Luxury brands must adapt

03 January 2011

SHANGHAI: Luxury brands will have to focus on engaging shoppers, ecommerce and corporate social responsibility to drive up revenues, a multimarket study by McKinsey has argued.

The consultancy reported that while high-end retailers were enjoying annual growth of around 9% before the downturn, sales fell by 13 percentage points from 2007-09, with manufacturers suffering more heavily still.

Based on a survey of 5,000 luxury consumers in the US, China and Europe, it predicted conditions may not return to their pre-recessionary form.

For example, although demand for handbags remains robust, 26% of women now visit stores providing lower prices and cheaper brands.

A further 38% solely bought discounted items and just a quarter had not modified their habits, totals broadly indicative of those observable elsewhere.

Indeed, 40% of Americans, and almost a third of Europeans, suggested they only splash out on luxury goods available on sale.

However, attitudes differed among the Chinese panel, a majority of which thought higher prices signified better quality.

Extra factors impacting the sector include a desire for products and services that add value, carry an "emotional punch" or can be frequently used.

Roughly 30% of the US and European samples, and over 50% of Chinese respondents, would meet the full asking price for an offering they considered to be a "classic".

One emerging shift is a preference for "responsible consumption", McKinsey's analysis revealed.

It found 40% of US and European participants, and an even greater number of Chinese buyers, felt guilty after making category purchases or believed it is "distasteful to show them off."

Sustainability, ethical policies and employee welfare are some wider issues gaining traction, but fewer than 20% of interviewees stated these matters determine their actual behaviour at present.

"This is a trend worth watching," McKinsey said.

Ecommerce is also anticipated to play a much stronger role in shaping the luxury industry's prospects, with its market share set to climb from 3% in 2009 and hit 5% in 2011.

Moreover, half of the adults questioned by McKinsey look online prior to completing a physical transaction, and the clientele of the most exclusive department stores typically double the average web spend of other netizens.

Finally, developing economies should deliver at least 80% of luxury growth by 2015.

China is due to fuel this process, contributing 40% of the expansion in global wealth during the next three years, and might overtake Japan in terms of national expenditure on high-end goods in the near future.

According to McKinsey's poll, nearly 40% of Chinese households with an income of $37,000 (€27,688; £23,834) bought a premium product in the preceding 12 months, falling to 15% regarding the equivalent demographic in the US.

"Luxury companies will have to manage complexity to a much greater degree than before: to use the internet shrewdly, to create inviting stores, to respond to social concerns and to sell a sense of tradition," it concluded.

"And they need to do all this while continuing to create both uniqueness and a sense of belonging."

Data sourced from McKinsey; additional content by Warc staff