After three consecutive years of growth, the global luxury goods market experienced a 'cooling off period' in 2024.

According to long-term data monitoring by the Italian Luxury Manufacturers Industry Association and Bain&Company, the global luxury consumer group has shrunk by approximately 50 million people in the past two years. Except for the early stages of the pandemic, 2024 has also become another year of significant decline in the personal luxury goods market since the 2008 financial crisis.

In 2024, only the wealthiest consumers at the top of the pyramid will still show resilience, while the highly sought after Generation Z consumers in recent years have now been left behind by brands, "said Claudia D'Arpizio, a partner at Bain&Company

The tight market environment has polarized the market. The market for watches, leather goods and shoes slowed down significantly, but the sales of high-grade jewelry, perfume and glasses were strong. Bain&Company predicts that only about one-third of luxury brands will achieve positive growth in 2024, down from two-thirds in 2023.

What strategies will luxury goods companies adopt in the face of this environment? Roland Berger partner Jiang Yunying told First Financial reporters that high-end customers (VIC) are still the key target group for luxury brands in the new year. In the next 2-3 years, luxury brands will continue to focus on maintaining the loyalty and stickiness of their core target consumers.

Luxury consumption shows structural differentiation

The stock price performance of the world's three major luxury goods groups in 2024 shows significant differentiation: Richemont Group rose 12.07% against the trend, LVMH fell 16.27%, and Kering Group fell sharply by 44.21%.

This is related to the structural differentiation of luxury consumer categories. Richemont's core business is jewelry and watches, while LVMH and Kering Group's core revenue sources are fashion and leather goods. According to the Bain report, the watch, leather goods, and footwear markets will significantly slow down in 2024, with consumers tending to "downgrade consumption" and making more cautious purchasing decisions. At the same time, the proportion of top customers in luxury consumption continues to grow, and the high-end jewelry market stands out.

According to the 2024 fiscal year report of Richemont Group, its jewelry division has performed strongly, with jewelry brands such as Cartier, Van Cleef&Arpels, and Buccellati contributing 69% of the group's sales. The sales of this department increased by 6%, with a growth rate of 12% calculated at a constant exchange rate, and an operating profit margin of up to 33.1%.

In contrast, the traditional leather goods and accessories market has experienced a cold wave. For example, in the third quarter, comparable revenue of Kering Group decreased by 16%, with core brands Gucci and Yves Saint Laurent, which account for the majority of the group's revenue, experiencing a 25% and 12% decline in revenue, respectively.

At the same time, the light luxury category has shown strong resilience. In 2024, although the overall revenue of LVMH Group dropped slightly by 2% in the first nine months, the perfume and cosmetics business achieved three consecutive quarters of growth. The revenue of Kaiyun Group's eyewear department also increased by 32% year-on-year, demonstrating consumers' continued enthusiasm for "small luxury goods".

Jiang Yunying analyzed that luxury consumption is gradually shifting towards a "lifestyle". Consumers used to purchase luxury goods mainly to "own" specific products such as designer bags and watches, but now they pay more attention to building and expressing personal taste and lifestyle through purchasing related products. Especially among young people, purchasing luxury goods is no longer just a way to showcase social status, but also a way to self reward and meet personal expectations.

Catering to the super rich or the general public

For a long time, luxury goods have been regarded by the economic community as typical Veblen Goods, and the demand for such goods increases with rising prices. In recent years, luxury goods groups have made a lot of money by utilizing this characteristic.

According to HSBC analysts tracking the prices of classic luxury goods, the average price of luxury goods increased by 54% from the end of 2019 to September 2024. This strategy has significantly improved the industry's profit margin. In 2021, LVMH Group's operating profit accounted for 27% of sales, and Richemont Group's net profit for the whole year increased by nearly 40% year-on-year.

However, in the current market environment, the negative effects of this widespread price increase strategy are gradually becoming apparent. According to data from Bain&Company, the total sales of the global luxury goods industry in 2024 decreased to 1.478 trillion euros, a year-on-year decline of 2%. Meanwhile, within two years, the industry has lost about 50 million consumers, accounting for one eighth of the total number of high-end consumers worldwide.

Luxury brand Prada CEO Andrea Guerra admitted in November last year that the significant price increases in recent years were a "huge mistake" because consumers' perceived value of the product did not match the price.

From the perspective of consumer group structure, according to a report by Boston Consulting Group (BCG) in 2023, approximately 350 million luxury consumers worldwide consume less than 2000 euros per year, but contribute approximately 60% of the market share. The so-called VIC customers, who account for 2% of the total, contribute about 40% of the global luxury goods market's consumption.

This structural contradiction forces luxury brands to make a choice between consumer positioning and market size. In 2024, brands that focus on serving ultra-high net worth individuals will perform outstandingly. Brunello Cucinelli, which sells $6000 cashmere sweaters, saw a 12% year-on-year increase in sales for the first nine months of 2024. Hermes achieved a 14% revenue growth during the same period.

However, even the VIC community has begun to question the brand experience, believing that it has lost its unique charm. The consumption habits of high net worth individuals are changing. They are starting to choose luxury goods more rationally, not only focusing on full price products, but also considering different price ranges and discounted products. At the same time, they value deeper values such as one-on-one exclusive services and brand culture inheritance, "observed Jiang Yunying.

However, Jiang Yunying believes that price reduction is not a wise choice for luxury brands: "Unlike mass consumer goods, luxury goods must adhere to their uniqueness and brand positioning. The key is how to convey core values to segmented consumer groups while maintaining brand tone, rather than blindly expanding low-priced product lines

If consumers need to pay higher prices, brands must offer something new and surprising, "said Luca Solca, a luxury goods analyst at Bernstein.

For example, Bain pointed out in the report that small leather goods and entry-level products are still favored by Generation Z. Luxury brands need to do more to attract and retain the increasingly fickle young consumer group.

Jiang Yunying predicts that in the coming years, young consumers will pursue a balance between classic and innovative luxury brands. They expect brands to continue to respond to demand, maintaining classic styles while showcasing uniqueness and vitality. This dual demand is a key direction that luxury brands need to focus on in the Chinese market.

Asset appreciation provides a buffer for affluent Americans

From a regional perspective, Bain&Company's report found that in the Asia Pacific region, Japan led the global luxury goods growth in the first half of 2024 with its exchange rate advantage and surge in tourism consumption, but this momentum has slowed down recently with price adjustments. Although the European market has maintained growth in each quarter, the growth rate is gradually returning to normal. The UK and Northern Europe have shown lackluster performance due to limited luxury tourists. The Middle East region is affected by the regional situation, and the influx of tourists is showing differentiation.

In contrast, the US market still maintains a quarterly growth trend. Regarding the resilience of the US market, Bob Schwartz, a senior economist at Oxford Economics, told First Financial reporters that the US stock market has risen by over 20% in the past two years, coupled with a surge in property values, providing sufficient financial support and net asset cushion for high-income families, which will help them cope with possible market adjustments in 2025. The consumption contribution of these affluent families is expected to further expand.

The actual wealth buffer may be underestimated, "Schwartz said." The nearly $3 trillion in cryptocurrency held by wealthy investors has not been included in the Federal Reserve's financial asset statistics. These hidden wealth are supporting luxury goods sales, as evidenced by a recent banana artwork that sold for over $6 million at an auction

Schwartz believes that if there is no stock market downturn that seriously undermines market confidence, consumer spending will maintain a good momentum this year. "The fundamentals supporting the stock market remain robust, and it is expected that economic growth will continue to exceed trend levels this year, which will drive corporate profit growth. At the same time, the Federal Reserve may cut interest rates at least twice this year, which will also support stock market demand

Looking ahead, emerging markets show enormous potential. Bain predicts that Latin America, India, Southeast Asia, and Africa will add over 50 million middle-class and above luxury consumers by 2030, bringing new growth opportunities to the global market. Overall, the luxury goods market is expected to see only a slight improvement by 2025 and will not return to a long-term growth trajectory until 2030.