The Road To Luxury. Blanckaert Christian

understand the effect of crisis in the luxury industry, luxury must first be divided into (1) hard luxury, such as watches and jewelry; and (2) soft luxury, such as fashion. A more comprehensive definition of the luxury industry includes products and services such as wine and spirits, food, travel, hotels and spas, technology, and cars. Among the most well-known luxury brands are Louis Vuitton, Hermès, Gucci, Cartier, Porsche, Ralph Lauren, Rolex, Tiffany, Armani, Burberry, and Ferrari. In 2012 the worldwide market for luxury grew more than 4 percent over 2011 to a massive €212 billion. In 2013 the worldwide market for luxury grew over 2 percent over 2012 to a massive €217 billion.1

During 2009–2013, this industry felt the impact of the crises. Luxury consumers changed, and so did the industry, with the rise of luxury multibrand conglomerates such as LVMH of Bernard Arnault, Kering of Francois Pinault, and Richemont of Johann Rupert, which were formed by the acquisitions of traditional family-run brands. Other luxury brands (usually family-owned) that resisted being taken over by the aforementioned conglomerates also grew alongside the conglomerates. The family brands protected their brand heritage and DNA; in addition, they purchased their suppliers and integrated vertically. They focused on brand equity, investing heavily in international expansion while repurchasing franchises and licenses to gain more control over their retail operations. Figure 1.2 depicts conglomerates that have a portfolio of brands selling different product categories (LVMH), conglomerates with many brands on one product category (Estée Lauder), companies with one brand and only one product category (Rolex), and houses with one brand with many product categories (Chanel).

Figure 1.2 Where Conglomerates Fall in Different Brand and Product Categories

      Due to the oligopolistic nature of the luxury industry, there arose intense competition among the handful of competitors. The most important driver for luxury brands to succeed was, thus, dependent on the disposal income of its clientele, which translated to consumer buying power. The disposable income of high-net-worth individuals had increased during the preceding 10 years. As society become relatively more affluent, consumers with disposal income were “created” through advertising to create an artificial demand for products beyond the individual's basic needs.

      Reaction to the Crisis of Global Markets

On one hand, the luxury industry is said to be recession-proof2 due to the noncyclical nature of the industry. This belief may be attributed in part to the change of consumer behavior in the United States and the broadening of the luxury consumer base, fueled by an increase in the disposal income of high-net-worth consumers. Another argument in favor of noncyclicality was the fact that luxury customers are generally the happy few who are not affected by economic crises and continue spending at the same levels.3 Both arguments, to a certain extent, are supported by the quick recovery of the luxury industry after the financial crises of 2001 and 2009. Figure 1.3 illustrates that over a 14-year period, the main players in the luxury industry could weather the effects of crises.

Figure 1.3 Revenues of the Main Players of the Luxury Industry, 2000–2013

On the other hand, democratization of the luxury goods industry whereby companies created accessible products, the noncyclicality of the luxury industry, is a questionable proposition. In the recent recession that started in 2007, the picture looked grim for the luxury industry. Bain & Company estimated that the sector lost 10 percent of its revenues in 2009. Reports from Bain & Company and Italian luxury goods traders Altagamma after a close watch indicated that luxury sales slumped to 5 percent in 2013 as compared to 13 percent in 2011 due to the debt crisis, which has currently gripped Europe since 2010. The growth of foreign tourism shopping in Europe slowed down to 18 percent in 2013, compared to 28 percent in 2012. Figure 1.4 depicts the effects of these two recessions, showing that the luxury firms are not immune to the slowdown in growth and revenue that follow each crisis.

Figure 1.4 Revenues of the Main Players of the Luxury Industry as a Percentage of the Previous Year, 2000–2013

      The economic crisis had deeply affected the luxury world, but in a way that was somewhat predictable. For many years, the luxury brands were undergoing constant growth, and no one thought they could be affected by a world financial crisis. They thought quite the opposite, in fact. The general opinion was that these losses would soon be overshadowed by the perennial story of growth and profitability.

      The sales figures from countries across the globe were interesting to observe in the light of the above discussion. In fact, the crises of 2009 and 2010–2013 helped us to better understand the luxury world. Most interesting was the behavior of consumers. Countries that were considered to be the homes and strongholds of the luxury planet were affected.

       Japan

      Japan was a star of luxury for 25 years, beginning in the 1980s. It represented 30 percent of sales for Hermès in 2005, at least 35–40 percent for Louis Vuitton, and up to 41 percent of the worldwide luxury goods market. Japan had been always a place where luxury shopping was considered to be an occasion. At the time of the global financial crisis, Japan represented about 50 percent of the clients of all key luxury brands. Up until 2005, luxury companies forged their futures with Japanese consumers in mind. For example, 94 percent of Japanese women in their twenties owned a Louis Vuitton handbag; 92 percent owned products from Gucci; more than 58 percent owned a Prada item, and over 51 percent possessed a product with a Chanel label on it. Traditionally, this market had been impervious to recession. Most major companies like LVMH, Hermès, Richemont, Kering, and Coach made supernormal profits in Japan until 2009. Two local crises hit the Japanese economy: the earthquake and resulting tsunami and the Fukushima nuclear meltdown.4 Since Japan accounted for a significant share of global luxury sales, the shares of LVMH, Hermès, and Burberry tumbled when the crisis hit.5 Overall, the Japanese market retreated between 20 percent and 30 percent. LVMH witnessed declining sales by 6 percent. Salvatore Ferragamo reduced prices of its 42 items by 7 to 10 percent for the first time since it began operations in Japan. Chanel held a sale of clothes and other items. Distributors such as Seibu and Sogo merged to form Millenium, Isetan merged with Mitsukoshi, Takashimaya merged with Hankyu, and Daimaru merged with Matsuzakaya to survive. Clearly, Japan became a nightmare for most luxury brands, as consumers saw the stock market at a five-year low and hoped to reduce their consumption to prepare for rainy days in the future. For the first time in history, 2009 showed the decline of the luxury market in Japan. Given the aftermath of the tsunami and nuclear disaster that rocked Japan, it is not surprising that people did not feel like shopping.

      In 2014, Japan registered between 5 to 16 percent of luxury sales. Chinese customers now account for about 15 percent of former Japanese sales. Does that mean that Japan has become a nightmare? It does not seem so. It is still, more than ever, a key market: stable, mature, and full of promise. Based on an interview about sales outlook, done by McKinsey & Co., on 2 °CEOs of luxury companies who were based in Japan, 75 percent were optimistic about the future prospects of Japan's luxury market. It would have been a mistake to consider that the market was lost. For brands like Van Cleef & Arpels, Cartier, Bottega Veneta, Hermès, Prada, Chanel, and others, Japan remains a strong and vital market. It is still the world's third-largest luxury market outside Europe, after the United States and China.

       Europe

      During the global financial crisis, Europe – the birthplace of luxury goods – surprised everybody. Europe had witnessed 40 percent or more of all luxury sales, but after the crisis it showed its resilience, with an average decline of only 5 percent. Compared to Europe, Asia-Pacific, mainly due to China,

1

Compared to the size of the luxury industry in 2014, no formal industry existed even during the 1980s. The luxury industry was an island where a happy few dwelled, unaffected by the worries of life.

3

Forbes, “Luxury Is in Crisis, Yet Luxury Brands, Tiffany's, LVHM Still Report Sales Growth,” 2011.

5

James Topham, 2011