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Bain: Luxury Goods Growth Slows Thanks to Currency Swings

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Bain Luxury Goods Study 2015

Global currencies seesawed in 2015 and the unexpected shifts shook up the luxury goods sector.

In Bain & Company’s latest luxury study titled, “A time to act—how luxury brands can rebuild to win,” analysts said personal luxury goods brought in 250 billion euro ($272.3 billion) in sales last year, 13 percent growth at current exchange rates, but real growth was a much slower 1 to 2 percent.

“The slowdown con?rms a shift to a ‘new normal’ of lower sales growth in the personal luxury goods market, which we highlighted in previous analyses,” Bain noted in the report published for Fondazione Altagamma, a trade association of Italian luxury goods manufacturers. “The challenge for luxury brands in this environment is to successfully navigate market volatility driven by currency swings and ?uctuating tourist ?ows.”

How did currency play into luxury spending?

A strong U.S. dollar helped make the Americas the biggest region for personal luxury goods purchases, but in real terms, as Bain put it, “the U.S. market did not deliver.”

The “super-dollar” priced out a lot of global tourists, and though local consumption was up, it was only slightly enough to offset the dip in tourism revenue.

Europe’s growth was sound, owed mostly to Chinese and U.S. tourists looking to capitalize on a weak euro.

“The old continent has become ‘the world’s largest in-season outlet,’ analysts wrote.

Chinese tourists’ tax-free purchases in Europe grew 64 percent and American tourists spent 67 percent more. Russian travelers spent 37 percent less on their tax-free shopping, and Japanese travelers spent 16 percent less.

In Asia, performance was all over the place.

Japan is benefitting from the emergence of Chinese tourists trying to capitalize on currency swings, and its retail sales value grew 9 percent in local currencies to 20.1 billion euro ($21.9 billion). South Korea saw 4 percent growth to 11 billion euro ($11.9 billion), but in Hong Kong, however, sales contracted 25 percent to 6.8 billion euro ($7.4 billion), due in large part to the crack down on grey market goods.

In China, local spending slowed 1 percent to 17.9 billion euro ($19.5 billion).

“Chinese consumers play a primary role in the growth of luxury spending worldwide,” according to the report. “They account for the largest portion of global purchases (31 percent), followed by Americans (24 percent) and Europeans (18 percent). Chinese shoppers continue to spend far more abroad than in Mainland China, which accounts for only 20 percent of their global purchases.”

The euro depreciation boosted China to the third-largest luxury market after the U.S. and Japan.

Which categories performed best?

By category, accessories—which account for 30 percent of the global market—still lead the personal luxury goods category and the sector grew 3 percent in 2015.

Growth of high-end shoes continued, surpassing leather goods growth, up 2 percent to 16 billion euro ($17.4 billion) in retail sales value.

Shoes are “the status symbol at the price sweet spot,” as Bain noted. In men’s, growth is on a positive trajectory and women’s is showing more dynamism. The ongoing sneaker phenomenon is leaking into other categories, giving rise to formal shoes with sneaker-like soles, and in general, lifestyle brands are showing greater growth than shoe specialists.

Apparel was the second largest category in terms of value at 24 percent of the market, with 2 percent growth.

“The performance of the fashion and apparel category was slightly soft, with both women’s and men’s ready-to-wear segments (accounting for 30 billion euro ($32.6 billion) and 29 billion euro ($31.6 billion) in retail sales value, respectively) growing at only 2 percent in constant exchange rates,” Bain noted.

In men’s ready-to-wear, casual wear posted low single-digit growth, while formal wear continued to suffer. Outerwear and cashmere categories outperformed others, as did denim, which has maintained momentum thanks to “a new fashion twist and the success of customization services.”

Things were positive overall in women’s ready-to-wear. Denim and outerwear both saw “brisk growth” and, as with men’s, formal wear sales are lagging.

What’s next for luxury?

The key for most luxury brands, as in any category will be getting the price right.

According to Bain, “The rise of e-commerce and global tourism growth create greater transparency around international price differentials.”

Price-conscious consumers are having a hard time reconciling the price of personal luxury products with their real value, so brands will have to mitigate volatility and deliver at local and global levels.

Many brands may also have to rethink their store strategies in terms of both number of stores and experience in stores as digitization increasingly alters consumer behavior.

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