Luxury & cosmetics financial factbook 2013
Over the past year, some luxury groups have started asking questions about their future focus and feeling the pressure of the slowing global growth in the luxury market.
However, the value of the global market for personal luxury goods is at an all-time high of over €200b. With a forecasted average long-term CAGR of between 5% and 6%, the luxury industry has a strong future, but it will need to adapt.
The value of the cosmetics industry has also reached an all-time high at an estimated €180b, after growth of 4.6% in 2012. Asia-Pacific emerging markets are the strongest drivers of this growth. We believe Africa and Brazil will be markets for the cosmetics industry to watch in the near future.
What are the other challenges the luxury and cosmetics industries face in the coming years and how can they meet them?
We believe three key factors are of prime importance to the sector. These factors have a common theme: sustainability.
1. Sustaining the luxury position: Growth, profitability and customer loyalty to a brand will be difficult to sustain. The new generation of connected customers, with instant access to globally transparent pricing, product comparisons and the opinions of luxury-bloggers, will make it more challenging to justify and sustain the high pricing differentials crucial to a luxury strategy.
The deliberate restriction in the supply of some luxury goods to maintain their value will also pose logistical and strategic challenges for luxury houses.
In response to the new kind of customer, some luxury houses are developing a digital strategy. This integrated approach harnesses social media, and connects mobile and tablet applications with back office logistics to deliver a viable e-channel. The channel can provide an alternative to retail and wholesale, or complement the more traditional routes to market.
2. Sustainability development: Maintaining the quality and supply of crucial raw materials, such as rare skins and ethically traceable gems, is a challenge. It has led to an increase in vertical acquisitions in the supply chain.
However, the challenge is not just to secure supply. The focus is on sustainable development in all its forms. It is important to consider:
- The ethics behind the products and images of luxury
- The perceived and actual wastage in production processes and packaging
- The carbon footprint and water impact of the end product
3. Sustaining growth in China: In the long term, how will the luxury industry develop and sustain the right kind of relationship with Chinese customers?
Many luxury houses that made successful early investments in China are now pulling back, especially on retail expansion into third-tier cities and shopping malls. Recent media reports have described over-development and fatigue in China’s demand for luxury goods.
However, China is now seeing luxury tourism on a much greater scale. Some luxury houses are struggling to adapt to these customers’ needs and expectations, and to meet them consistently across all their outlets.
We believe China will have a sustainable long-term impact on the global luxury market.
But as they adapt to new ways of doing business, luxury houses must apply the lessons learned to other BRIC markets. We expect these to form the next wave of the luxury industry’s continued expansion.
Worldwide personal luxury goods market trend
Source: Bain & Company and Fondazione Altagamma; and other selected research
Global cosmetics industry market growth, YOY (2003–2012)
Source: L’Oréal Annual Report 2012 and other selected research