Luxury and cosmetics financial factbook, 2016 edition

Keep calm and care about your consumer

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In 2015, the luxury goods industry felt the impact of global socioeconomic and political instability. We believe that a confluence of events — political disorder in many countries, terrorist threats and attacks, as well as slowdown in economic growth rate in China — contributed to a decline across the sector. 

Uncertainty can have an impact on the mood of any consumer, none more so than when a significant spend is required, such as with luxury goods. As a result, although the industry reached a total market value of €253b, currency fluctuations were the main contributor of this growth. Real growth was reported at 1%, lower than in 2014.

Against this backdrop, how should luxury players act to help gain consumer attention and spend? Will a quick reaction suffice, or do brands need to review their entire business model? Our Luxury and cosmetics financial factbook, 2016 edition seeks to answer these questions by providing a situational analysis, investigating the trends that are shaping the sector and highlighting the challenges and opportunities facing luxury and cosmetics brands.

New mandates for luxury sector success

Our factbook explores three main objectives that luxury brands must achieve to keep pace with a changing competitive landscape:

1. Increase digital effort

Luxury companies are lagging in an increasingly digital world — and traditional companies risk losing ground to more dynamic, digitally savvy players. To succeed, luxury brands must maintain their heritage and create long-term value while responding to consumers’ expectations and offering unique products that offer instant gratification.

2. Hold the positioning

A new category of players is threatening the balance of luxury fashion houses: the affordable luxury segment. This segment is gaining market share by continuously offering new products that are both fashionable and competitively priced. Top end luxury companies must emphasize the quality and rarity of their offerings to encourage their clients to spend more and reduce the risk of cannibalization by more nimble competitors.

3. Defend the luxury experience

During the luxury journey, a consumer is surrounded by opportunities that may not always be characterized by material, long-term purchases; instead, they may have intangible or more ephemeral benefits, such as travel, art, or epicurean gastronomy. In such an environment, personal luxury goods companies must demonstrate that they can offer the same level of experience and customer satisfaction. To that end, companies should focus on improving service and quality — not only in retail stores but also across every single customer touch point.

In-depth analysis from industry professionals

Our global sector and other industry professionals offer their perspectives on the key trends that are impacting the luxury and cosmetic industry:

  • Digital tango with China

    In 2015, many luxury “maisons” focused on digital challenges and Asian market expansion. After a booming era marked by new store openings, it may be time for brands to rethink their business model entirely and to contemplate how to balance and link stores with the digital space, known as the online to offline (O2O) integration.

    We investigate the digital strategies luxury brands are using to capture the Chinese market as well as the organizational changes and impact of these strategies.  We also explore the role the Chinese government is playing in stimulating and regulating online business growth in parallel with shifts in customers’ and companies’ behavior in China.

  • Recent transactions in the perfume industry

    For decades, the perfume market has been extremely attractive for luxury brands and fashion designers. These golden years appear to have ended. To continue to be successful in an increasingly competitive market, the main industry players must explore alternative or complementary strategies: from launching new fragrances for successful brands, to entering new market segments, to purchasing rights over existing brands.

    We consider these strategies in depth and answer the question market participants are asking themselves: is the price for continued growth still worth it?

  • Millennials and the luxury landscape

    Millennials are taking the reins of luxury, and for them, it’s all about the experience. Tapping into Millennials’ desire for engagement is forcing brands to innovate and create ever more immersive, interactive experiences for consumers.

    What are luxury brands doing to capture Millennials’ hearts — and wallets? We evaluate how companies are creating a dialogue with Millennials through social media and providing a personalized experience through technology. We also discuss how luxury labels are introducing the brand through accessible price points — while reinforcing the brand through social responsibility.

  • Chinese appetite for luxury goods and brands

    Accounting for roughly one-third of the total tax-free purchases in 2015, China was the number one “Tax Free Shopper Nation.” China is first in this ranking not because it is the most populous country, but because Chinese consumers bought expensive items — first and foremost, watches and jewelry.

    How are luxury retailers capitalizing on Chinese consumer preferences? We examine the uncertain Chinese economic climate and its impact on luxury brands, particularly the Swiss watchmaking industry. We also touch on the new face of “Made in China” as well as the intersection of European branding with Chinese design and production.

  • Store costs management

    The Internet and social media have changed the way consumers think about stores and what they should be. While aesthetic attributes remain important, modern shops must also be able to interact with social media and with customers’ smartphones. As a result, the overall cost of a store’s lifecycle has greatly increased.

    We outline cost management strategies to improve the internal rate of return and enhance performance. We also offer practical advice for evaluating store cost components against consumer value — working to ensure that any money spent has a positive impact on the customer and, consequently, increases store profitability.

  • A new challenge for luxury: Retail through online

    Most luxury goods are sold online but sometimes under conditions that are not approved by their brands. How is the development and growth of these marketplaces likely to impact distribution in the luxury segment?

    We consider the changing competitive guidelines, distribution practices, and legal developments that are shaping the regulation of online marketplaces. We also touch on another development that looms on the horizon: the geo-restriction of websites.

  • The beauty market: Where to invest

    The beauty market is proving to be very attractive for most of its players — beauty companies, retailers, start-ups, and investment funds. The market is also incredibly dynamic, with innovation representing up to one-third of yearly revenues. For the players in this market, this is a double-edged sword: the most innovative companies thrive, while the laggards are destined to decline.

    We analyze how different segments of the beauty market – from digital native beauty brands to e-commerce retailers – are driving innovation. We discuss the rise of innovation labs and subcontrators as well as digital beauty services. Finally, we list some of the small beauty pearls that the large beauty companies have acquired over the last few years

Key luxury and cosmetic statistics:

EY - Key luxury and cosmetic statistics

About the factbook

This sixth edition of the Luxury and cosmetics financial factbook builds on the five previous reports and reflects the valuable feedback we received from those in the industry, as well as from other market observers. The sample analyzed includes 30 listed companies from the luxury and cosmetics industry, of which 23 were from the luxury business and seven from the cosmetics segment.