Luxury brands and European consumers: back to basics?
Swetha Ramachandran, Investment Manager, Luxury brands equities, GAM Investments
Swetha Ramachandran, of GAM Investments, believes that luxury brands are gaining in appeal with a new generation of European buyers, thanks to the increased accessibility resulting from digital transformation, and the adoption of new models such as resale, which appeal to increasingly sustainability-conscious consumers.
Europe has long been regarded as the “cradle” of the luxury goods industry, the origin of a whole series of brands which, over time, have acquired iconic status in their respective categories: from leather goods (Hermès) to jewelry (Cartier) to sports cars (Ferrari). But, increasingly, Europeans are becoming minor consumers of their own country’s brands – compared to Chinese and American consumers, who collectively account for around 60% of total spending on luxury goods. New data suggests that the pandemic may have triggered an unexpected shift in European consumers’ priorities. They are regaining interest in brands they previously took for granted. An emerging preference for timelessness and high quality, combined with the possible deployment of substantial “surplus savings” as economies reopen, should make the European consumer an important player for luxury brands. Younger buyers are increasingly interested in sustainable lifestyles. This context plays in favor of the sector’s health: “buy less, buy better”.
2020 : When life goes local
It’s well known that, prior to the pandemic, the gleaming trade of European luxury stores was largely fuelled by tourists, most of them Chinese. When traveling to the continent, they were attracted by the significant price differences of the same products in Milan or Paris, compared to the shops in their own country. As a result, the slump in global travel in 2020 proved particularly damaging to luxury sales in Europe. For most of the year, this crucial tourist demand was non-existent. Yet local European consumers remained highly resilient: according to Bain estimates, purchases by European customers fell by only 10-15% (compared with a 20-22% decline for the sector worldwide). Moncler, an Italian outerwear brand, pointed out that on a typical year-end, almost half of its business came from tourism, whereas in 2020, this figure was no more than 10%. Despite this, the company recorded modest declines in Europe (excluding Italy, where the bulk of sales to tourists took place) – indicating strong activation of the local consumer base. Similarly, Hermès’ European decline of -10% in the fourth quarter demonstrates, in its own words, the “loyalty” of their European consumers. Conversely, Gucci’s 45% decline in Western European sales in the year 2020 is due to an over-reliance on tourism and a lack of engagement with local consumers, which the company hopes to correct in the future. LVMH’s quarterly update reveals that at the end of March 2021, the overall share of European business was “only” 18% below its 2019 levels, even though more than half of European store sales, normally made to tourists, have all but disappeared. This finding is corroborated by management’s comments on a significant “influx of local customers to Europe”.
The digital showcase
Why have European consumers moved closer to the luxury market in the midst of the most serious global health crisis in a century? We believe that this evolution is attributable to several factors: firstly, the stability or increase in disposable income of target consumers, who have shifted their spending from experiences (vacations, restaurants) to goods (jewelry, accessories, homewares). In times of crisis, well-known brands tend to fare much better than new, unproven ones: in an uncertain world, consumers prefer certainty, as the CEOs of L’Oréal and Pernod-Ricard have pointed out. But there is every reason to believe that the current digital transformation of shopping habits has been one of the main catalysts for European consumers’ return to the luxury sector. In the ten months of last year alone, e-commerce saw a penetration equivalent to almost ten years, as consumers became increasingly comfortable with buying expensive items online. The luxury goods industry has adapted its sales “ritual” and theater to the online world – using live-streaming techniques, and converting store salespeople into digital salespeople, who establish one-to-one relationships with customers. In other words, good old-fashioned customer loyalty has been adapted to the digital world. Luxury brands have been able to recruit new customers by making themselves more accessible to local consumers who previously might not have been willing (or able) to stroll into a store crowded with tourists. In 2020, German-based online retailer Mytheresa was able to increase its active customer base by 22% by offering ad hoc digital experiences as well as exclusive compact collections from Valentino and Moncler, among others.
Consumption: more reasoned, less casual
Thanks to the growth of the second-hand market, Europeans are discovering luxury brands at an increasingly early age. Buyers aspire to owning fewer items, but of better quality. This explains the recent industry-wide shift towards premium brands. A recent BCG survey revealed that almost 50% of second-hand buyers had tried a new brand in the last year. Second-hand consumption is particularly prevalent among younger American and European consumers. Luxury brands could therefore consider it a key factor in future customer acquisition. Nearly two out of three consumers say they would buy more from fashion brands associated with the second-hand sector.
No winter is eternal
Although Europe has not yet recovered from the pandemic, the accelerated deployment of vaccines should encourage a wider economic recovery in the months ahead. It is estimated that the Eurozone and the UK together account for around 18% of global private consumption. Following the example of the United States, whose reopening is taking place earlier, European consumers should release substantial surplus savings into the real economy, via pent-up demand, and catalyze a catch-up in luxury consumption that had been postponed the previous year.
Figure 2: Recent trends in European savings rates Source: Eurostat, ONS, Morgan Stanley Research. As of December 31, 2020. For illustrative purposes only.
Before the arrival of the pandemic, household balance sheets were already in great shape. Fiscal support from European governments pushed household savings rates to extraordinarily high levels. Even allowing for a degree of consumer caution and a higher-than-normal savings rate during the recovery, we believe that a significant upturn in consumption can be expected. Although consumers are likely to spend more on leisure and hospitality during the recovery, it should be noted that the total amount of spending available is higher than before the COVID-19 crisis, which favors spending on both goods and services.
New roads lead to Rome
More accessible thanks to their digital transformation, committed to new models such as resale – appealing to consumers increasingly concerned with sustainability – luxury brands are gaining in appeal with a new generation of buyers in Europe. They are aligning their value proposition more closely with the aspirations of local consumers, in an environment where the return of long-haul tourist travel may still take time to recover. The pandemic has fundamentally challenged many companies’ previous strategies – heavy reliance on tourists, lack of local products and merchandising. It has prompted them to return to their fundamentals, where they may discover the ability to nurture and cultivate a future generation of European luxury consumers.
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