As the 2010s come to a close, BoF reflects on how the past decade transformed the fashion industry — and the culture at large. Explore our insights here.
GENEVA, Switzerland — Over the past decade, the luxury goods sector has expanded at a healthy rate of approximately two times global GDP growth, largely powered by the rise of China, where new waves of wealth creation have given birth to millions of new luxury consumers. Ten years ago, Chinese shoppers drove less than 15 percent of global luxury consumption. In 2019, they will account for 35 percent of the market.
In recent years, China’s early adopters have become more sophisticated. Some have likely already left the personal luxury goods market, which long ago became dependent on upwardly mobile “new money” consumers. China’s second generation of luxury consumers were different: they wanted newness at a faster and faster rate. And as they have come to drive most of the luxury market’s growth, so too have they come to shape luxury’s new aesthetics. In recent years, deeper penetration of the Chinese social pyramid has provided major tailwinds for luxury mega-brands to the point where it no longer makes sense to talk about “the Chinese consumer.” They are now many clusters of Chinese consumers, defying broad-brushed generalisations.
In the last ten years, the digital revolution has also changed the shape of the luxury sector. Digital has rewired the way brands communicate with consumers: from monologue to conversation, from low-frequency to high-frequency, from mass market communications to segments of one, supported by exploding amount of data. This new media reality has broadened the audience for luxury brands and put pressure on companies to develop new expertise and processes, as well as a steady stream of fresh products for a world in which the rise of social media platforms like Instagram, too, have contributed to demand for newness.
Digital has also rebooted how luxury retail works, forcing brands to ramp up their e-commerce efforts and invent ways to support traffic to their stores with strategies like flagship counter-standardisation, temporary exhibitions and pop-up stores. This is a major departure from the cookie-cutter retail networks and “selling ceremony” handbooks of the early part of the century.
The rise of the internet has opened the door to new competition.
Furthermore, the last decade has seen digital multi-brand and grey market players, which offer products at discounts, wooing shoppers away from full-price brand.com sites and thereby short-circuiting the ambitions of fashion brands to sell online at full price. Now, brands are going through the painful of exercise of reducing their wholesale and grey market exposure.
What’s more, the rise of the internet has opened the door to new competition: new e-tailers with new business models but also new direct-to-consumer brands. Indeed, over the last decade, celebrities, major influencers and greenfield innovators have successfully launched new digital brands in categories from eyewear to beauty to footwear to fashion. These brands typically enjoy significantly lower overhead expenses, as they skip expensive physical stores, at least in their early stages, and have therefore been able to tap the opportunity to deliver product at lower price points. To some extent, digital has also disrupted the product itself, most dramatically in watches, where smartwatches are replacing Swiss-made products selling at less than CHF 1,000.
Meanwhile, the escalating complexity in the industry, driven in large part by the rise of China and the digital revolution, has put an even greater premium on scale, playing to the advantage of companies with the human and financial resources required to manage an increasing number of competitive fronts. Larger brands have become the only ones with the deep-enough pockets to finance higher marketing costs, counter fading in-store traffic, develop first-class direct digital activities and to do so without traditional wholesale and grey market exposure. As a result, performance has greatly diverged over the past ten years with the likes of LVMH, Hermès and Kering reaping the rewards, while Prada, Salvatore Ferragamo and Tod’s suffer.
For some of the same reasons, the last ten years have seen waves of consolidation in the luxury sector. LVMH has been the biggest protagonist here, rising unmistakably to the top of the industry while securing brands like Bulgari, Loro Piana and, most recently, Tiffany, though this latest deal is still a work in progress and will not close until the new year. (Let’s not forget LVMH’s move to take control of Dior and attempt — and fail — to capture Hermès).
The last ten years have seen waves of consolidation in the luxury sector.
Meanwhile, rival Richemont u-turned on Yoox Net-a-Porter (and on capital allocation efficiency), buying YNAP back, after initially divesting Net-a-Porter and merging it with Yoox. The medium-term results of the move remain to be seen. But LVMH’s Tiffany acquisition will be the largest in the sector’s history and will likely elicit a reaction. It certainly puts Richemont, whose holdings and expertise lie largely with watches and jewellery, under greater competitive pressure, and reduces Kering’s room for maneuvering in hard luxury. To be sure, there are fewer and fewer major acquisition targets left, but the next ten years is unlikely to be boring with the drive towards further industry consolidation set to persist.
Looking ahead, luxury companies also seem set to invest more upstream and put substance behind their craftsmanship and sustainability claims, as well as boost their speed-to-market to better align supply and demand and deliver customisation. But the future of the luxury goods industry is fundamentally predicated on the continued economic development of China.
How governments globally will manage rising income inequality will also be critical. Luxury consumption hinges on socio-economic emancipation being perceived positively by the broader public on the back of identification and belief in the possibility of future self-enhancement. If more people lose their optimism, stop believing in the future and retrench into a pessimistic, inward-looking mindset, wealth could once again be seen as a sin, and luxury consumption as inappropriate. The rise of nationalism in Europe and elsewhere is a warning sign that all is not hunky dory here.
Luca Solca is head of luxury goods research at Bernstein.