20 Oct 2014

Where to Next for the Luxury Goods Sector?

After many years of growth in emerging markets, luxury goods brands could be falling on hard times.

The European luxury goods market has long been regarded as the most sophisticated and brands like Burberry, Mulberry, Giorgio Armani, Gucci, Prada and Louis Vuitton have enjoyed many years of growth in global markets.

Burberry, the 158-year-old British luxury goods company, announced a 14% increase in sales in its first half but stated that like-for-like sales decreased in the second quarter impacted largely by a fall in Chinese demand. The company noted that it expected the “more difficult external environment” to reduce margins.

Mulberry, another UK firm which specialises in handbags, issued its fourth profit warning in a year as sales dropped 9% in the first six months of the year. The company is likely to make an annual profit of just £4m compared with previous estimates of £10m. The company has faced challenges trying to move upmarket due to tough competition and reduced demand.

LVMH, owners of the Louis Vuitton brand and the world’s largest luxury goods company, also noted that growth in Asia was slowing.

So, what has happened?

In China, showing off one’s wealth is no longer a way to win friends and influence people. The government has been actively engaging in an anti-corruption drive that has spooked Chinese businessman. Several high-profile government officials including Bo Xilai, a former Communist Party Chief, Liu Zhijun, a former railway minister and Liu Tienan of the National Development and Reform Commission were recently charged with corruption and abuse of office.

Chinese officials are now even looking beyond China’s borders to identify and seize assets of corrupt Chinese officials. The Australian Federal Police, for instance, are ready to seize the assets of corrupt Chinese officials within weeks, in an unprecedented joint operation with their Chinese counterparts. This has resulted in an estimated $9bn being wiped off annual entertainment budgets in China.

Meanwhile, Russians are being hit by EU and US sanctions and there are also concerns that the conflict in Syria and Iraq could reduce demand from Middle East customers.

In Africa, the rapid spread of the Ebola virus may also potentially impact luxury goods sales to wealthy Africans. On top of all this, currency devaluations in Russia and Brazil could further reduce demand in these key emerging markets.

Where to from here?

Luxury goods manufacturers and retailers may need to rethink their global marketing strategies and invest in regions that are more likely to boost their revenues and bottom lines.

Bain and Company conducted a study of the luxury goods market which suggests that luxury brands everywhere should be focusing on how to build growth organically. Here are some of their forecasts.

Europe: Western Europe can expect continuing strong touristic luxury shopping, with good influx of Chinese and Middle Eastern customers by contraction among Russians and Japanese. Eastern Europe and Russia in strong contraction. Projected 2014 growth of 2-4 percent.

Russia: Domestic market suffering and contracting – deteriorating economy, declining overseas influx due to political instability. Projected 2014 loss of 4-6 percent.

Americas: Strong U.S. fundamentals and growth among both local consumers and tourists; largest potential for European brands, leather goods, jewellery and men’s segment. Brazil slowdown. Projected 2014 growth of 4-6 percent.

Japan: Currency devaluation repatriating domestic consumption, spurring record growth in local markets. Luxury brands raising prices with potential to curtail growth. Projected 2014 growth of 9-11 percent.

China: Corruption crackdown reducing sales, especially gifting. Significant price differential driving purchasing overseas, making Chinese top global customers. Projected 2014 growth of 2-4 percent.

Asia Pacific: Stagnant sales in South Korea. Singapore, Indonesia performing well; Thailand investments questioned. Projected 2014 growth of 3-5 percent.

How luxury brands can weather the storm

As growth in the luxury goods market slows in many emerging markets and competition increases, consumers are likely to become more rational. As a result, luxury goods suppliers will need to become increasingly creative while keeping their brands aspirational and exclusive in order to tempt customers into their stores.

This means that instead of simply translating their marketing material from the source to target language – more than ever, they will need to ensure that they transcreate their marketing messages with their target audience preferences and behaviour in mind.

On top of that, brands will need to pay attention to how their products are being received in their target markets. So, brand and social media monitoring will become increasingly important.

Furthermore, differentiation will become increasingly important and selecting a translation agency that can successfully communicate a luxury brand’s values on an experiential and emotional level will be critical to future success.



 
 

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