EY - Luxury & cosmetics factbook 2014

Luxury and cosmetics factbook 2014

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2013 has been a challenging year for the luxury industry; perhaps the most challenging since the recession of 2009 and we see this on the impact on the overall industry growth rate.

For the first time in three years, the industry growth rate has slowed to single digits at 2.4%* (10.4% FY12) giving a personal luxury market worth an estimated €217b. This smaller but still positive growth is mainly led by US and Chinese consumption (all over the world) and is supported by the resilient accessories segment and the progression of the online channel.

Looking to the future however, we still see positive annual growth rates in the range of 4% to 6% through FY16. We believe that this positive future growth will be driven by:

  • Longer term urbanization
  • A reduced drag on the wholesale market
  • An increasing shift towards younger, male customers
EY luxury and cosmetics index evolution

If overall growth rates have declined, profitability in the sector has been maintained; on average 1% less than last year. This is largely due to:

  • Volume growth
  • A high retail mix (with higher margins)
  • A declaration by many players of an increased focus on efficiency

The cosmetics market shows a smaller decline in growth rates in 2013 (3.8%) and remains a solid market at €175b. The longer term outlook also remains positive as the world population with access to cosmetics in emerging markets is estimated to increase by 50%.

As a result, the beauty industry is expected to double in the next 10 to 15 years with China, US, Brazil, India and Japan forecast to become the top markets (only Europe is missing). By 2020, it is estimated that more than half of consumers will be in tropical zones, with hot and humid climates, and over 60% of the world’s population living in major urban areas affected by pollution – the demand for high quality cosmetics will likely rise year on year.

What are the key areas of focus for industry executives over the next year?

  • Develop a clearer strategy for the future Chinese market

    In 2013, Chinese customers accounted for approximately one-third of the global spend on luxury. The Chinese middle class is evolving with an increase in the number of households in the higher income bracket, and increasing teen-growth in luxury demand will follow as a result.  By 2020, Chinese customers are expected to add up to 40% to luxury growth.

    However, the Chinese market is under pressure from:

    • The pronouncements by the new president against corruption and gift-giving
    • Higher pricing due to luxury sales taxes
    • A lack of brand loyalty
    • Desire for higher-end, more discrete products
    • Increasing demand for a digital channel

    The right mix of wholesale, retail and on-line for the China market is no longer clear. However, adjusting or developing the strategy to win in China is essential for the future.

  • Focus on efficiency

    Whilst many large and small luxury houses deftly manage their increased retail footprint, this is not always the case across the back-office. The core skills, such as brand image management, merchandising, range and assortment planning, design and manufacturing, must be in order to compete in today’s world of challenging growth. 

    However, many houses, including international groups, are somewhat artisanal in how they organize and deliver what are considered non-core or support functions, such as finance, procurement, logistics, HR and IT.

    Houses are now turning their attention to becoming as efficient and effective as possible. Upwards of 30% can be taken out of SG&A costs by having leaner processes, better decision-making tools and more appropriately structured support functions.

    While this may seem small compared to some of the EBITDA delivered due to high margins and volume-based growth, luxury houses are now starting to take the efficiency of their support functions more seriously.

  • Accelerate your digital presence

    Online and e-commerce strategies are not new to the sector, but we have seen luxury houses lag behind other industries in developing clear and concrete plans for capitalizing on the digital opportunity. 

    Online penetration is growing at a rapid pace and whilst “only” 4.5% of sales, it is growing at a massive 30% year-on-year growth. Despite the hype about Chinese teenagers, 60% of the online luxury market is in the US, with accessories having the highest penetration to date. M-commerce currently represents one-third of all traffic and up to 10% of sales for some brands.

    The average age of the luxury consumer is falling, largely due to the Asian market, and the emergence of e-tailers, particularly in the US fashion market, is starting to challenge the traditional luxury world. The need for a consistent digital strategy has never been more pressing. 

    Contact us to find out more details about the report including operational and financial aggregates about the industry, key valuation parameters and multiples, and opinions from our global sector specialists..

*Includes currency effect