When it comes to the luxury sector, the premium European brands still have bragging rights over higher growth rates than their mass luxury counterparts.
Erwan Rambourg, luxury analyst at HSBC, said, “Over the holiday season, we saw that the premium European companies had incredible growth rates, while their more affordable, democratic luxury peers are structurally lower growers.”
European conglomerates such as Kering and LVMH have high brand equity, helped by a smaller footprint that’s not as exposed to the outlet channel and a more tightly controlled volume of goods in the marketplace. In contrast, mass luxury brands like Coach and Michael Kors cater to the aspirational consumer. But these brands also are perceived to have a significantly lower brand equity because of the sheer volume of product manufactured.
Rambourg also noted that the high exposure to the outlet store channel also hurts the mass luxury brands because of the lower-tier price point. He explained that outlet stores limit a brand’s pricing power because even if a customer is not shopping the outlet center, they know that option exists. “That’s not the case with Vuitton or Gucci. The premium brands don’t really provide that option, which raises the brand equity and consumers, if they want the brand, know that they have to be ready to pay up,” he said.
As consumers become more educated in their own fashion preferences and as their income levels rise, their taste level tends to mature and they and aim for the better brands. “These mass brands may be what the up and coming consumer will purchase for the first time, but over time they’ll wait longer to buy and save up for the higher-end European brands,” the analyst said. And wealthy individuals also want to be seen wearing the premium brand, which becomes an identifier of social status among their peers, he said.
According to Rambourg, the biggest challenge to the premium luxury brands is how to innovate and be creative on multiple fronts.
“How do you keep a young, savvy well-traveled consumer excited? The challenge is around the brand’s capacity to surprise. When you see the growth rates of Gucci and Vuitton, the big risk is complacency. It’s very important to understand that the vast majority of sales are still with people buying for the first time….Everyday you are going back to the recruitment field and you have to be the brand that is more relevant [than your competitors],” he said.
Growth for many of the brands, both high-end premium and the mass luxury group, is still largely in the Asian market, particularly in China. The analyst cited Moncler, which last year said more than 70 percent of sales in China were linked to people purchasing the brand for the first time, while more than half of the growth at Gucci is also tied to newcomers to the brand rather than repeat purchases.
According to Rambourg, the Chinese consumer in particular has been targeting the higher end brands, even if it means they have to wait until they can afford their purchase. He calls it the premiumization in the Chinese market. Brands that do a better job on the social media front have an advantage. “For the Chinese female in her early-to-mid 20’s, Gucci and Vuitton are dominating that conversation,” the analyst noted.
For the mass luxury brands, Tapestry Inc., the parent of Coach, Stuart Weitzman and Kate Spade, will be focused on turning around the Kate Spade brand. And Capri Holdings Ltd., which also owns fashion house Versace, Jimmy Choo and its core Michael Kors brand, is still in the process of integrating Versace.
According to Rambourg, Versace has “great brand equity,” but a limited consumer base even though brand awareness is high. He also voiced concern about how much time might be needed to build a higher, sustainable growth rate for the business.
“Premium, European luxury brands have a better growth rate on a ten-year view, but the disadvantage at Capri, because of its focus on premium luxury, is that it systematically over pays for its acquisitions,” Rambourg said.
Explaining the mergers and acquisitions structure that’s in place, Rambourg said: “An independent premium business that’s local in Europe knows someone who knows someone at one of the conglomerates, such as LVMH, Kering and Richemont. Everyone knows everyone. If one of those European multi-brands aren’t willing to pay up, then the U.S. multi-brands get to take a look, and Chinese money as well.”
That means that a European firm “will never get the best price if it sells to a U.S.-domiciled company,” he said, and conversely that the U.S. firm buying the European asset also will have to pay up for the acquisition even if its still less than what its overseas counterpart would have paid for the brand.
For now, it’s too soon to tell how difficult the repositioning of the Versace brand will be, or what the impact will be on Capri’s bottom line. The company is also saddled with the lackluster growth rate of sales in North America. “If you think long term, I’d say pedestrian growth. Maybe flat to up low-single digit. For the industry as a whole, the outlook for 2019 is 6 percent growth. For brands such as Vuitton and Cartier, I expect them to outperform 6 percent,” Rambourg said.