2. Emerging markets are key
Both in the luxury and cosmetics sectors, growth is mainly driven by consumer spending in emerging luxury markets, such as China, Russia and the United Arab Emirates. This is particularly true of the cosmetics market – EY expects emerging markets to be 50% of sales in personal care by 2020. In luxury, year-over-year (YOY) sales growth has been high, ranging from 4.6% to 5.8%, and is expected to register an all-time high YOY in 2017A-18E (6.1%).
3. Store formats are impacting capex
The average capex ratio has slightly decreased in recent years due to the slowdown of monobrand store traffic and sales, and the consequential slowdown in retail store openings. In the upcoming years, the mix of store formats will shift toward off-price stores and airport stores, to the detriment of monobrand stores, department stores and specialty stores. Omnichannel strategies, which create an ecosystem where every interaction with the customer has a great impact, are key to increasing and improving customer relationships.
4. Expansion into developing countries and low levels of debt are seen with stronger market capitalization
Market capitalization of almost all luxury companies has increased. The average increase has been 8% compared with 2017, with the cosmetics companies at 18%.
5. After a dip in 2016, mergers and acquisitions increased in 2017
In 2017, there was a 20% increase in transactions (vs. 2016) confirming the positive investor expectations of the potential in the luxury market. In fact, M&A activity reached all-time highs with 140 transactions, with accessories and e-commerce being the hottest sectors. Many transactions were led by private equity funds (30% of deals vs. 25% in 2016), with investors showing growing interest in the e-commerce sector.
6. Premium and entry-to-luxury segments are where growth is
The premium and entry-to-luxury markets are expected to grow by 7.5% CAGR, while the luxury market will decrease its historical fast pace (CAGR 3.0%). We believe this is due to diversification in markets and increasing digitization opening up the market.
7. The cosmetics industry is developing as a result of new attitudes
A concern with ingredients and provenance, a preoccupation with anti-aging, a new fashion- conscious male, online platforms, digitally conscious customers and growth of emerging markets are all influencing the cosmetics market. Cosmetics companies are expected to register high growth in the next three years (average CAGR between 2017A-2020E of 7.5% vs. 6.2%).
8. Luxury requires a “haute couture” digital approach
Digital is no longer just an option − it is key to survival. Digital distribution channels widen the playing field for luxury brands, allowing them to increase their client base by engaging with customers online in geographies where a brand has no stores. Fears that digital would not evoke the same emotional response as a luxury shop are being allayed as brands see how the physical and digital can merge, with customization and personalization, virtual reality enhancement and multibrand platforms that allow them to remain true to the brand experience. Digital is improving customer relationship management (CRM) through data collection, recruitment, stock management and finances.