Luxury continues to outperform, but faces new challenges

May 16, 2019

PARIS - 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, says global credit insurer Coface, pointing to counterfeiting, e-commerce and Chinese consumer importance.

Coface says 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% (to Euro 1.2 trillion), driven by rising consumption in China with a growing middle class, Coface says.

"Chinese consumers now account for 33% of global purchases of luxury products, and they are expected to account for 46% 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," the report says.

Luxury also faces other threats, such as counterfeiting. Market estimates are that counterfeiting will reach US$1.8 trillion in 2020.

"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," the report says.

"A study in the UK showed that 66% of consumers who had purchased a counterfeit product without their knowledge no longer had confidence in the brand in question - and 44% 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, Coface says.

"While e-commerce represented only 10% of sales in 2018, it is expected to increase to 25% in 2025.

"However, many brands resist e-commerce for fear of counterfeiting competition on the one hand 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."

Coface says that Chinese economic activity, e-commerce and counterfeit products constitute risks that can penalise the 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," it says. (ATI).