Big Data Watch: The drivers of luxury’s 2021 market boom

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business and bi-monthly Market Insights Reports and webinars, sign up for Advanced Membership here. This is the latest in our new Big Data Watch series looking at the big macro-economic, demographic and industry data to forecast the new trends, helping you make better business decisions. Luxury’s largest conglomerates have enjoyed the biggest share gains this year. However, some disruptive players, such as newly listed Farfetch and Gen Z-focused turnaround brand Hugo Boss, have also powered ahead, indicating areas of opportunity for the industry. A rising tide lifts all boats, but share prices of the luxury giants have been well ahead of the market average over the last 12 months. “It’s a matter of organic growth and profit performance continuing to be very strong,” says Luca Solca, senior research analyst for global luxury goods at Bernstein. “That is in a context in which many other sectors suffered... The industry has been on the right side of the line both in terms of growth and profit.” Smaller brands have failed to see the same kind of returns. The influence of size on success has been demonstrated throughout the pandemic. “There are clearly some self-reinforcing mechanisms at play,” says Jacqueline Windsor, retail strategy lead at PWC. “They're also doubling down on their own transformation, making their products relevant and customer experience much more engaging.” Differences coming through this year contrast with the pattern of 2020: while luxury’s biggest players aren’t necessarily widening their lead by accelerating their businesses, smaller companies are struggling to close the gap, says Jeffries analyst Kathryn Parker. Reputational strengths have been a significant benefit during the pandemic, along with the rise of ultra-high-net-worth and high-net-worth customers. “They are more desirable because they were more desirable to start with,” says Solca. “In times of crisis, there is this concept of flight-to-quality, particularly for some kind of reference points like accessories,” says Windsor. “[Luxury brands] are also benefiting from a higher number of, and the spending power of, millennials across all regions.” Digital luxury fashion player Farfetch, meanwhile, enjoyed an elevated share price during the pandemic, but as the market normalised its share price has dropped. This is not exclusive to Farfetch, says Solca. “If we look at the third quarter and we look at other digital players they’ve all been on the back foot and missing expectations. It's because consumers, as [some come] out of Covid-19 [restrictions], want to go out on the street. Store traffic is moving up. E-commerce is probably growing at a lower rate.” The China opportunity In particular, wealthy Chinese customers have been driving luxury business during the pandemic. The preferences of these high-net-worth individuals enabled brands with a higher price positioning to outperform, says Parker. Domestic taxes on Chinese consumers spending at home had a profound effect, adds Solca. “The repatriation of Chinese luxury spend could [be described] as a de facto price increase, because Chinese consumers have to spend much more. So what do you do when you need to spend much more? You concentrate on the must-have brands. If your brand was more desirable to start with, then you're going to be at an advantage.” The luxury sector had “wobbled” in the summer, notes Parker, related to the narrative around the Chinese government’s ‘common prosperity’ policy initiative. “The market didn't necessarily know how to interpret that initially. There are rumblings of tax rises on the wealthy in China.” In terms of share prices, Parker observes an initial bifurcation between current sales momentum and a forward-looking view of what might happen. “Luxury share prices have actually had a strong recovery from the summer onwards. It's almost as if the ‘common prosperity’ potential issues have not appeared. The market seems to have reverted back to just looking at brands' relative sales performance and margins, but not seeing the level of the risk asset,” she says. “Our question is, have the share prices been too resilient this year given that the risk profile has gone up in our view? The risk of changes in Chinese policy is… not going away.” Solca is more optimistic about the influence of policy change on Chinese luxury consumption: “My assumption is that the Chinese government is reforming — for example, tax — in a very measured and very prudent manner and I don't expect a major negative impact on discretionary demand as a consequence.” Beyond China, Parker observes that brands have been making meaningful price increases this year. She highlights the Classic Chanel Flap handbag: “If you compare the price now to before the coronavirus hit, on average it’s 60 per cent more expensive — that has a very big impact on the top line. [The crisis] has really tested the pricing power that some brands in the sector have.” A key factor in the surge of share prices in the luxury space has been the “acceleration of digital” across all markets, says Windsor. She points out that luxury companies were “under-indexing the wider market, primarily because they chose not to play — and then realised they had to play. There was a feeling that as stores opened that would unwind, but it's actually been re-based.” Marketing’s effect Digital marketing has progressed fast. “The other thing that [luxury companies] are doing is to more directly engage with consumers. It is a little bit about marketing but I think ‘just marketing’ is an incomplete story,” says Windsor, highlighting brands' growing presence on social media. “They’re not necessarily using fashion weeks as the vehicle to share their stories. In their flagships, the combination of in-store tech and human interventions enhances the customer experience and is really personalising the experience for high-net-worth people.” “Pop-up stores, category extensions and more collaborations have all been important marketing tools,” says Parker, “Pop-ups have been a key strategy and initiative. Whether you have pop-ups in a resort location or a pop-up to celebrate a particular collaboration or kind of campaign, these are driving a lot of the earned media value.” Parker heavily credits this as part of the dynamic accelerating LVMH, noting that a typical marketing budget in luxury is between 5-9 per cent of sales. “LVMH fashion and leather goods [division] is huge. When you take 6 per cent of that, you can see how much more firepower they have for collaborations; for pop-ups; for celebrity brand ambassadors. A forward-thinking attitude and other benefits of scale; the clout that they have with their suppliers and also with mall managers — all of these things really acted in their favour and gave them the ability and the confidence to keep spending on marketing,” Parker says. “In hindsight, LVMH acted in a very sensible way; they reallocated their marketing budget to China. They had fashion shows and exhibitions last summer in China when other brands were trying to protect their margins and maybe had less visibility, or more concerns about how the situation was going to develop. Other brands, such as Ferragamo, are still double digits down from 2019. They’re still going to be looking at margin preservation rather than spending in order to get out of the crisis.” Parker points to Gucci as an example of a brand that has made significant operational changes during the pandemic to improve its long-term outlook at the expense of short-term goals: “It looks as though they are dramatically underperforming on a total sales basis as they've been curtailing their wholesale distribution, particularly in Europe,” she says. “Wholesale distribution has been one of the causes of the parallel market.” For instance, luxury brands have struggled to keep track of so-called ‘daigou’ traders (unofficial personal shoppers who buy products abroad on behalf of Chinese consumers). “Gucci wasn’t really aware of who the end consumers were, and it's detrimental to the brand within China,” says Parker. “This is something that they were looking to get control of this year. With everything else that's going on, it's a good opportunity for them to cut the wholesale and start 2022 with a much cleaner business.” Looking ahead What’s next to watch? Resale, suggests Windsor. “[Luxury brands] used to be cautious of cannibalisation of new products, but they're all kind of jumping into the game.” Kering took a stake in Vestiaire Collective in February and has launched the Gucci Vault initiative, an online platform that upcycles vintage products. Within the rental market, luxury group SMCP launched its own clothing rental business in March. “Kering is often one of the industry leaders in trying out new things, whether it’s new technologies or different business models,” says Parker. “Then others in the sector follow later, so it does seem that other brands will launch similar initiatives going into next year.” “A share price is not clearly driven by unification of resale. But, luxury brands are leveraging their heritage, status and exclusivity, and at the same time trying to stay relevant and make themselves more inclusive in terms of their ethos,” says Windsor. “When you think about other things that matter to consumers, around sustainability and ethical credentials, I don't think that in itself explains the performance to date. I think [that luxury brands are] looking at ways to reinvent themselves. It's about going back to first principles and thinking about what consumers want to buy, without compromising the heritage products.” How long can sales continue to surge? “Consumers have been coming out of the pandemic [restrictions] in a sort of post-war euphoria,” says Solca. “They're spending more than they were before… I think this feeling will moderate but it's not necessarily going to fall off abruptly. It's probably going to be a smooth return to normal, which will take a few quarters.” Windsor is more cautious, citing the experience of the 2008 financial crisis. “There is a big lesson from the last recession. We noticed what people were doing in the recession — being much more promiscuous about brands and retailers — became ‘sticky’ when we recovered from the recession. This time around, I think purpose and sustainability and ethical stuff will stick coming out of this pandemic.” Key takeaway: Luxury brand share prices have risen more strongly than the rest of the market. A shift in consumer behaviour has refocused sales growth on bigger brands, while investment in new ways of engaging with customers has paid off, enticing new transactions in-store, online and on the stock market. Chinese consumption continues to be a dominant factor in global demand, although opinion is divided over what that means for the future of luxury. To receive the Vogue Business newsletter, sign up here. 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