Global luxury sales are on track for a record decline in 2020, but business is booming in China
- China is on track to become the biggest luxury market by 2025, as wealthy Chinese consumers travel less and splurge more on their home turf, a Bain report said.
- The market for personal luxury goods is expected to contract this year for the first time since 2009.
- Bain expects the global luxury market to return to 2019 levels by the end of 2022 or early 2023, driven by digital sales growth and strength in China.
The stage is set for China to become the world's biggest luxury market by 2025, according to a new report.
In a year where global luxury spending has fallen dramatically, China's domestic market is still poised to grow, as the region's wealthy residents stayed close to home due to the coronavirus pandemic but splurged on jewelry, leather goods and fine wine.
Historically, luxury markets in Europe and the United States have been fueled by international travel — especially of Chinese tourists. But the new report from Bain & Co. predicts wealthy Chinese consumers are going to be doing much more of their spending locally in the years ahead.
"The overall [luxury] market has basically been shut down," said Federica Levato, a partner at Bain's luxury goods vertical, citing lockdowns and pandemic-induced store closures. "And then the immediate consequence of it was no travel, basically. We've had 11 months of no intercontinental travel whatsoever."
The result: Local luxury consumption has "roared" in China, Levato said.
Chinese consumers were already a known force in the industry, accounting for a third of luxury spending last year, Bain said.
This year, mainland China is expected to be the only region to report year-over-year growth, with the country's luxury market soaring 45% to reach 44 billion euros ($52.21 billion), according to Bain's 2020 Fall Luxury report.
It said sales of personal luxury goods — which includes clothes, jewelry, watches, beauty products and accessories — will contract this year for the first time since 2009. Bain estimates sales will fall 23%, at current exchange rates, to hit 217 billion euros ($257.47 billion) — the largest annual drop ever recorded by Bain.
The overall luxury market — which encompasses luxury goods and experiences such as private jets, yachts and fine wine — is forecast to shrink at a similar pace year over year. It is estimated to be valued at roughly 1 trillion euros ($1.19 trillion), according to the report, which was done in collaboration with the Italian luxury goods manufacturers' foundation Altagamma.
In the Americas, consumers are not offsetting lost sales from global travelers, and department store chains are struggling. Sales in the region are expected to contract 27% to 62 billion euros ($73.56 billion) this year.
Several American department store operators have filed for bankruptcy protection this year, including the high-end chains Neiman Marcus and Lord & Taylor. The latter, the oldest in the nation, is liquidating.
A 'rebalancing' in the luxury market
Through the busy holiday shopping season and beyond, Bain expects luxury sales to return at a different pace in each region. China is expected to rebound at full speed, while Asia on the whole is still in "recovery" mode, the firm said. The Americas are expected to remain "sluggish," while Europe struggles through new pandemic-related lockdowns. Covid-19 cases are still rising robustly in Europe and the United States.
This, in part, will help China's luxury market overtake Europe and the Americas by 2025, when Chinese consumers will account for almost half of all luxury spending, according to Bain.
"There is going to be a rebalancing between different geographies that, of course, will massively impact the distribution ecosystem, and the size of the distribution networks of the [luxury] brands in these regions," Levato said.
Bain expects the global luxury market to return to 2019 levels by the end of 2022 or early 2023, driven by digital sales growth and strength in China.
Online shopping for luxury goods has doubled to represent 23% of total purchases in 2020, from 12% in 2019, Bain said. The firm expects e-commerce to be the biggest channel for luxury spending globally by 2025.
Sales of personal luxury goods are forecast to be down about 12% during the holiday quarter worldwide, in line with this category's performance in the third quarter, Bain said.
The consulting firm predicts the luxury market will grow by 10% to 19% next year, depending on the pandemic, effective vaccine distribution and consumers' willingness to return to travel.
"Luxury brands have faced a year of tremendous shifts, but we believe that the industry will come out of the crisis with more purpose and more dynamism than ever before," Levato said.
Experiences may rebound faster
All personal luxury goods categories have reported declines in 2020, according to Bain, as wealthy consumers have culled their spending on items to treat themselves or loved ones. Watches and apparel are down by 30%. Beauty is down 20%. Shoes, cushioned by demand for expensive sneakers, has fallen 12%.
While experience-based goods — which Bain defines as fine art, luxury cars, private jets and yachts, fine wines and spirits, and gourmet food — have suffered as well, their declines have not been as large, and their outlook is higher than personal items.
"These are the categories that have suffered less, especially the wines and spirits, because they can be consumed at home," Levato said.
Experience-based goods are on track to be down 10% in 2020, compared with a 23% drop for personal luxury goods. Within that, luxury experiences like trips on luxury cruises and fine dining, are on track to fall 56%, according to Bain's report.
Spending on experiences is expected to recover at a faster pace than personal goods like jewelry and leather, Bain said. But experiences that rely on tourism may lag, Levato said.
'We're witnessing a paradigm shift'
In recent weeks, luxury retailers have called attention in their earnings reports to rebounding sales in China. The French handbag maker Hermes said in late October its return to growth in the third quarter was aided by "remarkable performance" in mainland China.
Coach and Stuart Weitzman owner Tapestry booked triple-digit e-commerce growth, in addition to double-digit revenue growth in mainland China, for the quarter ended Sept. 26.
Capri Holdings earlier this month reported "positive global retail sales" at its Versace banner and positive sales in China across its Michael Kors, Jimmy Choo and Versace brands.
And when Farfetch reported earnings last week, the luxury e-commerce platform noted the pandemic was accelerating a permanent shift to luxury shopping online. Farfetch's third-quarter sales surged more than 70%.
"We believe we're witnessing a paradigm shift in the way people buy luxury," CEO Jose Neves said. "The luxury industry will not go back to the same normal as we did with pre-Covid-19, and it affirms my beliefs that we're witnessing a major acceleration of the sustained online adoption I have anticipated when I founded Farfetch 13 years ago."