this success to its “continued focus on Chinese consumers, including taking our runway show to Shanghai”, which shows just how much the luxury market relies on the demographic.
While Brocklebank insists that the coronavirus will only have a short-term impact, brands including Ralph Lauren have also issued a profit warning – earlier in February, it stated expectations for its fourth-quarter sales in Asia to be hit by £43m-£54m.
The US company gets 4% of its total revenue from China, where it had to temporarily close two-thirds of it 110 stores – and also said that global fourth-quarter orders could be affected as a result of disruptions in the supply chain.
Capri Holdings, the parent company of brands including Michael Kors, Versace and Jimmy Choo, warned in early February that revenue could be hit by £77m, and had to close 150 of its 220 stores in China. Its chief executive John D Idol said that the effects of the coronavirus were having “a material impact on our business.”
Big overseas spenders
Coronavirus is having less impact on the UK’s biggest foreign luxury spenders: customers from the Middle East.
Luca Solca, head of luxury goods research at Bernstein, explains: “The UK has been an attractive destination for some of the most important nationalities in the luxury high end, namely the Middle Eastern customer.” He attributes this to “tradition, and Britain’s presence in that area”, adding that tourist spend overal accounts for “more than 50% of luxury demand, when you account for overseas nationals living here”.
A superior shopping experience creating lasting memories is just as important as the products
Derrick Hardman, Global Blue
Tax-free shopping specialist Global Blue defines “elite” international shoppers as the 0.5% that account for 17% of tax-free spend. In the UK, it says those from the Gulf states account for 30% of this group. They spend an average of £29,520 in UK transactions, and are attracted to department stores, where they make 85% of their purchases. It found that the Chinese customer is the second biggest spender, followed by those from South-East Asia, the US and Russia.
Shoppers from the Gulf states are particularly attracted to department stores, where they make 85% of their purchases.
Global Blue managing director Derrick Hardman explains their attractions: “A superior shopping experience creating lasting memories is just as important as the products [international visitors] purchase and take home.
“Department stores such as Harrods, Selfridges, Fortnum & Mason and Liberty have increasingly established experiential VIP services and lounges devoted to these elite shoppers – these offer personal invitation, one-to-one treatment, and exclusive brand collaborations and products.”
Giulio Cinque, owner of Cambridge high-end boutique Giulio Fashion, which stocks Burberry and Alexander McQueen, argues that these expectations extend into the luxury independent sector: “The consumer is searching for an emotional experience and is prepared to pay for it.
“Luxury is doing well as a result of the high street not delivering the aspirations its consumers are looking for, and the consumer finding that aspiration in luxury.”
Ida Petersson, director of men’s and womenswear buying at Browns, agrees that customer involvement sets the market apart: “There are definitely opportunities in the luxury market, with the in-store experiences and events that are offered, that go outside of the normal product and operational side of our business.”
Britain’s departure from the European Union by the end of the year is likely to impact trade with the UK’s largest export market: 42% of British luxury goods are exported to the EU, 23% to the US and 11% to China.
But Solca believes that Brexit might not be so negative for the luxury sector, he tells Drapers
“I believe Brexit could potentially help the luxury market in the UK, as it could allow continental European visitors to buy duty free – the same way as Swiss or Chinese tourists do.”
Brocklebank explains: “The challenge that every luxury business has is the change in trading conditions that come from the back of Brexit.” Walpole said last month “the introduction of friction in the form of tariffs or of new administrative burdens around the movement of goods and delivery of services will be an unwelcome and additional cost on luxury businesses used to trading freely across the channel”.
She also cites the 25% tariff on some EU goods – imposed by the US in October 2019, as another challenge for the luxury industry, and UK textile manufacturers as cashmere is included, “It is affecting suiting, pyjamas – a number of categories that will impact British businesses. We’re working with the government to try to solve this as soon as possible.”
Despite the trade war, Brocklebank believes the US is “a bigger market than China”, adding: “We’ve been thinking of how to reinforce those export opportunities.”
A cultural shift
Another challenge to the sector is changing attitudes to shopping, which is impacting all areas of the fashion industry. Consumers are increasingly prioritising spending on experiences, rather than goods. In January, Barclaycard research showed that spending on clothing fell by 3%, while the amount spent on experiences such as cinema tickets rose 19% in December 2019.
The former luxury retail director tells Drapers: “There’s just been a cultural change to spending on clothes. It’s across all sectors. I know people who shop on the high street, and luxury consumers who would rather go out for a nice dinner than buy another shirt.”
He continues: “Everyone’s considering sustainability – how many clothes they have or what that’s doing to the planet. There really seems to be a big conscience around that. It’s having a knock-on effect on people’s shopping habits.”
But those choosing to spend more wisely on better, but fewer items, could also provide a boost to the luxury market, as shoppers choose higher-value products that will last longer over cheaper fast fashion.
Boutique owner Cinque says: “In general I think consumers are being more considerate towards over-consumption, the planet and are starting to buy less, meaning what they buy will be a more considered purchase and not just another throw away item.
Petersson agrees: “Non-apparel had a smashing year with the customer returning to luxury investments and slowing down on quick pick-me-ups from the contemporary world.”
Womenswear label 16Arlington designers Marco Capaldo and Kikka Cavenati agree: “The luxury market’s performing better than ever because of a shift in mindset about buying quality over quantity and investing in pieces that have longevity within in a women’s wardrobe. Pieces that can be re-worn, re-worked, re-imagined are where people would rather spend their money these days.”
Katherine Holmgren, CEO of designer label Galvan, also believes that shoppers are buying less, but better, “As the fashion community focuses increasingly on sustainability, we see customers moving away from fast fashion or trend-driven purchases and instead investing in fewer pieces that are higher quality and longer lasting.”
The year is off to less than a flying start for retailers, though the luxury industry appears in a stronger state than the high street, thanks to affluent international customers. While the coronavirus is a setback because of the powerful influence of Chinese shoppers, the effects on the luxury market may only be visible on a short-term basis. Brexit could allow the sector to target new international customers