NEW YORK, United States — There’s no question the past year has been a difficult one for luxury brands. In 2015, the global market for personal luxury goods grew to €253 billion (about $284 billion), up only 1 percent on the previous year in real growth terms, according to a report by Bain & Company, a global consulting firm. “The luxury market is stuck in a holding pattern for the foreseeable future,” says Claudia D’Arpizio, a Bain partner and the principal author of the study, which cites slow US holiday sales, decreased tourism in Europe, instability in the Middle East and the downturn in China as prime factors behind the slow growth.
In the current climate, even elite luxury brands like Chanel and Hermès — which emerged from the Great Recession virtually unscathed and were once thought to be immune to market headwinds — are showing signs of distress. Chanel International BV, one of Chanel’s holding companies, recently made a filing with Kamer van Koophandel, the Dutch chamber of commerce, reporting revenue of $6.24 billion in 2015, a 17 percent drop from the previous year. Operating profits were $1.6 billion, down 23 percent from 2014. It’s hard to know which parts of Chanel’s total business the filing covers, making it impossible to discern overall sales performance for this privately held brand, owned by the secretive Alain and Gerard Wertheimer. But around the same time, Chanel also filed numbers in France for its beauty business, showing revenues of €2.6 billion ($2.9 billion) in 2015, down 21 percent on the year before.
Hermès, meanwhile, reported that revenues in the first half of 2016 reached €2.4 billion ($2.7 billion) in sales, up 6 percent at current exchange rates and that operating margins were projected to be “slightly higher” for the full year, with operating margins reaching at all-time high of 33.9 percent or €827 million ($928 million) in the first half. However, the company also said it could no longer stand behind its previous estimate of 8 percent growth for the full fiscal year, and that earnings would likely be lower in the second half of the year. “We have to be frank and transparent,” chief executive Axel Dumas said during a recent investor call. “We see first-half results that were better than we expected, but there is a lot of uncertainty around the world and the rigidity of written guidance means we are less flexible.” Shares of Hermès were down on the Paris Bourse by as much as 5.7 percent after the announcement.
Brands like Chanel and Hermès, which are very exclusive, are the last ones to be cut.
Even in 2009, arguably the worst year for the global economy in recent decades, Hermès saw revenues increase 8.5 percent, or 4.1 percent at constant exchange rates. “Brands like these are more resilient in the downturn of an economic cycle because they are top of mind among the consumer,” says Mario Ortelli, senior luxury goods analyst at Sanford C. Bernstein. “The consumer cuts the volume of spend when the economic cycle is negative. Brands like Chanel and Hermès, which are very exclusive, are the last ones to be cut.”
Widespread economic uncertainty and slow growth in key global markets is at the heart of the problem. While blue-chip luxury brands were able to rely heavily on growing wealth in China as the West went through the Great Recession, the slowdown in China has hit them hard. “During the recession of 2009, Hermès and Chanel in particular were resilient because they were able to tap into the preferences of the emerging market consumer,” says Ortelli. Chanel’s decision to harmonise pricing across markets, making its products less expensive in China, has also affected recent performance. “Chanel global pricing not only impacted the results, but brand desirability,” continues Ortelli. “It has managed to keep its status on some iconic products, but it’s maybe not as desirable in other product categories, such as ready-to-wear.”
Thanks, in part, to a long term investment in Japan, which saw its luxury business revitalised in the wake of China's troubles, Hermès was able to stay above water in the region. What's more, sales of luxury goods in China are projected to increase 6 percent in 2016, according to a new report from Euromonitor International. But China's deceleration is only one factor. Terrorist attacks in Europe have put a serious dampener on tourism to the region. In August 2016, officials estimated that Paris alone had lost €750 million ($842 million) in tourism revenue since the November 2015 attacks that killed at least 130 people. “It’s not just that wealthy tourists in Paris are not spending money on an Hermès bag or a Chanel jacket, it’s that they are not travelling at all,” says Fflur Roberts, head of luxury goods at Euromonitor.
At the same time, luxury consumers are shifting their spending patterns, increasingly favouring experiences over objects. Of the $1.8 trillion spent on “luxuries” in 2012, nearly $1 trillion, or 55 percent, was spent on luxury experiences, according to a 2014 Boston Consulting Group report. That year, the market for luxury experiences grew 14 percent year over year, outpacing sales of personal luxury products — watches, jewellery handbags — which increased by 11 percent. “Consumers are changing and what they want is changing,” says Roberts. “Maybe they won’t spend money on a Bulgari bag; they might rather stay in a Bulgari hotel.”
Chanel, in particular, is also behind when it comes to e-commerce. At the moment, the company only sells beauty products and sunglasses through its e-commerce site. “Consumers want to buy online, especially if they’re not travelling as much,” says Roberts. “Some [brands] may stick to their guns and say, 'No, we don’t want to expose ourselves too much.' But let’s see how their sales look.”
What these top tier brands are very good at, however, is making products that retain their cultural value for decades. “Creating something like an evergreen bag is not easy, it’s more a result of art and magic than of science,” says Ortelli. “It requires luck, and time.” And to some extent, brands like Chanel and Hermès do have the luxury of time. Chanel, in particular, does not face the pressure of the public markets and it's likely that elite brands like these will be able to take advantage of their positioning to reset for a less-certain future.
“These companies have worked generations to ensure that they are impregnable, that they’re rock solid,” says Arnold H. Aronson, partner and managing director of retail strategy at Kurt Salmon, a management consulting firm. “They have the what it takes to withstand the rigours of cyclicality.”
Technology upgrades can also help. “Intelligent use of technology, the most advanced techniques in logistics and distribution — analytics, artificial intelligence, demand forecasting — are part of the science versus the art,” adds Aronson. “The real hardball issue is: can you improve the science of your business to be able to maximise the art form of your business?”