INSIDE LVMH|Future Growth in Luxury

This article is a study note of INSIDE LVMH courses. In the course, Erwan Rambourg, a top-ranked Luxury analyst and renowned author of books about the future of Luxury, shares an optimistic view about the next decade of growth in the luxury sector and highlights the key topics that will influence that growth.

▍The next decade of growth in luxury

To beginning with, there are three reasons to be confident about the next decade of growth in luxury:

  1. Ladies first. The future is female:

Women are already the key decision-makers for households across the planet. Yet, with significant financial autonomy and higher employment participation rates, the female spending power is on the cusp of becoming much greater. As women get married later and have fewer children, higher disposable income will support increased luxury spending. While economics will support female-driven consumption, societal change around gender inequality seems to have accelerated recently.

2. All points East:

China has become even more important for the luxury sector in terms of contribution to sales. We are by no means at the end of the journey. Asia will continue its strong support of the luxury sector with China as the main driver of growth over the next decade. Four main trends will be associated with this growth:

1) Wealth creation will fuel the next generation of Chinese shoppers, with the number of potential luxury clients close to doubling over the next five years.

2) Growth will come from China itself, with four good reasons to shop at home:

  • Harmonisation of price.
  • The rapid development of omnichannel buying.
  • The administration’s monitoring of consumer spending.
  • Increased education about where to purchase genuine luxury products.

Short term, Covid-19 has been an accelerator of this repatriation of growth on the mainland.

3) China’s market is becoming highly profitable after having been margin-dilutive for years.

4) Other Asian markets are either reaching a ceiling (such as in Japan or Taiwan), getting mature (such as South Korea) or are too small to move the needle for now (such as in India or Indonesia).

3. The power of Youth Inclusion and Diversity:

Luxury buyers start young for many reasons, but the essential one is ‘human nature’ and ‘buying your place in society.

Whether in China, the US, or emerging markets, the modal age of the population is much lower than in Japan or Europe. In the West, youth demographics are increasingly diverse.

The young generation of luxury buyers, including most notably people of colour, around the world have transformed the luxury industry and should continue to do so, particularly in certain areas such as casualisation, i.e. a more relaxed way of dressing up.

This is not a fad. It is more of a generational shift. These younger generations are clearly purpose-driven and expect the companies they buy from to start ‘getting woke.’

What about distribution?

Looking at distribution, although we saw the rise of e-commerce post-Covid, brick and mortar is still an important part of the luxury story. While the consumer world is going online, e-commerce will have some limitations as a contributor to luxury brand sales, almost by definition. Separately, many luxury brands might aspire eventually to control their distribution as strictly as LV does.

Brick and mortar is still the future of luxury.

Of course, the stores of tomorrow will not be comparable to the ones people are experiencing today. As long as brands’ main target is not just to sell, they should offer consumers a unique experience, for example, a place to spend time and socialize, learn and be entertained.

▍Three substitutes for luxury brands

As luxury moves from recruitment to a repeat purchase business over time, there will be a potential for substitutes to arise. So, which substitutes should we focus on? Let’s focus on three substitutes.

  1. Health:

It is a major concern for many consumers, and they are ready to invest to live healthier lives. Spending on the so-called trinity of health, i.e. diet, exercise and sleep, as well as on mindfulness products.

The healthy trend could divert from spending on traditional luxury products to other products or services, especially given the greater overlap between brands and experiences. If anything, the Covid-19 outbreak has accelerated consumers’ greater focus on health and wellness.

2. The ‘Premiumization’ of everything:

Everything can be premiumized, from coffee to entertainment. The issue that traditional luxury brands will face is that the next generation of consumers will be diverting their spending away to free up spending on products and experiences that they will perceive as being edgier or more in line with their values.

3. Travel:

Travel trends are well supported by wealth creation and will be a positive factor for luxury demand ahead as with travel also comes bragging rights. Structural factors will enable travel to thrive, notably the lower costs, greater awareness of destinations, and increased safety of the world.

As with luxury demand overall, the continued emergence of wealthy Chinese consumers will dominate travel trends and the associated spending for the next ten years. This consumer will change destinations depending on foreign exchange moves, political, and security concerns, as well fashion trends.

One big concern, however, remains. Travel comes with high greenhouse gas emissions and being environment friendly will be increasingly important to the up-and-coming luxury consumers.

▍Sustainability: The most disruptive trend of the next decade

On this topic, it seems that sustainability will be the most disruptive trend of the next decade. Ethical transparency, production traceability, and environmental sustainability are not mere buzzwords for the young generation. Whether due to lab-grown diamonds, faux fur, or second-hand appeal, the next decade will be very disruptive.

Existing luxury companies need to have an alternative in mind, and possibly invest in them, as a hedge for when their own businesses might be affected by these emerging categories.

Recognising the existence of a circular economy, environmental, sustainability, and governance issues will not be merely a fashionable conversation or an opportunity to greenwash. A genuine transformation of processes is needed as the next consumer will not be gullible and they will be asking questions. A substantial amount of growth potential remains to be harvested.

▍key takeaways

In a conclusion, there are many growth opportunities for the sector, and Covid-19 has accelerated some key changes in the industry. Brands that are quick enough to embrace change and willing to take risks and rethink their business models, that are great success stories ahead!

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