What does the future of the luxury industry hold? From sales growth to the use of AI in customer relations, Bain & Company’s latest study “A thousand winds that blow” takes stock of the luxury market and its prospects. Here is an exclusive interview with Mathilde Haemmerlé, partner at Bain & Company’s luxury goods division.
Journal du Luxe
Is optimism still the order of the day for luxury markets? Why did you choose “A thousand winds that blow” as the title of your study?
Optimism, yes! Against a backdrop of geopolitical tensions and macroeconomic uncertainty, the luxury personal goods market is staying the course, recording growth of around 10% in the first quarter of 2023 – following a record year in 2022 – with a market estimated at €345 billion. The luxury sector is once again demonstrating its resilience.
But this optimism is a cautious one, with major contrasts from one region to another. The United States – which provided the backbone of the post-Covid recovery – is experiencing a slowdown. American consumers are curbing their spending due to economic uncertainty and the removal of consumer stimuli from the Covid period. Europe began the year strongly, but doubts remain over the next few months as to the speed of the return of Asian tourists and whether the momentum of local consumption will be maintained. Heavily impacted by lockdowns in 2022, China is once again on the rise. The Asian market is undergoing a reshuffle, with Japan, Hong Kong and Macao making a strong comeback, and South Korea experiencing a slowdown.
While the sector is doing remarkably well overall, extremely heterogeneous dynamics and headwinds have been impacting the industry for some years now. As a result, the map of the luxury industry (buoyant regions and customer segments) is constantly changing. This is how our June 2023 study got its title.
Journal du Luxe
The luxury sector is launching headfirst into a “quest for elevation”. What are the fundamentals of this strategy? How can such an approach succeed in the long term? Is the meteoric rise of “Quiet Luxury” the embodiment of this widespread attempt to elevate the sector? Isn’t the luxury industry flirting with disaster if it focuses only on its wealthiest customers?
Our study shines a light on this “quest for elevation” across all sector categories, a strategy driven by iconic and super-luxury pieces.
The growth in the unit price of iconic pieces is nothing new, but it did accelerate with the emergence of Covid. What has been new in recent months is that high-end pieces are occupying an ever-greater place in large purchasing volumes. With this dual effect of rising unit prices and product mix, we estimate that price explains more than 70% of market growth in recent quarters (vs. ~50% between 2019 and 2021).
How can we explain this trend? In this gloomy period of uncertainty, it is the Top customers – the (U)HNWI – who have proven most resilient, and this is impacting the product mix. 2% of luxury goods consumers represent more than 40% of the market. On a more structural level, luxury sector customers – who are constantly on the lookout for quality and sustainability – are seeking to buy “less but better”. Iconic and timeless pieces (such as rare and highly sought-after watches, fine jewelry, iconic bags and smart fashion pieces) are driving growth, and are seen as valuable assets that continue to appreciate. The success of “Quiet Luxury” is part of this upward trend. Brands have recently focused less on entry-level products (typically status and aspirational items such as logo bags, sneakers, etc.), and more on products targeting the top of the pyramid, i.e. unique products (with a more discreet style but still using exquisite materials) offered alongside an unforgettable experience (e.g. new trade shows reserved for “Very Important Clients”).
The luxury sector is entering the age of “literally me”. Have prices reached an inflection point? The answer definitely varies between brands. Those who know how to maintain and reinforce the desirability of their brand while delivering an ultra-premium experience around their iconic pieces still have room to maneuver, but perhaps at a slower pace.
Journal du Luxe
What remains of the “Access Luxury” out of Gen Z’s influential reach?
‘Aspirational’ customers – those who buy a few pieces a year, often at entry-level prices – played an active role in the rapid recovery of the post-Covid industry, at a time when China was still subject to repeated lockdowns.
Today, this ‘aspirational’ segment – which is more sensitive to slower GDP growth, inflation, interest rates and the risk of layoffs – is clearly buying fewer luxury goods in a tense and uncertain economic climate. This trend is particularly noticeable in the United States, and is well reflected in brands’ half year results.
Europe is experiencing the same dynamic, although the gradual return of tourists has made it less visible. But this attitude is unlikely to last, as the return of ‘aspirational’ customers to the luxury goods sector will depend on the speed of the economic recovery.
“We believe AI is a game changer for the Luxury industry.” Mathilde Haemmerlé, Bain & Company.
Journal du Luxe
Is AI a “game changer” for the luxury industry?
We do believe AI is a game changer for the Luxury industry.
Last year, our Luxury and Technology study – carried out in partnership with the Comité Colbert – showed the luxury sector is accelerating its AI adoption as it plays catchup with other industries in response to various challenges.
The first is to improve customer relations (in June 2022, 27% of brands had already adopted AI for this purpose, and 17% were testing it) by making them hyper-personalized (e.g. via extremely targeted recommendations to sales assistants or on websites) and more experiential (e.g. AI deployed for virtual fittings, calculating the perfect positioning of the object on the wrist, hand, etc. in real time).
The second challenge involves optimizing operations (19% adoption rate and 29% being tested for this purpose by 2022), while meeting sustainable development commitments. This includes predicting how demand is managed, optimizing flows between points of sale and warehouses, and developing merchandizing and pricing policies. Use cases are wide ranging, even going so far as to aid the creative process by analyzing trends on social media.
Generative AI, which reached an important milestone this year with the launch of GPT 4 and similar models, represents a new inflection point. With the rise of generative AI, we can now expect nearly 80% of luxury brands to launch their own tests. We are seeing experimentation throughout the value chain of these brands, with increasingly sophisticated customer engagement use cases, as well as back-office applications. More specifically, the vast majority of luxury brands are testing customer use cases in which sales staff are supported by sales assistants augmented by generative AI or chatbots. These brands are also thinking about how generative AI impacts their internal procedures, particularly around human resources (managing CVs, writing offers, onboarding employees), purchasing (generating RFPs, analyzing and evaluating supplier responses) and legal (drafting contracts and identifying inconsistencies in certain laws).
Experiments observed today are highly promising and could have a positive impact both on the customer experience and on employee commitment within the industry.
Journal du Luxe
What are the latest drivers keeping the luxury sector resilient now and into the future?
As the pandemic came to an end, nearly every brand emerged as winners with increased revenues.
Now that growth is returning to normal and the economic environment is highly uncertain, 2023 will be more of a mixed bag, with both winners and losers. The winners – those better able to withstand headwinds – will have to adapt their business model to the new paradigm in several ways.
The first challenge over the coming months – especially in Europe – will be to help stores ‘absorb’ the expected return of tourists (particularly Chinese) without compromising the quality of the relationship developed with local customers over the last 3 years. As part of the continuous reshaping of the luxury sector map, brands will have to balance their exposure to the different regions, while gambling on becoming pioneers in certain emerging regions.
Finally, luxury brands will have to continue to get behind their prestigious and timeless pieces, redouble their clienteling efforts and deliver a memorable experience to satisfy the demands of the top clients.
Journal du Luxe
How does Bain & Company see the future of the luxury sector in 2024? And looking ahead to 2030?
There is still a great deal of uncertainty surrounding 2023’s return to reality. In the short term, we expect the luxury personal goods market to grow by 6% to 12% in 2023, with different scenarios depending on the extent to which mature markets slow down and the speed at which China recovers.
2024 will see the same factors of economic uncertainty. We remain highly positive on the outlook for 2030, though we expect a few bumps along the way. We’re forecasting growth of around 5% to 7% per annum between 2022 and 2030, which would take the value of the luxury goods market from €530 billion to €570 billion, or around 2.5 times its size in 2020.
Growth fundamentals remain solid while factors for success are rapidly evolving. These might include extending the brand’s scope to meet people’s need to feel inspired and express themselves, obtaining 360° customer knowledge and offering ultra-personalized dialogue, and constantly developing more innovative experiences throughout the customer journey. Tomorrow’s leaders will be those capable of decoupling business growth from absolute growth in carbon emissions, as well as those able to stay one step ahead as they create competitive advantages through new technologies.