Despite a troublesome time in the global economy, the outlook for the luxury goods industry remains optimistic, where key drivers of performance are visionary and experienced management, value chain level integration of technology, and creation of shared value.
The Savigny Luxury index doubled its November decrease rate, and continued its descend until the end of the year, to fall over 6%, last December. In 2016, the industry will have to adjust to the tumultuous conditions in which it operates, as the impact of 2015 events will filter through into the New Year. The drag on sales can be attributed to a slowdown in China, muted demand in several markets, and further threats of terrorist attacks in key luxury shopping destinations. The turmoil in the global FX market and currency volatility have pushed customers to abandon local markets and seek to benefit from pricing differences abroad, which might lead brands to reconsider the idea of a globally consistent offer and to present a variable price, indexed to exchange rates and purchasing power in each area.
While it’s clear luxury executives will wrestle with challenges on multiple fronts, the industry as a whole remains attractive. According to luxury society data, sales are set to reach $328 billion this year, having increased from $317 billion in 2015. Moreover, the intense M&A activity from both strategic and financial investors reflects the resilient interest in the market. To name a few, the Italian private equity group Investindustrial finalized a €100 million acquisition of Sergio Rossi, from Gucci owner Kering SA, Estée Lauder continually purchases interest in small brands with big growth potential and the investment firm Mayhoola is working on an IPO for the Qatar-owned Valentino.
Today, most companies are refocusing their strategies around three performance levers: management, digitalization, and shared value.
The level of complexity in executing a winning development strategy that takes into consideration retail fashion investments and distribution rollout in various channels, globalization, and brand vision requires a highly competent management team. Experience at the C-level can be a performance multiplier and command much higher valuations. Christopher Bailey, CEO and CCO of Burberry, is a good example of a leader who knew how to guide his team toward transforming the British label into a coveted luxury powerhouse, with a focus on digital innovation.
With millennials gaining more influence and disposable income, brands need to adjust to the experience- based spending trend and create a frictionless consumer journey inside and outside their brick and mortar stores. They become increasingly aware that use of technology shouldn’t be limited to the marketing function but expand to product development, as well as, the creation of online point of sales and effective CRM systems. Digital flagships need to act as online sanctuaries and mirror the brand’s heritage and exclusivity. Brands have also opted to enrich their customer relationships by creating highly polished and entertaining digital content. Some examples include the documentary “Dior and I” and Chanel’s short film “Behind the Scenes”.
Lastly, generating monetary return through delivering social value is one of the growing focuses of the luxury industry. There is a general consensus that corporate social responsibility should evolve from charitable spending to initiatives that are aligned with and reinforcing the brand’s strategy. Emphasis on craftsmen and skilled artisans, as ambassadors of the brand’s DNA, is one of the primary CSR themes. Through job creating initiatives, like LVMH’s Institut des Métiers d’Excellence or Brunello Cucinelli’s Scuola dei Mestieri, luxury brands ensure the transmission and mastery of intricate manufacturing techniques necessary to their longevity and prosperity.