A year ago, Marvin Siebert, Partner and luxury goods expert, wrote about the trends and issues that will occupy the luxury industry in the coming years. Now he discusses what has happened since then.
Unlike the retail industry in general, luxury goods suppliers still have a reason to celebrate, as the global luxury market is growing. In 2022, sales reached €345 billion, an increase of 19% over the previous year. China remains the world’s largest luxury market. In 2022, it accounted for around 20% of global luxury goods sales (around €59 billion).1
In 2022, LVMH, Hermès, and Cartier parent Richemont, in particular, gained market share. They accounted for three quarters of additional sales. The reasons for their growth were: As owners of some of the world's best-known and most coveted luxury brands, they have strong brand positions and reach a large customer base in over 100 countries. They are innovative and invest in new products, technologies, and services to meet customer needs. It is likely that they will continue to strengthen their market position in the coming years.
With its direct impact on consumer purchasing power, inflation is the biggest challenge facing luxury goods companies. Experts expect it to remain high in the coming years, leading to a slowdown in growth.1, 4, 5 Historically, the luxury goods market has grown by an average of approximately 7% per year. Experts are currently forecasting a growth of 3.3% per year.5
The super-rich are less vulnerable to inflation than the general population. Analysts estimate that inflation will slow the growth of the global luxury goods market by 1% to 2% in 2023. Luxury brands for the upper middle class are expected to be hit harder (2% to 3%) than those for the super-rich (1% to 2%).3, 1 Therefore, the ability to pass on price increases remains a critical success factor.
Around 1.8 billion people worldwide belong to the upper middle class (approximately 25% of the world’s population). The number of super-rich people is about 65 million. In 2022, these two groups accounted for 35% of the global luxury market.1, 3
The upper middle class has considerable growth potential as it is larger than the super-rich group and will continue to grow significantly in the future, especially in emerging markets. They also tend to be younger and more dynamic than the super-rich, making them more likely to follow new trends and try new luxury brands. However, they are more vulnerable to inflation, so growth will largely depend on whether inflation continues to rise. In addition, competition in this market is likely to increase as more brands try to meet the needs of this large target group.
E-commerce is also playing an increasingly important role in the luxury market. The share of the online luxury market was 21% in 2022.1 Many luxury brands sold their products directly to customers through their own websites or apps. As a result, monobrand online stores, in particular, continued to gain share. However, luxury online retailers, such as Mytheresa and Farfetch, are finding it increasingly difficult to compete in the D2C sector. Despite a successful fiscal year in 2022, with revenue of around €690 million and EBITDA of around €66 million, Mytheresa had to significantly revise its 2023 forecast revenue (€755 million - €800 million) and EBITDA (€68 million - €76 million) in July (revenue: €750 million - €765 million, EBITDA: €34 million - €43 million). UK online retailer Farfetch also notably lowered its own forecast for 2023 after a disappointing Q2 in August.6 In addition to increasing competition in D2C, online platforms are also affected by inflation, geopolitical tensions, and supply chain disruptions.
Their go-to-market strategies, with a greater focus on online retailing and direct sales, are also changing the marketing of luxury brands. Personalization is becoming increasingly important to build customer loyalty. In addition, social media, influencer marketing, and digital advertising are key components of marketing strategies, especially when targeting Generation Z consumers. This includes, for example, the menswear show by Pharrell Williams and Louis Vuitton. This major event brought the luxury group an audience of billions (1.1 billion views).
As a result, the marketing budgets of the major players have changed significantly, both in terms of distribution and size. According to a study by the Boston Consulting Group, luxury brands’ marketing expenditures amounted to around $100 billion in 2022. Digital channels accounted for 40% of this.5, 1 Kering invested 77% of its marketing budget in online channels (€2.7 billion), while LVMH invested 70% (€6.7 billion). In addition, both increased their total marketing budgets significantly, with Kering increasing its budget by as much as 50% over the previous year. Hermès is an exception. The French family business has kept its marketing budget fairly stable in recent years. In 2022, it amounted to €1.6 billion, an increase of 5% over the previous year. Unlike the aforementioned competitors, Hermès spends the largest share (2022: €1.2 billion) on traditional channels such as print advertising and TV.
In addition to the shift to digital channels, major luxury brands’ marketing expenditure has also changed in terms of content. Luxury brands are increasingly focusing on content that revolves around their customers’ values and lifestyles. Another trend is increasing diversification. Luxury brands are offering new products, such as beauty and lifestyle products, in addition to their usual assortment (e.g., leather goods, jewelry, and fashion). This diversification helps them reach new target groups and accelerate market growth. They are also increasingly offering personalized products and services to their customers.
Luxury brands are increasingly using AI technologies to improve efficiency, enhance the customer experience, and develop new products and services. The applications go far beyond chatbots, personalized recommendations, and offers. Customers can now experience new worlds (e.g., Metaverse), VR factory tours (e.g., Luis Vuitton), styling apps (e.g., Hermès), and personal stylist robots (e.g., Gucci).
Luxury brands are facing increasing challenges. The market is changing, consumer habits are changing, and competition is increasing. It is essential to find new ways of maintaining customer loyalty in order to succeed. Two key words are particularly important: experience and hospitality. Luxury brands need to offer their customers a unique and memorable experience. This can be achieved through a combination of craftsmanship, world-class customer service, and a memorable engaging environment.
The most critical success factor for luxury brands is attracting and retaining talent. Only those who develop the right recruitment strategies and focus on employee retention will be able to successfully manage the transformation process. Despite the challenges, the growth prospects for the global luxury market are positive. we look forward to helping you find and select the right leaders.
1 Bain & Company-Altagamma „Luxury Goods Worldwide Market Study 2022” (June 2023)
2 McKinsey & Company Global Institute (2022)
3 McKinsey & Company „The Future of Luxury: 2025 and Beyond“ (May 2023)
4 McKinsey & Company „Luxury Goods in the Age of Inflation” (July 2023)
5 Boston Consulting Group „The State of the Global Luxury Market 2023” (July 2023)
6 Press Releases of Mytheresa Group and Farfetch Limited (2023)