The Strategist

Premium brands embrace Modernization and Optimization

01/24/2017 - 14:40

A new research on luxury market conducted by Boston Consulting Group (BCG) together with Bernstein suggests that the world luxury centers - New York, London and Paris - will maintain a high concentration of stores of this class. However, luxury brands are an urgent need to review effectiveness of existing stores chains as the world is gripped by highly competitive e-commerce, especially in Asia.

BCG published a study based on its own index and called Metroluxe. The paper evaluates opportunities for selling luxury goods in different cities. The analysts used Bernstein Luxury Store Database, which contains information on about 7 thousand retail shops and 36 brands throughout the world. The authors estimate current amount of the luxury market about € 1,5 bln. "Cars and boats" segment makes up the biggest share of the market (€ 404 billion). The second is "hotels and exclusive holidays" - € 399 bln. Other categories, such as watches and jewelry, art, clothing, accessories, hold much smaller volumes of € 129 billion, € 73 billion, € 70 billion, € 77 billion, respectively.

The Chinese keep the first place in the luxury goods consumption ranking (30%). The Americans come the second (23%), and the Europeans took the third place with 20%. 

The authors note that recent market growth has slowed significantly. In 1996-2001, average annual growth was around 9%; in 2002-2007 - 7%; in 2008-2014 - 5%. The analysts expect that in 2015-2022 the growth will stop at the level of 2-4% per year. One of the main reasons for this is saturation of Asian markets.

The researchers said that luxury manufacturers and sellers will have to adapt to new conditions, including paying attention to US markets. "Premium brand still have an opportunity to open new stores in the luxury centers, where their products are already well represented. Most importantly, they should strive not only to development of e-commerce, but also to be more active in each of their stores. The United States generally remains an important market for luxury brands since markets of many American tier-two cities are still not mastered. Although tourist flows there are much weaker than, say, in Paris or Los Angeles, local population displays steadily high demand"- the report said.

Another finding is the need to intensify e-sales of luxury goods. BCG and Bernstein believe that "effectiveness of e-commerce motivates leading brands to implement multi-channel solutions as soon as possible, and determine which set of distribution channels suits best for a particular market. Specifically, growth and potential of online sales means reduced need to keep stores that are on the verge of profitability. Despite the fact that some US cities retain a good opportunity to open new stores, high level of e-commerce development is likely to lead to a reduction in average number of stores in a city as compared to other countries."

BCG and Bernstein’s researchers argue that leading luxury brands are shifting focus from expanding stores chains to improving its efficiency. "Modernization and Optimization will be main motto of premium brands in the next few years", - summarize the report's authors.