Why luxury still has its work cut out

The luxury sector should get ready for a slow down in global growth in 2016 and beyond; and should not rely on charging different prices in different regions to generate revenue, an analyst has told CNBC.

"There's been a shift. The luxury companies cannot charge significantly more in say China versus France, as they used to do only two, three years ago. Pricing has to converge, this basically means tighter margins," Nicla Di Palma, equity analyst at Brewin Dolphin, told CNBC in a TV interview Tuesday.

What's happened, Di Palma explains is that the luxury consumer has now become "a global consumer", therefore a Chinese consumer can go to France and South Korea to buy products, rather than purchase solely in their home market for luxury.

Up until 2014, luxury brands had been growing extremely quickly, particularly in China. However, some brands may have not picked the best store location, Di Palma adds.

"You need to have a cluster of luxury stores, while sometimes even buying at the wrong end of the street is not good enough. So what's happening now is there has to be a rethink and that's expensive. Closing stores, opening new stores, refitting, that doesn't come cheap."

China has become a "saturated" market, at least with top brands, Di Palma said in a note emailed to CNBC, adding that she didn't see an obvious region which could become the "next China" in terms of consumption, therefore "growth is due to slow down."

"Where is growth coming from? Surely not from China. Surely not from the U.S., where the consumer has only been buying a lot of SUVs and expensive cars, but not many luxury goods. Not from the Middle East. Not from Russia. A little bit in Europe, but not enough to drive up the entire sector growth."

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Anthony Wallace | AFP | Getty Images

On top of companies potentially looking to restructure their store network in China, brands may choose to invest more in their digital platforms, Di Palma suggests, in order to attract a larger audience.

Society has shifted from "a need culture to a want culture", with technology and consumer tastes becoming more acquainted to personalized and multi-channel retailing services, Beth Pickens, William Blair's managing director of global consumer and retail, told CNBC in January.

As a result of the slowing growth in luxury, Di Palma sees an increasing number of brands having to revise down their revenue forecast and operate with tighter margins.

"I think there will be more earnings downgrades to reflect the slower growth and smaller margins; although I don't think the sector is "dead". I would focus on more diversified companies with a full range of brands/categories rather than those with a more limited range of products," Di Palma said.

Goldman Sachs also expects Chinese luxury spending to grow 6 percent in 2016, compared to the 10 percent growth in 2015; adding that it expects brands to focus more on fashion and less on heritage, to satisfy China's middle class and the millennial generation.

For 2016, HSBC expects the year to be softer than luxury's previous history, however better and less volatile than 2015, adding that they see "no concrete signs that Chinese consumers have lost their appetite for luxury products."

By CNBC's Alexandra Gibbs, follow her @AlexGibbsy and @CNBCi