In Italy, Altagamma (Italian Association of Industries of Alta Gamma), founded in 1992, is an association whose purpose is to promote the work of several Italian companies on an international level and encourage their development. Currently the Foundation Altagamma brings together 76 Italian companies operating in the fields of fashion, design, transport, jewelry, shoes, perfume, and hospitality.
Despite these tectonic shifts in this industry, the family business remained a paramount and dominating factor in the Italian luxury enterprise until the last decade. Slowly but steadily some famous brands were acquired by the three multibrand conglomerates – LVMH, Richemont, and Kering Group. LVMH, after acquiring more than 60 luxury brands, acquired two of the largest Italian groups, Bulgari and Loro Piana, in 2011 and 2013 respectively. Gucci, Brioni, Bottega Veneta, and others were acquired by Kering in Italy and in France. The more recent crisis has spurred a desperate fight for survival, pushing the luxury industry further away from its historic structure as the key factors of success become finance instead of family, and the focus shifts from the small artisan businesses to the colossal conglomerates.
Luxury Industry Trends
Luxury is a cyclical industry. Given the continuing deterioration of the macroeconomic backdrop and the cyclical nature of the luxury market, 2009 was a very low year for luxury spending globally, though spending then peaked in 2010. However, spending in 2011 went back down to close to where it was in 2009. The 2012 Luxury Report by Unity Marketing reported that luxury spending grew by only 1.3 percent between 2009 and 2011. During this time, the highest spending was witnessed in luxury travel (up 40.8 percent), kitchenware and cooks' tools (up 37.5 percent), entertainment (up 33.6 percent), dining (up 26.5 percent), and fashion accessories (up 23.4 percent). The categories falling most from 2009 to 2011 were kitchen appliances (down 23.9 percent), watches (down 20.1 percent), jewelry (10.2 percent), and furniture, lamps, and floor coverings (down 7.3 percent). Analysts expect luxury goods markets will slow down in sequence, as the ripple effects from the global recession travel around the world. Pam Danzinger, president of Unity Marketing, noted, “Last year we were looking for the return of the HENRYs (high-earning, not rich yet) back into the luxury market and this year we can say they have returned and are more positive about spending in the future. For example, in 2009 only 18 percent of the luxury consumers surveyed expected to spend more on luxury in the next 12 months; by comparison 26 percent in 2011 predict greater spending on luxury throughout 2012.”15
Despite global macroeconomic headwinds, worldwide sales of personal luxury goods grew an estimated 10 percent in 2012 to 212 billion euros, led by an estimated 16 percent increase in the leather goods category. By region, sales rose an estimated 18 percent in Asia-Pacific, 13 percent in the Americas, 8 percent in Japan, and 5 percent in Europe. Bain & Company projects worldwide luxury goods sales to reach between 250 billion and 350 billion euros by 2015, supported by 4 percent to 6 percent annual growth.
Hard luxury players are expected to be particularly under pressure in this environment, as their underlying demand disadvantage is compounded by dependence on the wholesale channel. Big-ticket-item purchases like mechanical watches are likely to be delayed, especially by men, and retailers will be de-stocking.
There is no hiding place in the high end. The notion that the luxury market high-end segment may be immune to the cycle appears to be an investment myth, as it is not supported by evidence and analysis. In the current context, emerging markets exposure is seen to be the key short-term factor limiting adverse trends in more mature markets. In addition to better momentum in the future, markets like China will provide superior long-term structural growth opportunities. This will give a key advantage to first movers with the necessary resources to “make it big” in emerging markets.
In difficult times, investors should go back to fundamentals: mega brands. Scale rules in an industry where fixed costs have increasing importance. It is argued that “mega brands” will continue to dominate the luxury and fashion industry, enjoying faster top-line growth and superior profitability.
Scale pays, as mega brands can lead the advertising expenditure league, while committing a smaller portion of their sales. Besides, scale allows superior downstream integration into retail. Various data confirm that there exists a direct relationship between sales per square meter and advertising expenditures. Direct retail operations are essential to luxury goods brands: Luxury mega-brands have an interest in “escalating the race” for direct-retail operations, in order to further leverage their scale advantage. Escalating into larger, richer, more prominent and ultimately more expensive directly operated stores (DOS) allows mega brands to awe consumers even more and to extend the distance in consumers' minds between the mega brands and everything else. Downstream integration into profitable DOS allows mega brands to push the envelope on entry price points and to lead the way in globalization.
The luxury goods industry is currently estimated to be valued at around US$320 billion, which includes jewelry, watches, leather goods, wines and spirits, perfumes, and apparel. The recent trend shows that luxury consumers are looking for brands that will help them to develop themselves through a unique and sensual experience and provide them with an emotional state of mind. These consumers wish to own something authentic, with a heritage and with personalized style. Luxury items must combine historical quality with the trendiest designs, which would also be a means of self-expression. For example, Bulgari is known for its classical chic design sensibilities, with jewelry pieces of voluminous precious stones for traditional clients and a modern, simpler, trendier line for younger clientele.
In general, luxury wines and spirits account for the largest part of luxury sales at approximately 30 percent, fashion and clothing accessories account for 20 percent, and premium fragrances and cosmetics account for 18 percent, followed by the watches and jewelry sector at 15 percent and premium handbags and travel goods at 6 percent.
One of the major trends facing the luxury goods industry was that of consolidation. Many of the major players in the industry have, since the 1980s, been transformed from small family-owned businesses into global powerhouses. This has resulted in a profound shift in the way in which many luxury companies are managed today. Such luxury conglomerates are driven by the bottom line, and the companies who dominate are able to exploit synergies across brands and product categories.
The power of the conglomerates is underscored by the struggling small independent brands, the fashion doyennes of yesteryear, such as Pierre Balmain, who filed for bankruptcy, and Ungaro, which was sold in 2005. Nevertheless, consolidation has not always been successful even for the large companies such as LVMH, whose earnings from Louis Vuitton are often eroded by the losses from the less-than-successful brands.
In the wake of September 11 and the Iraq war, the luxury goods industry faced one of the worst downturns for three decades, finally rebounding in 2004 when many companies in the industry posted a 10 to 15 percent increase, finally returning to the black. Since then, other major events such as the subprime mortgage crisis, Japanese earthquake, and Eurozone financial crisis have occurred, though the luxury market had been relatively untouched. The future outlook for the industry remains relatively positive while Mintel forecasts that the luxury goods industry will see market growth of 10 percent for 2012, although it expects growth rates to slow in the following two years to nearer 6 percent. Similarly, Bain is forecasting growth for the world market of 4–6 percent from 2013–2015 at constant exchange rates, bringing the total value of the luxury industry to US$320 billion by the middle of the decade.16
Developed Markets
The largest market for luxury goods is in Europe, which accounts for 33.7 percent of the world's expenditure, followed by Japan with 28.4 percent and North America with 24.6 percent. Yet, the Asia Pacific region accounts for the largest sales of leather goods. Although these nations are strategically important, these markets are becoming increasingly mature.