Luxury brands will be challenged to focus on the human aspect of the digital revolution, as they seek to find traction with the younger, digitally-powered consumers that have come with it.
Market turbulence, slowing sales. At the end of November the Savigny Luxury Index, compiled on the stock values of 18 leading luxury companies, reported a drop in average stock prices to reach a lower level than at the beginning of the year. Citing worries over a decline in Chinese tourism, that government’s heavy-handed enforcement of personal luxury goods’ imports, and the threat of a trade war with the U.S. French investment bank Societe General foresees similar trends, forecasting a “slowdown in the luxury sector has just started as concerns over the spending trend of affluent Chinese millennials and the impact of the Yellow Vest protest in France.” Goldman Sachs concurs and dropped its 2019 forecast for luxury industry sales growth from a previous 7% to 5%. The investment community dislikes any uncertainty and there is plenty of it to go around. A recent survey by J.P. Morgan among ultra-high-net-worth investors (those with more than $30 million in liquid financial assets) found that 75% expect a recession to hit the U.S. by 2020.Even Gucci CEO Marco Bizzarri, who sits on top of the world’s fastest-growing legacy luxury brand, knows the good times can’t last. “We need to recognize the fact that at a certain point we’re going to slow down, we cannot keep on growing 50-60% per month, it’s impossible,” he said in a video to company employees.
Rising wealth, growing anxiety. What gives luxury brands hope is the growing wealth class. Those who can afford luxuries have more money than ever to spend on it. The U.S. has the heaviest concentration of millionaires by far, with some 41% of the world’s millionaires or 17.4 million of them living in the U.S. That is almost as many millionaires as live in the next largest nine countries combined. China has but 3.5 million millionaires, Japan 2.8 million and the U.K. 2.4 million, these three being the next most prosperous countries. But cultural tides are turning against the wealthy elite. Where wealth used to be something the affluent wore proudly, today the wealthy are retreating into their cocoons, living behind walls and going increasingly inconspicuous. The back lash against the wealthy elite has had immediate impacts on luxury sales, that are likely to persist through 2019 with not just the wealthy Chinese but other well-heeled tourists avoiding the country.
Consumers don’t like uncertainty anymore than investors. It isn’t only fear of physical violence that is keeping French citizens from shopping. It is psychological anxiety about what comes next.
What is happening in France is but a bellwether of things to come worldwide as the wealthy grow more anxious and in response become less conspicuous, retreat from danger in the public square and act to secure their holdings. The watchwords for the wealthy in 2019 will be privacy and security. This will only make it harder for luxury brands to connect with them in the coming year.
Adapting the human side of digital disruption. After being slow to adapt to the digital revolution, luxury brands have made extraordinary investments to play catch up. With most brands now comfortable selling their luxe online, with the notable exception of Chanel, many of the luxury players are going deeper into the digital market. Why? Because that is where the growth is. Euromonitor International reports that luxury goods sales are growing nearly three-times faster online than in physical retail, 14% as compared with traditional retail at 5%.
Digital disrupters got an early leg up on the digital revolution, as luxury brands were slow to commit or not convinced that their customers wanted to interact digitally. This also made for strange partnerships. But as luxury brands have all eyes on technology, they’ve been slower to adapt to the human side of the digital revolution. Using catch phrases like omni-channel or channel agnostic, most organizations still run digital operations behind locked doors. That is because the technologists remain the experts on translating the brand’s DNA into computer code. Then there is the continued digital disruption coming to advertising and marketing that supports luxury brands in their mission. The winners next year will be digital advertising platforms; the losers will be print publications.
Enter younger, digitally-powered customers with new ideas about what luxury is. In order to grow luxury brands need new customers and today that means millennials. The generation’s sheer size, reputed to be as large if not larger than the baby boom generation, offers luxury brands a 20+ year supply of new customers. Looking across this vast generational cohort, defined by Pew as 73 million strong in 2019 and born between 1981 and 1996, there is one segment in that cohort that is most important for luxury brands: the HENRYs (high-earners-not-rich-yet). With higher incomes relative to the majority of the population, between $100k and $250k in the U.S., HENRYs hold the space above the bottom 75th percentile but below the top 95th percentile, where luxury brand’s traditional ultra-affluent customers are found. Since true affluence comes with age, the millennials aged 23-to-38 in 2019 are only now beginning to hit their stride in terms of income and wealth. Compared with the rest of the millennial generation, the young HENRYs are better educated, more informed and set the trends that their lower-earning peers will emulate. And even more important for the long-term prospects of legacy luxury brands, most people who reach ultra-affluent levels of income start out as HENRYs. These are the customers that luxury brands need to identify now in order to nurture for future growth. Complicating matters for luxury brands is the fact that HENRY millennials approach the luxury market with new ideas about what luxury is, what it means to them and how they want to participate in it. A recent Ipsos study found that 81% of modern luxury consumers believe the definition of luxury is rapidly changing, a fact that should be abundantly clear to luxury brands.
HENRYs’ new ideas about luxury will require fundamental shifts in what luxury brands sell and how they sell it. More than 50% of U.S. millennials prefer to spend money on experiences over things. That means the concept of a luxury good as a status symbol is rapidly being replaced by that of a status experience or an Instagram-worthy moment. Millennial HENRYs want to start checking off the boxes on their bucket list by age 40, not wait till their 70.
Turning to their material goods’ needs, millennial HENRYs are the most empowered generation ever and thanks to technology, they have access to most of the products the world has to offer at their fingertips. They are also far more educated and informed consumers than any generation before and are able to suss out the relative value of their purchases to make decisions right for them.
Luxury brands are going to feel the conflicting push-pull from their traditional wealthy and older customers who want one type of luxury and their younger, less financially-endowed customers and potential customers who want a totally different kind of luxury. Luxury’s present fortunes hang on the one, and their future depends on the other. It will face a complicated balancing act and beyond as they are forced to navigate potential disruption coming at them from these macro trends. Not all will be up for the challenge.