Introduction For more than a decade, the luxury industry appeared relatively immune to the disruption underway in most consumer industries. But rapidly changing consumer attitudes, sophistication, demands and expectations have shaken the status quo and propelled luxury purveyors into the tech-savvy and social-media-savvy 21st century. Those that aren’t keeping pace with the new luxury consumers are being left behind. Luxury brands steeped in heritage have stories to tell, and digital platforms are increasingly the means of brand discovery and communication, if not the actual purchase transaction. Luxury brands can use technology to romance potential shoppers and entice them to a brand experience in store. This Sector Overview covers the following subjects:

• Key themes in the sector.
• A look at global growth.
• Top industry participants.
• Retail channels.

Themes We’re Watching Global Themes We are seeing an evolving definition of luxury. The concept of luxury is as old as humanity and has been instrumental in social stratification. Since the 19th century and the dethroning of noble rulers, luxury products provided the social markers that communicate one’s status in society and place in the world. Attributes of luxury brands included:

• Innovative, creative, unique and appealing products
• Exclusivity
• Tightly controlled distribution
• A distinct brand identity
• Premium pricing
• Premium quality
• Heritage of craftsmanship
• Global reputation

In the last 10 years, luxury’s democratization has accelerated, and luxury brands are adding new attributes to brand positioning, including:

• Inclusivity
• Authenticity
• Transparency
• Sustainability
• Egalitarian or democratic
• Out-of-the-box collaborations

We have seen the emergence of a new normal for luxury, brought about by the confluence of new luxury shoppers, trends in globalization, and technology. Once slow to change, luxury brands are now experimenting with new forms of communication, out-of-the box collaborations and bringing technology into the heart of the business. Long protective of every touchpoint with the consumer, luxury brands are testing the waters of inclusivity, and engaging in real conversations with their consumers. In a world dominated by Amazon, luxury brands have been slow to enter the digital age. However, in the last few years, brand managers realized the necessity of going where their potential consumers are – and that means going online. Burberry was an early adaptor of social media and has transitioned more than half of its media spend to digital platforms. With over 51 million social media followers globally, across 13 unique platforms, 24 accounts and 11 languages, the Burberry brand has extensive digital reach. Digital doesn’t have to mean Amazon. While premium and mass brands may be lured by Amazon’s siren calls, luxury brands are reluctant to join the platform’s endless aisles and jeopardize brand positioning with potentially mundane product adjacencies (toothpaste and toilet paper). In 2017, LVMH took its visual merchandising expertise online with the launch of 24 Sèvres, a digital commerce platform with delivery to more than 75 countries and more than 150 premium luxury and fashion brands. New Global Luxury Consumers Younger generations are looking for different types of luxury goods and they are buying them in different ways.

• Young consumers drive fashion and cultural changes. Millennials and Gen Zers are fueling growth of the global personal luxury goods sector and by 2025, Bain posits that 45% of luxury sales will be to these two cohorts. Deloitte says it will be more than 40%. So, their influence is growing. The casualization of the workplace and the popularity of streetwear began with youth and subsequently was adopted by older generations hoping to emulate a millennial state of mind. Using iconography such as emojis and cartoon characters, luxury brands can attract youth, make older consumers feel young again, and transform a brand persona.
• Chinese youth are avid luxury shoppers. More than half of China’s luxury shoppers are under 30 years old, and 26% are 18-20 years old, according to joint research from Tencent and Boston Consulting Group. Chinese youth will shape the luxury market for the coming decade.
• Traditional luxury shoppers were Americans, Europeans and Japanese. The expanding Chinese middle class and developing nations around the world, and easy access to everything, has changed the profile of the luxury consumer. More and more, established luxury consumers will cede share to the growing middle classes of developing nations. In the last three years, Chinese luxury spending in China contributed twice as much growth as Chinese luxury spending abroad, according to Bain. This trend is likely to continue. Moreover, Chinese luxury shoppers have become increasingly sophisticated, expecting more than logo-adorned product to luxury brands that are more understated, along with higher levels of brand engagement. By offering limited editions of short duration and exclusive products, widely distributed brands such as Louis Vuitton and Gucci can continue to appeal to a luxury sophisticate.
• Some have pointed to Chinese luxury consumers focusing more on experiences at the expense of spending on luxury goods. Our 2018 survey of Chinese outbound tourists found a sharp decline in average spend on shopping per trip, and we think the shift of spending to experiences contributed to this fall.

The Health of the Chinese Economy China’s economic growth rate is estimated to have eased from the 6.7% GDP growth achieved in 2017, to 6.5% in 2018. A more rapid slowdown could slow global luxury sales. Regardless of economic strength, Chinese luxury consumers are directing a growing portion of their luxury spend domestically, and this will impact luxury sales in other regions — notably, the U.S. and international flagship cities such as Paris, London, Rome and Geneva. US-China Trade Tensions Pose a Threat Any escalation of tensions between the U.S. and China could derail prospects for many luxury firms operating in both markets. Chinese consumers have driven much of the expansion in the personal luxury goods market since the global financial crisis of 2009. According to the China Outbound Tourism Research Institute, Chinese tourist arrivals in the U.S. fell 20% year over year in the third quarter of 2018. At the same time, Chinese tourist numbers to France and Italy grew 20.7% and 18.9%, respectively. The U.S. is no longer the first choice, in part, due to exchange rates and in part, due to trade tensions. It may be difficult to reverse this trend. Winning in China According to market-research firm Euromonitor International, luxury goods spending in Mainland China accounted for 28% of the global luxury market in 2018. The key growth drivers were super-premium beauty and personal care, and luxury jewelry. As more luxury spending by Chinese consumers takes place in China rather than on overseas trips, luxury brands will need to create compelling store experiences and build loyalty to attract and keep Chinese luxury shoppers engaged. Chinese companies will likely develop indigenous luxury brands that will compete domestically with global luxury powerhouses. Cross-border e-commerce of high-quality luxury products is poised to grow in China, allowing domestic consumers to shop online from overseas merchants while enjoying tax savings and better consumer protection. We described the huge opportunity for cross-border e-commerce in China in two reports:

• Chinese Demand for Cross-Border E-Commerce Booms but Looming Tax Reforms are a Cloud on the Horizon
• Chinese Cross-Border Retail Heads Offline with New Brick-and-Mortar Formats

Global price harmonization is projected to accelerate luxury sales growth in Mainland China and propel that geography to become a more important region for luxury brands. At the same time, luxury sales in Europe, the Americas and the rest of Asia will see attenuated growth from Chinese tourists. Sustainability and Ethics Today, stakeholders tend to expect greater transparency and accountability from companies. The role of the luxury industry in sustainability is evolving. Consumers pay more for, and expect more from, luxury products. Many luxury brands practice sustainable business practices in their efforts to ensure quality raw materials and artisanry. Global luxury group Kering, with its 13 luxury houses of fashion, leather goods, jewelry and watches, including Gucci, Saint Laurent, Bottega Veneta and Balenciaga, has been working hard to reduce its environmental footprint – and was recently recognized as the second most sustainable company in the world in the Corporate Knights’ Global 100 index published at the World Economic Forum in Davos. Chanel, a privately owned company for more than 100 years, published its Report to Society in June 2018, saying that to secure its future and the long-term value of the Chanel brand, it must contribute long-term value and sustainability to the environmental and social ecosystems in which it operates. The company recently ended its use of exotic skins, the first luxury company to do so, saying it has become harder to source the pelts (snake, crocodile, lizard, stingray and furs) ethically. Mindful consumerism should support the appreciation and growth of luxury products over fast fashion and other alternatives. Millennials (typically defined as those born after 1980) and Gen Zers (typically defined as those born from the late 1990s or 2000 and after) are demanding sustainable business models and with today’s transparency and information flow, to ignore these mandates could be ruinous. The influence of a luxury brands exceeds the size of their operations, due to the aspiration and desirability luxury brands enjoy. Using this influence, they can define and promote solutions to the challenges of sustainability. Many in the luxury sector heed this calling.

• A shift to online/offline Integration. Online has been the driver of revenue growth for most luxury brands, achieving strong double-digit annual gains while still accounting for a modest 10% or so of total sales, according to Coresight Research analysis. While Bain expects online to grow to around 25% penetration by 2025, most if not all luxury sales will be influenced by online interactions. Online/offline integration means luxury brands can be where the customer is.

Luxury Brands as Social Currency

• “It” bags and must-have sneakers are the new social currency. Entering the 21^st century, “It” bags were a marker of fashion status. Highly sought after in limited distribution, Fendi’s Baguette and Louis Vuitton’s Graffiti Bag are just two examples of bags that enjoyed demand that outstripped supply and afforded the owner fashion cred. While Gucci is enjoying a cult-like status, many of today’s sought-after bags aren’t as well known as Gucci, Louis Vuitton, Fendi or Chanel, giving the owner a claim to exclusivity (often at a lower price point than globally recognized luxury brands). Sneakers are just as popular, for both sexes and can cost as much as $2,000.
• High-priced puffer jackets are creating unease in some places as they are obvious statements of wealth. Recently, high schools in London banned students from wearing Canada Goose and Moncler, as this expensive outerwear was perceived to create a sense of inequality among students. As social mores have adopted more inclusive and democratic aspects, such moves could be a harbinger of more difficult times ahead. Gen Zers tend to survey as more sensitive than their older peers and expect inclusivity and equality as a norm. They could say no to luxury purchases as a vote of solidarity with those less wealthy than themselves.

The Growing Popularity of Online Retail Platforms Such as Net-A-Porter, MatchesFashion and Farfetch Support the Development of Partnerships with Luxury Brands Digital disruption is the #1 worry of most luxury marketers and brand managers. Yet the use of technology has been eagerly embraced by consumers who prefer the convenience of online, mobile and social shopping to the detriment of store visits. The growing popularity of online retail platforms such as Net-A-Porter, Farfetch, MatchesFashion, Rent the Runway and Moda Operandi has luxury customers shaping the future of the luxury industry. Digital partnerships will be a key source of growth for the luxury industry. Selective, brand-appropriate third-party partnerships allow luxury brands to extend their digital presence. A differentiated channel strategy is most effective, providing exclusives to partners that enhance their go-to-market value proposition with the allure of coveted luxury products. Top of mind for luxury brands is ensuring a consistent brand experience and product representation. We will also see a deepening of existing relationships — for example, through limited-edition capsule product collaborations. Recommerce, Rental and Subscription Models A new breed of buyers is meeting new luxury business models, such as resale (often termed recommerce or, where the platform physically processes the products ordered, consignment), rentals and subscriptions. One of the largest luxury consignment startups, The RealReal, is built on authenticating luxury products and eliminating the risk of counterfeit goods. At a recent industry conference, Rati Levesque, Chief Merchant at The RealReal, said the company has sold over 8 million items since its 2011 beginning. The RealReal provides entry to first-time, value-focused buyers, including younger shoppers. Buyers and sellers get maximum value out of luxury goods. Even the luxury brands have taken notice and are beginning to work with The RealReal. Levesque pointed out the company’s partnership with designer Stella McCartney to make a shared impact and advance their shared values. Consignors at The RealReal earn a Stella McCartney gift card when they consign a Stella McCartney product, and more partnerships are in the works. Rent the Runway’s CEO Jennifer Hyman recently shared the math on her company’s subscription model, Rent the Runway Unlimited, aimed at wardrobing professional working women. “75 million professional women in the US spend $3,000 a year or more on clothing for work, and they’re getting $3,000 worth of value. Our subscribers spend $1,908 a year, and last year the average subscriber got $40,000 worth of value,” Hyman said in an October 2018 interview with The New Yorker. While these figures seem high given that the average man, women and child in the U.S. spent $1,186 on apparel and footwear in 2017 (latest) according to our analysis of data from the U.S. Bureau of Economic Analysis, there is growing demand for rental apparel: According to the same article, subscriptions have increased 150% year over year and currently account for half of the company’s revenue. As resale, rental and subscription become part of the new normal of acquiring apparel and footwear, consumer preferences and behavior will continue to change. Higher priced items that weren’t part of a middle-class consumer’s consideration set are now considered, either for rental, second hand or a splurge if there are savings relative to first-time retail purchase. Casual Wardrobes, Streetwear and the Adoption of Athleisure   Luxury brands are reinterpreting streetwear to appeal to younger consumers. T-shirts, down jackets and sneakers were among the standout categories in 2017 according to Bain, growing 25%, 15% and 10%, respectively. This is creating a democratization of luxury as these products are typically offered at lower price points than a Brioni suit, for example, and they can attract a larger audience. The lower price points can result in lower average transactions and reduced commissions for sales staff. Demand for Personalization   Personalization has become the new norm with approximately 70% of U.S. consumers expecting some sort of personalization from online businesses, according to a Linkdex survey. Personalization takes multiple forms for luxury brands, from story-telling to customized products and personalized product recommendations. Sector Landscape The global personal luxury goods market reached $289 billion in 2017, up 4% year over year at constant exchange rates, according to Bain & Company. The five-year CAGR for 2012–17 was a more modest 3.3% at constant exchange rates. In November 2018, Bain estimated that the total global luxury market would grow by 5% at constant exchange rates in 2018. The highest-growth categories in 2018 were shoes and jewelry, followed by bags and beauty, according to Bain’s early estimates. [caption id="attachment_75918" align="aligncenter" width="580"] Euro-denominated data are as report by Bain, at constant exchange rates. Conversions to U.S. dollars have been made at current exchange rates.
Source: Bain & Company/Coresight Research[/caption]   [caption id="attachment_75919" align="aligncenter" width="580"] Source: Bain & Company/Coresight Research[/caption]   Competitive Landscape The luxury industry is relatively consolidated, with the top 15 companies driving close to 50% of industry sales. The top five companies are multi-branded companies, the result of acquisitions and/or licensing over many decades. LVMH, Richemont, Kering and more recently, Tapestry and Michael Kors, are pursuing business models of independent, decentralized luxury “maisons” that can react with agility and in an entrepreneur-like manner in response to their consumer markets. [caption id="attachment_75920" align="aligncenter" width="800"] *LVMH’s Fashion and Leather Goods, Perfumes and Cosmetics, and Watches and Jewelry maisons
Source: Company reports/Coresight Research[/caption]   [caption id="attachment_75921" align="aligncenter" width="800"] Source: Company reports/Coresight Research[/caption]   Innovators and Disruptors

• The new business models mentioned above have been disrupting luxury for the past five years. Recommerce sites, such as The RealReal, and rental and subscription models, such as Rent the Runway or jewelry rental startup Flont, are changing the ways consumers interact with luxury brands. They democratize the luxury marketplace. Items too precious to own can be rented or purchased “lightly used.” These digitally enabled business models can lengthen the lifespan of a luxury product, which in turn supports the creation of a more sustainable industry, and at the same time, enables more consumers to enjoy luxury products.
• Many luxury brands have been innovative in their use of textiles and design, pushing boundaries. Now they are engaging in tech-driven research and development as well. In April 2018, LVMH joined the world’s largest startup incubator, Station F, with the launch of La Maison des Startups, where it will welcome 50 international startups per annum. Its mission: reinvent luxury. These startups will receive personalized coaching and support from LVMH group experts to accelerate collaboration with the LVMH maisons with a key focus on seven themes: AI, Internet of Things, retail and e-commerce, AR and VR, blockchain and anti-counterfeiting, personalization/social and content, and raw materials and sustainability. LVMH also nurtures intrapreneurs with its Disrupt, Act, Risk to be an Entrepreneur (DARE) initiative.
• In June 2018, Tiffany opened a jewelry design and innovation workshop, an open-plan, 17,000-square-foot space designed to remove organizational barriers and encourage creativity, problem-solving and collaboration, and increase the pace of innovation.

Sector Outlook

• Ten years into an economic recovery is enough of a reason for many to posit a slowdown in the global economy and ergo, the global personal luxury goods Bernard Arnault, CEO and Chairman at LVMH warned of a slowdown entering 2017, which didn’t come to pass. Nearly two years later, the possibility of a slowdown in the luxury industry seems more likely. However, on the company’s 3Q fiscal 2018 call with investors, LVMH CFO Jean-Jacques Guiony spoke of an expected slowdown in Japan, from mid-teens to mid-single digit and a little slowdown among Chinese customers from high-teens to mid-teens with increased strength in the Mainland China business.
• China and the Chinese luxury shopper were mentioned 68 times on Tiffany’s 3Q fiscal 2018 conference call in November 2018. Similar to Guiony’s comment, Tiffany’s CEO, Alessandro Bogliolo, spoke of a shift in Chinese tourism and spending in 3Q, declining in some important non-Chinese markets while accelerating from a double-digit growth rate of the first half in 3Q.