When asked why Harrods would continue to perform well despite the economic downturn, the luxury department store’s managing director Michael Ward offered a simple answer: “The rich get richer in a recession.”
His confidence is emblematic of the seemingly unstoppable growth seen in the premium retail market of late. Analysts at Bain & Company and Altagamma predict that 2023 will be another strong year for the luxury sector, with its €353bn (£286bn) of retail sales in 2022 expected to grow again by between 3% and 8% this year. Brands such as Richemont, Hermès and Moncler are likely to continue to lead the way, having seen in excess of 20% growth in their share prices over the past 12 months.
Topping the list of success stories is LVMH, owner of fashion houses Louis Vuitton and Christian Dior and champagne producer Moët & Chandon. In April, the French luxury group became the first European company to reach a market valuation of $500bn, cementing its CEO Bernard Arnault’s status as one of the richest people in the world.
However, while the luxury retail market has seen consistent post-pandemic growth, the sellers of mid-market goods and essentials have been struggling to navigate a challenging market. Rising prices for energy, materials and transportation have all put a dent in retailers’ profits, and the cost-of-living crisis has placed a strain on customers’ spending power, with as many as 73.4% of UK consumers planning to cut back on retail spending this year, according to research by VoucherCodes.
How luxury retail captured consumers’ pent-up savings
So, how has the luxury sector been able to dodge the wider economy’s woes, and what can other retailers learn from its success? “Despite all the macroeconomic indicators worsening quarter after quarter, the personal luxury market is continuing to grow,” says Federica Levato, a senior partner in Bain & Company’s global fashion and luxury goods practice. “This market has proven to be over-resilient, compared to the wider retail sector.”
One of the reasons for that resilience is consumers having embraced a YOLO (you only live once) attitude, according to Luca Solca, a senior research analyst at private wealth management firm Bernstein, specialising in luxury goods.
He claims that the pandemic made many wealthy consumers more aware of their mortality, adding that “nobody wants to be the richest person in the graveyard”. He says: “On the contrary, everyone has raced back from the Covid-19 pandemic in a mood to recapture time we feel has been lost.”
The pandemic also had a secondary positive impact on the luxury market. Amid all the lockdown restrictions, European consumers accumulated nearly €1tn (£870bn) in additional savings. Solca argues that the top brands in each category – such as Chanel, Hermès, Louis Vuitton and Cartier – have capitalised on this pent-up spending power and leveraged their high desirability to encourage customers to spend their savings on their products.
Many high-end brands were also pleased to see the Chinese market re-emerge from strict zero-Covid restrictions. “The return to normal social life comes with a restocking of the wardrobe and purchases of new clothes and accessories,” says Levato. The impact of this alone could help the luxury market sustain another two years of “very comfortable growth”, according to Solca.
Can other retailers copy the luxury sector’s success?
Although luxury brands have benefited greatly from the fact that their wealthy customers’ finances remain relatively secure, even in a cost-of-living crisis, there is still much that other retailers can learn from their recent success.
One method that retailers are turning to is premiumisation. Although consumers may be spending less frequently when finances are tight, many are still willing to pay a higher price for products. Figures from the Office for National Statistics show that despite a decline in retail sales volumes, overall sales value has continued to climb.
“There’s always someone in the room who thinks that consumers will turn to more value-oriented offerings when finances come under pressure,” says Brian Perkins, CEO of Budweiser Brewing Group in the UK and Ireland and AB InBev’s Western Europe president. “But it doesn’t happen.” AB InBev’s latest financial report, for example, shows that sales of the brewer’s premium products have helped to offset declining sales in its other categories.
Helen Brocklebank, CEO of Walpole, the official sector body for the British luxury market, believes that another reason high-end brands are seeing sales growth is because these businesses are “willing to go the extra mile” when it comes to creating memorable experiences in-store and online.
This is something that other retailers may wish to take inspiration from. She points to Harrods, which recently welcomed Michelin-starred chef Björn Frantzén to its fifth-floor restaurant, and Alexander McQueen’s tendency to sell certain products exclusively in stores, as good examples.
Elsewhere, Selfridges has set out an area within its store for customers to exchange or upcycle old clothing. Premium womenswear brand Rixo will allow visitors to its new west London flagship to enjoy coffee and pastries while they shop.
“Brands need to think about how they can make their experiences special and unrepeatable,” Brocklebank says. “This takes imagination and, fortunately, that’s one of luxury retail’s big strengths.”
Why it pays to get down with the kids
Retailers can also learn from the way luxury brands communicate with their customers. “It’s a different kind of engagement which encourages dialogue with the customer, rather than talking at them,” Levato explains. “In some instances, they even allow co-creation and personalisation of the message.”
This type of storytelling, which translates particularly well to mediums like Instagram and TikTok, has been particularly effective in attracting younger consumers. Growth in the luxury market last year was primarily driven by the spending of gen Z and millennial consumers, with gen Z making their first luxury purchases some three to five years earlier than their older millennial counterparts.
The luxury market’s success in capturing this younger audience is another thing that retailers should look to emulate. “Gen Z influences the purchasing decisions of all the other generations,” Levato adds. “So, it’s important for brands to be focused on these new generations.”
After all, Bain & Company is already revising its forecasts for the luxury market’s 2023 growth. If that’s anything to go by, retailers would certainly do well to learn from some of the techniques deployed by their luxury counterparts. It’s a strategy which might just offer them a way to weather the challenging economic headwinds out there.