Against a backdrop where the global luxury market will grow between 8% and 10% across all categories, the personal luxury segment’s growth is more muted, projected to advance by only 4% in 2023 at current exchange rates, according to the latest Bain-Altagamma luxury market study.
The total luxury market will reach $1.65 trillion (€1,508 billion) this year, including automobiles, experiences, wines and spirits, home furnishings and art. Personal luxury goods will account for 24% of the market and close the year with about $400 billion (€362 billion) in revenues. This segment includes clothing, fashion accessories, beauty, jewelry and watches.
Summing up the year that almost was, report co-author Claudia D’Arpizio said in a statement, “This is a defining moment for brands, and the winners will separate themselves through resilience, relevance, and renewal—the basics of the new value-centered luxury equation.”
Yet, looking forward to 2024, D’Arpizio signals cautious optimism for the personal luxury goods sector, which may well slow from its 4% rate of growth this year to something less next, noting “fragile consumer confidence, macroeconomic tensions in China and spare signs of recovery in the U.S.”
And along with those headwinds is the possibility of even more from the “disruptive changes in the global sociopolitical situation,” a diplomatic way of saying the world hangs in the balance.
Solid Fundamentals
While emphasizing the luxury industry’s strong fundamentals that provide “unparalleled resilience” for luxury brands, co-author Federica Levato acknowledged in a call that there were many bumps along the road, specifically luxury consumers’ uncertainty in the face of a potential economic slowdown.
They are already delaying discretionary purchases, even as their income and wealth remain solid.
“There are soft aspects in their willingness to buy, which is equally relevant to the hard data about the number of people able to spend on these items,” she said, adding that the engine for growth over the long term is the “increasing convergence between products and experiences.”
“Convergence among luxury markets will unleash further expansion in the intermediate term and going forward,” she said and described the convergence as personal luxury brands offering more experiences in-store, opening restaurants, hotels and other experiential venues and romancing goods brands beyond the thing itself to the feelings and experiences owning and wearing it gives.
Conversely, experiential brands are also expanding into products and retail, yielding “relevance over different episodes of the customers’ lives.”
Despite the existential talk of convergence, the data reveals a growing polarization in the market that will separate the winners from the losers in the coming year.
This year, there will be fewer winners and more losers than last year, when 95% of companies enjoyed growth. In 2023, some 65% to 70% of brands will post positive results, yet looking back at the global recession of 2008-2009, the percentage of luxury brand winners dropped to 35%.
Hopefully, things won’t get so bad as during that previous crisis, but there appears to be more divergence than convergence in the data.
From Things To Experiences
A widening divide is evident in consumers’ preferences toward more experiences, specifically luxury hospitality, cruises and fine dining, as people are now free to travel. This category will advance 15% year-over-year.
In addition, more luxury consumers are partaking in what Bain defines as “experience-based goods,” specifically fine art, luxury cars, private jets and yachts, fine wines and spirits and gourmet food. These experienced-based goods will advance 10% this year over last, leaving luxury products to pick up the pieces.
Luxury products will grow a mere 3% this year. That includes personal luxury goods and high-end furniture/homeware, which will be lucky if it is flat over last year. This trend is credited to “normalization” as discretionary spending “rebalances toward lived-in experiences.”
Generational Differences
Having successfully transitioned from the Baby Boomer generation (born 1946-1964) to the younger GenXers (1965-1980) and Millennials (1981-1996), now luxury brands must pivot toward GenZ (born after 1997).
In 2016, Boomers accounted for nearly one-third of personal luxury good sales, GenX for 38% and Millennials for 27%. In 2023, Boomers’ share has dropped to 11% and GenXers to 24%, while Millennials are at 45% and GenZ has sprung to a 20% share market.
By 2030, Millennials will dominate (50% to 55%) and GenZ will hold 25% to 30% share, yet they will represent different sources of power for luxury brands in the near term.
Being older, GenX and Millennials will have the spending power, with Bain-Altagamma predicting that there will be six-to-eight times more “high-income” members of these generations over the next two years.
The younger GenZers’ power will be realized through their influence, being at the forefront of cultural and societal change and inspiring value shifts across older generations. “Luxury brands need to target them to reach their parents or older brothers and sisters,” Levato said.
Distinctive to the younger generation is their quest for meaning to define what matters most and a shift toward more “purposeful” purchases, emphasizing “lived experiences” and concern for the environment.
Yet, being only 25 years and younger, they are in the process of defining meaning and purpose in their own lives, so where luxury fits in their lifestyle is still being shaped. Millennials and GenXers are further along that journey.
Income/Wealth Inequality
With older consumers having the wealth and income on which luxury brands’ revenues depend and younger consumers being influencers-in-chief for future growth, it presents a dichotomy for brands, especially as luxury goods prices have increased dramatically during the post-pandemic period.
The U.K.-based data analytics firm Edited found luxury prices are up 25% since 2019, making luxury goods increasingly unattainable for the so-called “aspirational” consumers or HENRYs (high-earners-not-rich-yet), a vital segment on which luxury brands have long relied upon for growth.
While the Luxury Institute and Bernstein analyst Luca Solca estimates that the top high-net-worth five-percenters account for 40% of the luxury industry’s revenues, the other 60% comes from those under that line.
“As wealth inequality increases globally, luxury brands are doubling down on an ever smaller slice of their clientele,” the New York Times reported as it observed luxury prices have gotten so high, “who can sustain this market?”
Luxury brands face a dilemma: whether to broaden their reach by expanding their entry-level offerings or lean into the true-luxury consumers who can afford their most exclusive products.
“There is always this paradox of growth for the industry because some of these brands are double-digit billion dollar businesses and need to grow by expanding the customer base,” Levato said. “But what is happening this year is that the core customer base is not growing, so brands must focus on their top spenders and key customers.”
Most recently, China has been the market the mega-luxury brands have tapped to expand their base, but in 2023, there has been a rebalancing of geographic distribution with the industry much less reliant on Chinese consumers.
In 2019, the Chinese accounted for one-third of personal luxury goods revenues; they will drop to between one-fifth to one-fourth in 2023. On the other hand, Americans have grown their share, from 22% in 2019 to between 29% to 31% in 2023. And that presents another challenge for luxury brands.
U.S. A Bellwether of Outlier?
The U.S. luxury market has progressively slowed down throughout 2023. This is especially problematic since Bain-Altagamma estimates about 50% of the world’s ultra-high-net-worth individuals live in the Americas.
The year will close with the Americas down 8%, making it the only geographic market experiencing a decline. And with Europe enjoying a 7% growth spurt in 2023, partly driven by Americans spending overseas, the Americas will relinquish its position as the world’s largest luxury market to Europe, $111 billion in revenues to Europe’s $112 billion.
Yet American consumers still account for the largest share of luxury spending worldwide (29% to 31%), and that’s the biggest challenge for luxury brands in 2024.
“The U.S. is rapidly falling into a luxury recession, if it isn’t already there,” shared Chandler Mount, founder of the Affluent Consumer Research Company (ACRC), a firm with which I am affiliated.
The ACRC’s latest survey of U.S. affluent luxury consumers (average income, about $400k) finds their financial confidence has dropped from an index of 64.2 points in June, the highest it’s been all year, to 55.6 points in October, its lowest. And the index measuring future luxury spending declined from 58.3 points in June to 49.7 points.
“This is telling me that the growth in luxury spending is likely to stop in the near term, but I’m not sure yet if it will turn into a decline,” he added.
Across the 22 luxury goods and services/experiential categories included in the survey, all but one – premium airline cabin seating – showed a downward shift in purchase incidence over the last three months.
Particularly hard hit were luxury brand fashion accessories and leather goods, down from 21% purchase incidence in July to 11% in October and luxury brand fashion apparel, off from 25% to 19%.
“We are heading into a period of lower spending due to the perception that it’s becoming more expensive to live well,” Mount observed.
If that is happening here, it stands to reason that it will spread because the uncertainty affecting U.S. luxury consumers is also affecting others.
“Wars and rumors of war, plus the resulting humanitarian crisis, make people scared and not want to spend. ‘Politics’ is taking center stage over ‘Policy’, causing uncertainty about wealth creation and its sustainability,” Mount said. “And then there’s inflation and rising cost of living affecting a wider swath of upper-income people, impacting their discretionary spending power.”
The Bain-Altagamma report provocatively asks, “2023: Are we in a defining moment in luxury market history?” to which the only answer is “Yes.”