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Bain: China Will be Key to Any Hopes of Luxury Market Revival

The luxury market is putting all its eggs in China’s basket for any hopes of greater growth.

In its latest global personal luxury report, Bain & Company said the high-end market has entered a period of slower but steady growth, and anything beyond that will be “heavily contingent” on what China’s logo-loving consumers do.

Last year the luxury goods market, including leather accessories, fashion, hard luxury, fragrance and cosmetics, reached 253 billion euro ($283 billion) in revenue, just 1 percent growth over 2014 thanks to a slow U.S. holiday season, decreased tourism across Europe, instability in the Middle East and China’s downturn. That slowdown is expected to continue at least throughout the year.

“The luxury market is stuck in a holding pattern for the foreseeable future,” Claudia D’Arpizio, a Bain partner and lead author of the study, said. “All eyes are again on Mainland China, which is the key to unlock recovery around the world, and the U.S., where local consumption is failing to offset decreased tourism. Consumers’ changing purchase patterns, including a reshuffling of tourism and revitalized local spending in Europe, will likely do little to drive luxury brand growth much beyond the low single digits.”

Greater China, namely Mainland China, has shown signs of a comeback, nearly reversing a three-year decline, with luxury growth up 2 percent. The market will be steady in Taiwan, but Hong Kong and Macau will see their struggles in the sector continue.

In the rest of Asia, Southeast Asia (with the exception of Singapore) is doing well with a boost from intra-regional tourism and local spending, and Chinese tourism will continue to support luxury spending in South Korea. Taking China out of the mix, luxury market growth in Asia is down 1 percent.

Japan is still the top market for luxury growth, up 5 percent in 2015, though the slowdown may be catching them, too. A stronger yen and fewer Chinese tourists could mean locals will spend less at home.

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Slow tourism in Europe owed to terrorism and new biometric visa requirements, made for market growth of just 1 percent, though locals are expected to make up for it.

Retail in general has been down in the U.S. and the luxury market there is no exception, thanks in part to zero support from tourism and uneven local demand. Luxury growth in the Americas overall fell 2 percent in the period.

Bain said the luxury market will see growth between 2 and 3 percent through 2020, reaching roughly 280 to 295 billion euro ($313 to $330 billion) in revenue, but that outcome will very much be tied to continuous growth in Mainland China.

Chinese shoppers are expected to make up close to 34 percent of global luxury consumers in the next four years, far ahead of American and European consumers.

And the top luxury spenders are getting younger. Increased spending among Millennials who have changed their consumption habits, and the growth of incoming Generation Y (largely driven by China’s middle class) will launch a hardly insignificant 50 million new consumers into the market.

“The luxury market will continue to receive a substantial boost from Generation Y and Generation X,” according to Federica Levato, who co-authored the report. “Together with Generation Z, which will continue to make up just a sliver of luxury spending, these younger consumer will comprise three-quarters of the global luxury market by 2020. Therefore, the market cannot afford to ignore them or their preferences for accessible yet content-rich products and brands.”

To maintain luxury market growth, brands will have to master their brand content and storytelling, improve personalized consumer experiences and refocus distribution strategies to evolve into value-driven “fast luxury,” Bain said.

“The future market scenario will be inevitably shaped by luxury brands’ strategic decisions across various levels,” D’Arpizio said. “While customer strategy, branding and story-telling, omnichannel distribution and pricing remain at the top of the CEO agenda for luxury companies, the best brands also implement ‘locally global’ value propositions and develop, grow and retain best-in-class talents to win in a more sluggish market.”