The Luxury Space in 2023
Reading time: 5 min
For luxury brands, 2023 will be the fourth consecutive year of trading in unusual times. Last year’s VERB State of Luxe report reflects this. However, in common with other luxury industry benchmark measures like the Bain & Co Luxury Report and The State of Fashion Report, we see many reasons for the sector to be bullish.
In this article, we draw on findings from our State of Luxe report to cover:
- How the luxury industry fared from 2020 to 2022
- The bright side: positive trends affecting global luxury sales that are likely to continue
- The downside: how many luxury brands may suffer as the current economic environment worsens
- Revenue defence strategies for personal luxury market suppliers
How luxury brands fared from 2020 and 2022
In light of the uncertainty caused by the COVID-19 pandemic, luxury sales declined by nearly a fifth in 2020. This is despite the fact that sales of Louis Vuitton, Ralph Lauren and other luxury brands in that year were propped up by stimulus cheques in America.
As 2021 dawned, analysts expressed relief that there was only limited scarring to major economies in the world. Confidence returned to the luxury market that year as sales jumped 15% to €1.14 trillion.
Bain recently predicted that 2022 sales would reach €1.4 trillion, a 21% jump as 95% of luxury brands “generated positive growth“.
Six luxury trends to focus on
What was behind the resilience in 2021 and 2022? Analysts have pointed to six key drivers driving luxury brands’ revenues.
1. Second-hand markets
Growth in sales of pre-owned designer handbags, watches, fine jewellery and luxury goods has outpaced growth in the sale of new luxury items. Gen Z and millennials have led this charge, a phenomenon we wrote about back in September 2022.
The factors behind the trend are:
- An increasing appreciation among Gen Z and millennial buyers of the quality, affordability and collectability of pre-owned luxury goods.
- Extending the lifespan of luxury goods reflects consumers’ interest in sustainability issues.
- Major supply chain issues caused by the COVID-19 pandemic caused shortages in new luxury item inventories.
- The desire to have tradable assets they could liquidate for cash if needed.
Rather than view this as a threat to immediate revenues, luxury brands embraced the resale market as a way to connect with affluent consumers of the future. They took a long-term view instead in light of the findings of researchers that many second-hand luxury consumers intended to trade their second-hand items for new luxury items when they earned more.
Brands see an opportunity to profit a second or third time from the sale of their products while locking in brand loyalty in the process. Investors, including the brands themselves, are pouring money into luxury resale platforms to share in growing transaction volumes.
2. The rise of Gen Alpha
The Future Digital report contained encouraging news for luxury brands regarding the Gen Alpha cohort, born from 2010 onwards.
Surveying 4,000 6-16 years old, report author Wunderman Thompson found that the appeal of brands endured in the era of Google and Amazon. Gen Alpha already ascribes positive or negative associations to brands. They view their favoured brands as a part of their identity, just as much as the peer groups they belong to. Interestingly, when they buy something from a preferred brand, they choose to do so direct from the brands themselves.
Business Insider reports that Generation Alpha sees luxury goods as valuable investments. There is also a growing trend among them to buy vintage pieces from the growing number of online marketplaces like the Vestiaire Collective.
3. Price rises on popular items met with no resistance
From 2019-2022, luxury brands pursued an “elevation strategy” – a program of progressive price increases across their ranges.
This did not damage growth in the volume of sales. In fact, 60% of revenue growth in the 2019-2022 period was driven by this approach.
4. The “post-streetwear” era
Leather goods, sneakers and skincare led the resurgence of the luxury market post-pandemic. They were also among the categories most affected by the elevation strategy.
The same period saw a surge of interest in fashion ranges that retained a streetwear vibe which embraced luxury (particularly in collabs). Bain noted that clothing which met at the intersection of inclusivity, gender fluidity, and sports styling and that utilised improved “techniques, materials and functionalities” performed particularly well.
5. More high-income consumers to target
The number of luxury consumers is expected to grow from 400 million now to 500 million by 2030. Spending by the most affluent consumers will account for 40% of global luxury market revenues as opposed to 35% in 2021.
Expect competition to be fierce as more luxury brands launch to claim a share of the market. Bain forecasts that given the expanded choice consumers will have, they’ll become more knowledgeable and choosy than ever before. It will become harder to secure customer loyalty and advocacy. At the very top end of the market, brands will have to focus on developing one-off experiences and products, especially for Very Important Clients (VIC).
As China finally lifts its zero-COVID policies, revenues this year and next should receive a boost from Chinese consumers seeking luxury fashion and other high-end goods.
By 2030, a third of luxury sector sales will be to Gen Z and Gen Alpha with growth for these cohorts outpacing all others.
6. Omnichannel 3.0
Part of the “Omnichannel 3.0” approach emphasises the publication of high-quality, platform-ready content across websites, apps, print and social media. Also important are its focuses on customer engagement, experience and loyalty, better order fulfilment and pricing strategies that maximise profit.
Many of the big winners in 2022 made significant online investments in 2020 and 2021 in their websites, social media strategy and infrastructure – well-judged Omnichannel 3.0 plays.
But we’re not sure yet about Omnichannel 3.0’s enthusiastic embrace of the metaverse, blockchains and web3 digital innovations. We’re always interested in new opportunities at Verb Brands but we feel that major investment in these areas is risky because demand for these technologies is unproven.
There are long-term questions over web3 poster children like cryptocurrencies and NFTs that have not been satisfactorily answered yet. For years, blockchain has threatened to revolutionise the ad market but it’s barely made a scratch. And Facebook appears to be backing away from the metaverse and focusing on AI.
Is a recession coming?
There is widespread agreement among economists that there will be a slowdown but not on whether the technical definition of a recession will occur. The recent collapse of the Silicon Valley Bank has further frayed nerves, reports the Financial Times. According to the World Economic Forum, US and Europe economies are expected to grow at a very slow rate this year.
Speaking to Luxonomy, Oliver Chen, investment bank Cowen’s managing director for the retail and luxury sector, stated that “That middle-income consumer is under a lot more pressure…there are fewer dollars for all discretionary items.”
Observers of the luxury market are not however pessimistic. The Bain-Altagamma analysis however predicts growth in the personal luxury goods market of 3-5% or 6-8% depending on currency exchange rates.
The State of Fashion 2023 report by The Business of Fashion and McKinsey & Company is forecasting growth in luxury spending of 5-10% higher than the previous year. Middle Eastern and South Asia economies (particularly South Korea and Japan) are expected to drive much of the luxury sector’s growth during the year.
Appealing to high-net-worth individuals in the year ahead
This year may be challenging and so might the next year.
The brands that have gained the most during the last few years have focused on their online marketing, ecommerce platforms, personalisation and fulfilment. Online sales will continue to increase albeit at a slower rate in the coming years. We see signs of many brands now focusing more attention on the bricks-and-mortar experience and marrying it with online, in line with much of the Omnichannel 3.0 approach. As footfall returns to major cities, this move looks shrewd.
Inflation will continue to be a factor for some time as will supply chain issues. However, unlike for budget and mid-market brands, customers do not feel price increases in the same way as was proven with the elevation strategy.
To discuss how your brand can improve revenues and market shares in the coming year, get in touch with us. In just over a decade, VERB Brands has worked with international and up-and-coming brands on developing successful marketing approaches. Click here to contact us. We look forward to working with you.