LONDON, United Kingdom — When we began exploring areas of focus for Walpole’s 2016 Luxury Summit, one thing became immediately clear. With a stagnant European market aggravated by Brexit, a slowdown in China, lukewarm Asian performance and growing instability in the Middle East, few international markets seem a safer bet for luxury now than the Americas.
The US is certainly at the top of everyone’s agenda as shown by our recent study with McKinsey & Co called “Key Growth Drivers of British Luxury.” When surveyed about international growth markets, 75 percent of luxury company respondents identified the US as a future growth market, whilst 79 percent said it was a current growth market.
But this is only part of the story behind growth opportunities in the Americas. Latin American markets like Mexico and Colombia now offer exciting potential and, although Brazil is still somewhat precarious, it is a market whose wealth and scale cannot be ignored. Given this and the fact that some luxury players have overlooked smaller dynamic South American markets or underserved the Canadian consumer, it seemed only fitting that we turn our attention toward opportunities in the Americas.
And so with this in mind we assembled experts from across the region to share their perspectives at our annual June summit in London.
Strong fundamentals in the US
What we were reminded was that the US continues to be the world’s largest economy, with stable annual GDP growth of approximately 2 percent and that many other economic indicators are positive. It is easy to take the scale of US market for granted but it is worth remembering that the luxury market in New York alone accounts for $25.5 billion, estimated to be more than the whole of Japan and that Los Angeles, at $6 billion, is double the size of the Russian market. Of course, many luxury brands have penetrated deeply in these and other major US cities, but there are untapped opportunities and interesting developments in urban markets elsewhere around the country where their footprint is much lighter.
While concerns over an increasingly polarised American political system are certainly founded and the upcoming election brings some uncertainty, private consumption growth in the US is currently reasonably strong growing at 2 to 3 percent. With unemployment as low as 4.9 percent, consumption growth is expected to move closer to 4 percent over the next year. Real wage growth and disposable incomes are rising, household debt has dropped to 10.1 percent and US household net worth has increased by $30 trillion in 2008 to $88 trillion today.
Furthermore, in terms of wealth creation, the US now has 14 million affluent households — those earning more than $150,000 annually. This group has households with a mean income of approximately $300,000 and assets of about $3 million. At the top tier, 400,000 households have a mean income of approximately $1 million with assets of $20.1 million.
The luxury market in New York alone accounts for more than the whole of Japan and Los Angeles is double the size of Russia.
Certainly, the overall economic picture in America is strong, but the mature luxury market segment is rapidly evolving. We are seeing a shift in customer attitudes and associated behaviours; new centres for luxury are developing; the role of the American department store is evolving and brands and retailers alike need to focus on more emotional engagement with their customers.
According to YouGov’s Wealth Practise managing director Cara S. David, the generational differences in US consumption play an even bigger role. Research suggests that the market for luxury is diverging rapidly and markedly between affluent high-spending boomers and millennials. According to the “Affluent Perspective Global Study,” David forecasts a 0.9 percent reduction in luxury spending in 2016 among all affluent groups, except in two — American millennials and America’s 400,000 wealthiest households, whose spending is expected to increase by 8 percent and 10 percent, respectively.
However, the total millennial spend at $49 billion is only around half that of Gen X at £96 billion and a fraction of the $117 billion attributed to baby boomers. Marketers therefore need to be careful not to sacrifice one demographic for the other. Two categories are expected to benefit from an increase in spending. With travel up 10 percent from 2015 to $119 billion and fine dining up 5 percent to $42 billion, it supports the idea luxury customers are increasingly investing in experiences and the wider lifestyle associated with luxury brands. This presents opportunities for fashion brands able to engage with customers on an emotional level, but challenges for those that don’t.
Linked to this and another topic of discussion at the summit was the evolving model of the American department store, whose strength and geographical reach has always been crucial for luxury brands to build profile and scale. However, as highlighted by Marigay McKee, founder of MM Luxe Consulting, department stores around the world are facing enormous competitive pressures, which she identified as “the three ‘O’s of online, off-price and outlets.” In the US, department stores remain critically important but many need to focus more of their efforts on improving the shopping experience, environment and emotional engagement, as pointed out by McKee.
Interesting prospects in Latin America
Looking south, Latin America is still a story of emerging markets but luxury brands, with the exception of a few, continue to have a relatively light footprint across the region. Although there is great variation among the constituent countries in respect of economic stability and market accessibility, there are significant concentrations of wealthy consumers across the region.
Despite tariffs, infrastructure challenges and the country’s current economic and political instability, Brazil remains one of the two areas of focus for most luxury brands alongside Mexico, the other giant economy of the region. Brazil’s scale will offer long term potential to some brands given its size and the large number of wealthy people (the country accounts for more than 50 percent of the total of South America’s high net worth individuals) as well as the fast growing urban centres beyond Sao Paulo and Rio de Janeiro.
Mexico has fared well because of its proximity to the US and a relatively open market. Following recent political changes, there is even measured but growing optimism around hitherto unstable markets like Argentina. But perhaps most interesting is Colombia, which after years of being defined by violence and corruption, is now an increasingly open and stable economy, growing at more than 3 percent per year. Over the last 10 years, Colombians have been one of the top three shoppers from Latin America in the US and are gaining recognition as sophisticated and savvy luxury consumers in their own right.
Charlotte Keesing is director of international and public affairs at Walpole, an alliance of 170 luxury British brands.
The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.