Luxury brands need strong support

10 June 2009

NEW YORK: Luxury brands that are backed by a strong parent company and have their own retail network are best placed to survive the economic downturn, according to the latest analysis of the sector produced by Bain & Co., the consultancy.

Brands play a vital role in the luxury category, as argued in research by Millward Brown, but Bain & Co. has also forecast that category sales will fall by 10% this year to $201 billion (€152bn; £135bn). 

At the Global Luxury Summit in New York, hosted by Reuters, the news agency, Claudia D'Arpizio, a partner at the consultants, further predicted that sector sales will increase by 1% in 2010, and enjoy successive upturns of 4% in 2011, and 7.5% in 2012.

However, she added that the current climate means that "austerity is fashionable, even for the wealthiest consumers," with most shoppers preferring to buy "evergreen" goods rather than following new fashions.

While building a store network is an expensive proposition for luxury brand owners, it also enables them to more effectively gauge changes in consumer behaviour, D'Arpizio said.

This is because, "in general, whoever has stronger control of their retail network is well-equipped now to react to this," as they have "all the levers to really understand how consumers are changing."

Another option for luxury brands trying to boost sales is to develop strong links with major retailers, including department stores.

By way of an example, D'Arpizio said many brand owners in the FMCG sector are now looking to work with Wal-Mart, the grocery giant, to improve their prospects in the recession.

She similarly argued that, in the luxury market, "category leaders can work with department stores and retailers, trying to understand how really to improve the relationship."

Brands that are part of a major holding company, like LMVH, the world's biggest luxury operator by sales, may also be somewhat more insulated.

Such "medium-sized brand inside a big group," she argued, are effectively "better-equipped to overcome this moment of crisis because in that group there is at least one big cash cow that is still fueling growth for all the others."

Scilla Huang Sun, a luxury fund manager for investment company Julius Baer, echoed the view that sales will fall by between 5% and 10% this year, and may struggle next year before improving in 2011.

However, she added that the sector was not "dead", as “human nature will always be attracted to nice product and nice brands. The question is when will it be back to the level we saw in 2007?"

The brands that are most likely to prosper are "the big and beautiful brands, strong brands and well-managed brands and the classic brands," such as Burberry.

In a similar vein, Patrick Thomas, chief executive of luxury giant Hermès, said the current "turbulence" in the market will last by at least two years. 

The company has reduced its investment budget, and halved the number of stores it will open in China to two, although it still plans to launch new outlets in Brazil and Turkey. 

It has also increased its advertising budget by 10%, to over €100m, focusing the main part of its spending on the Chinese market.

Data sourced from Reuters; additional content by WARC staff