In a Global Economic Slowdown, Luxury Continues to Outperform but Faces New Challenges

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Home > Articles > In a Global Economic Slowdown, Luxury Continues to Outperform but Faces New Challenges

 In a Global Economic Slowdown, Luxury Continues to Outperform but Faces New Challenges

General
June 4, 2019
Counterfeiting, E-commerce, Chinese consumers importance, even if it is generally relatively spared by recessions, the luxury market must adapt to a profoundly changing economy if it does not want to lose its exceptional status.

Despite their supposed rarity, they are everywhere! Luxury products, from champagne to watches, cars, jewellery, haute couture, and cosmetics, are ostentatiously displayed in our magazines, screens, and public spaces. And this omnipresence reflects an economic health that is sometimes considered insolent in the face of slowdowns in other industries. For a long time, the luxury market appeared as an exception impermeable to recession. However, the situation is not that simple.

A Market with Strong but Levelling Specificities Luxury is traditionally characterised by high quality products with a high price for the “happy few” who want to show their social status. Cultivating rarity and exceptionality, it is aimed at populations that are supposed to be able to withstand slowdowns in global economic activity. But this landscape is changing with a new population that wants to show its success.

In 2018, the luxury market grew by 5 per cent (to Eur 1.2 trillion), driven by rising consumption in China with a growing middle class: Chinese consumers now account for 33 per cent of global purchases of luxury products, and they are expected to account for 46 per cent of the global luxury market, representing both an opportunity and a threat to the luxury industry, which will be increasingly subject to the economic uncertainties of this middle class, more sensitive to possible losses in purchasing power.

Counterfeiting and E-commerce, between Risks and Opportunities
Luxury also faces other threats such as counterfeiting. Market estimated to reach US$1.8 trillion in 2020, counterfeiting often damages the image in addition to the financial damage to targeted brands. Driven by the same desire for social recognition, the purchase of counterfeit luxury goods impacts both the desirability of the brand and the confidence of buyers. For example, a study in the United Kingdom showed that 66 per cent of consumers who had purchased a counterfeit product without their knowledge no longer had confidence in the brand in question and 44 per cent went so far as to stop buying brand goods for fear of counterfeiting. On the other hand, some counterfeit goods boost the reputation of the original brand, creating a desire to own an original item of that brand.

E-commerce also has a very particular impact in the luxury industry. While it represented only 10 per cent of sales in 2018, it is expected to increase to 25 per cent in 2025. However, many brands resist E-commerce for fear of counterfeiting competition on the one hand (if it is public knowledge that you do not sell online, the buyer will have less chance of being fooled) but above all to preserve the unique bond forged with the customer during his purchase experience in their stores, a key element of loyalty and differentiation.

The health of the luxury market is therefore well linked to various global factors and is not totally disconnected from the rest of the economy. While prospects are good despite of the global economic slowdown expected (COFACE expects global economic activity at 2.9 per cent in 2019 from 3.2 per cent in 2018). Chinese economic activity, E-commerce, and counterfeit products constitute risks that can penalise luxury market but also create opportunities. It is up to luxury brands to remain vigilant to maintain their specificity while taking into account the evolution of their environment.

Coface: For Trade—Building Business Together
Seventy years of experience and the most finely meshed network have made Coface a reference in credit insurance, risk management, and the global economy. With the ambition to become the most agile global trade credit insurance partner in the industry, Coface’s experts work to the beat of the world economy, supporting 50,000 clients in building successful, growing, and dynamic businesses. The Group’s services and solutions protect and help companies take credit decisions to improve their ability to sell on both their domestic and export markets. In 2018, Coface employed about 4,100 people and registered turnover of €1.4 billion

IMAGE: 123RF
Copyright © 2019 Singapore Institute of Management

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