In 2009, the Great Recession brought great panic to the luxury industry. Lower-rung affluents tightened their budgets, slowed luxury spending, causing many prestige brands to consider the sinful thought of: discounting. Coach and Nordstroms bit the bullet and slashed product prices, and unlike what some experts predicted, the prestige brands have retained their luster and thrived. Other high-end brands are hedging losses in America and Europe by entering the booming Chinese market. Boomers are entering retirement while Gen X isn’t large enough to support their historical spending. From a global lens, the luxury market is experiencing tectonic shifts that show extraordinary short-term gains, but are profits sustainable?
Nearly across the board, the luxury market has rebounded after a recessionary slump. Global luxury sales rose 15 percent in the first quarter of 2010, according to U.S. consultants Bain & Co. Nearly all categories are in the black. e-Commerce, luxury, jewelry and restaurants saw May sales rise 13.7 percent, 9.7 percent, 6.4 percent and 2.8 percent, respectively, reports Reuters. Bricks and mortar retailers are also up. Saks countered last year’s loss with record profits in the past quarter, with sales up 6.1 percent — and an astounding 395 percent stock increase. Nordstrom shares skyrocketed 246 percent over last year’s bottom. Tiffany & Co’s global strategy benefited them with international sales up 17 percent in the most recent quarter and profit up nearly fourfold. How have prestige brands made such a comeback?
If the recession provided any key lessons, it’s the value of diversification. Those prestige brands with all of their eggs in one, American basket, suffered when the market bottomed in 2009. Milton Pedraza, CEO of the Luxury Institute, termed the strategy as a “self-imposed limitation.” He added that “overseas markets like China could be key growth engines for luxury players and also sees Japan as a ‘cash cow’ for those brands who can manage costs well.” Indeed, Chinese consumers account for nearly 25 percent of global luxury sales, followed by Americans, Europeans and Japanese, each taking around 20 percent of pie. Many large-sized luxury brands see the writing on the wall.
Taking Pedraza’s advice, historical luxury brands, such as Hermes and LVMH, have bumped up profits by entering the Asia market, writes Rob Lever of AFP. “Shiseido, Japan’s largest cosmetics firm, expects sales of its high-end cosmetics to grow up to 20 per cent a year in China over the near term, making it a key pillar of its global expansion plans,” reports the Economic Times. For prestige brands, all signs are pointing to Asia right now, but what should we expect for the future?
Global luxury goods industry sales are expected to grow 4 percent in 2010 to $195 billion dollars after 8 percent decline in 2009, according to the consulting firm Bain & Company. Five to ten years out, Gen X will pick up the torch and lead luxury spending. As Baby Boomers conserve spending in retirement, Gen X will be the primary target for prestige brands. Some experts predict Gen X cannot support Baby Boomer’s historical spending. Gen X is simply not a big enough group to pick up the slack, writes Rob Lever of AFP. Lever suggests Gen Y will fill-in the gaps left by Gen X. “The luxury market is unlikely to regain its luster until around 2018 to 2020, when the Millennials born after 1997 start their spending sprees,” he writes.
If this generational shift occurs as Lever predicts, the short-term profits in 2010 will serve as only a slight uptick in struggling American market. Luxury brands will have to shift focus slightly away from the American market over the next decade to sustain growth. The recession could have been a wake-up call for luxury brands focused entirely on Western markets, and considering the imposing generational shift, they should look East for answers.
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