Luxury and fashion

The Fashion and Luxury Industry: Global and Regional Dynamics

In 2019, the global fashion industry’s annual revenues will amount to 1.64 trillion euros, including shoes and jewelry. Of these, women’s fashion accounts for 51.5% of the overall amount. The fashion industry has grown by 4-5% since 2013 and, in particular, the luxury industry has seen gains, in part due to the return of luxury consumption in Asia. This positive growth has held at around 4-5% in 2018 and 2019 and is expected to continue in the 3-5% range through 2025, despite the complex and turbulent global environment in which luxury companies operate (Bain and Company 2018; BOF and McKinsey 2020). This data does not take into account the coronavirus pandemic crisis in 2020.

In 2019, the size of the global luxury market was valued at 281 billion euros, a growth of 4% compared to 2018 ( Kering Financial Document 2019). In 2018, the fastest growing brand was Gucci, which grew 36.9% in revenue ( Kering Integrated Report 2019). Interbrand2 had the second-highest brand value growth (+23%) among all luxury brands in 2019, followed by Dior (+16%) and Louis Vuitton (+14%).

In 2019, apparel accounted for 23% of the total personal luxury goods market, up 5% from 2018. Leather goods generated an estimated €57 billion in sales in 2019. The category grew at a rate of 11% between 2018 and 2019. Footwear accounted for 7% of the luxury market in 2019 and grew at a rate of 12%, according to the data reported. Watches generated €39 billion in revenue in 2019, representing 14% of the total personal luxury goods market, and revenue increased by 1% from 2018. Finally, jewelry revenue grew 12% in 2019 to €21 billion, representing 7% of the personal luxury goods market (Deloitte 2019).

In 2019, the retail channels directly operated store network accounted for 39% of the total global personal luxury goods market, compared to 61% for the wholesale channel (department stores, high-end multi-brand independent stores and franchise stores). The six most diffused sales formats were single-brand stores (31%), specialty stores (20%), department stores (18%), online stores (12%), outlets (13%) and airports (6%) ( Kering, Financial Document 2019).

Luxury companies are mainly located in Europe, the United States and Asia, and Italy has the highest number of luxury brands in the interbrand ranking (24 to 100)

By nationality, global luxury fashion is characterized by the volume of Chinese (32%) and American (22%) consumers. Chinese consumers increased their share by two percentage points from 2018. Generation Y ( Millennials) and Generation Z contributed 100% of the market growth in 2019. Those in this demographic in China and Southeast Asia are more dynamic and attracted to personal luxury products ( Kering, Financial Document 2019).

Over the past decade, China has accounted for 70% of the expansion of the luxury fashion market segment, and this dominance is expected to continue through 2025

LVMH, Gucci and Lululemon are examples of brands that have been very successful in China. The latter increased its revenue in China by 68% in Q2 2019. Here, physical retail is still crucial – 85% of shoppers engage in both online and offline touchpoints, up from 80% in 2017. Chinese consumers are expected to drive growth, thanks to a growing middle class.

Europe still accounts for 17% of sales and other Asian countries 11%, followed by Japan (10%) ( Kering, Financial Document 2019).

India, the Philippines and Indonesia are among the fastest growing major economies, but mainly for the modest fashion market.

Russia is the ninth largest luxury market in the world. In terms of the luxury industry, market growth has been declining and then stabilizing, and in 2018, brands like LVMH and Dior recorded the highest sales in the region since 2014.

In addition, the Middle East is a well-established fashion market with growth potential due to the propensity of shoppers to spend large amounts of money. For example, in the United Arab Emirates (UAE), shoppers spend more than six times as much as Chinese shoppers (BOF and McKinsey 2020).

The Eurozone continued to grow, albeit at a slower pace in 2018, and saw a 1% decline in mid-2019. Spain and France outperformed the Eurozone, with Germany and Italy experiencing a slight contraction in growth. The cause of this slowdown can be attributed to rising energy prices, the high valuation of the euro, trade uncertainty, and weakening global demand. The eurozone has undoubtedly been affected by the trade wars between China and the United States. However, the eurozone’s debt to gross domestic product (GDP) ratio has also contributed to the slow growth. Despite this backdrop, the Eurozone has achieved its highest level of employment and wage growth, fueling private consumption.

Many factors could impact the future of the luxury industry

The recent slowdown in economic growth in many countries, the recent adoption of protectionist policies in the U.S. and China, the digital revolution and the impact of technology on production systems, the influence of Millennials and Generation Z and the Brexit in the Eurozone. Overall, estimates for 2020 are positive with growth in the number of Chinese consumers (+10%), leather goods (+6%) and the digital sales channel (+13%). The marginality of high-end companies is expected to increase by 4.5% due to the extraordinary performance of large conglomerates. This performance is mainly due to the consolidation of the main growth drivers of recent years: the rise of Chinese consumption, the increase in spending by younger generations and the rise of online channels (Osservatorio Altagamma 2019).

To stay competitive in this complex and ever-changing digital and global landscape, companies need more skills and resources. The minimum size required to survive as an independent global luxury fashion company is estimated at €1 billion. Smaller companies risk being trapped in local competition that, for example, does not lead to success in countries like China or take full advantage of e-commerce. This is why, since 2000, we have seen an increasing number of mergers and acquisitions (M&A) in which the largest groups, mainly LVMH and Kering, are acquiring many luxury fashion brands, increasing the level of concentration in the industry, while smaller family businesses struggle to survive.

Competitiveness and Mergers & Acquisitions

Since the mid-1980s, many companies in the luxury sector have begun to increase their investment in mergers and acquisitions to promote rapid growth and increase their competitiveness. Year after year, this process has increased the level of concentration in the luxury fashion industry, especially in Europe, where many small family-owned companies are located. These companies, such as Gucci or Fendi, have a strong brand image, a clear reputation, value proposition and positioning, but also lack the resources to face the threats and opportunities mainly related to the emergence of new markets and technologies.

By 2000, M&A deals had reached a considerable number, but over the past twenty years they have more than doubled. LVMH, Mayhoola, Kering and Michael Kors are examples of groups that have undertaken the largest and most expensive acquisitions of the last twenty years, creating extremely diverse brand portfolios to strengthen their market position.

Notable acquisitions include Kering’s purchase of 42% of Gucci Group for $3 billion in 1999, the Arnault family’s acquisition of Christian Dior in 2017 for $13.7 billion, Michael Kors’ acquisition of Versace for €1.83 billion in 2018 (Euronews), and Mayhoola’s acquisition of Valentino (a company owned by a leading investor in Qatar) for €858 million in 2012 (Sowray 2012).

The Fashion Luxury Private Equity and Investors Survey 2019 conducted by Deloitte highlights precisely this race to consolidate the luxury market and the growing interest of investors in the sector. A total of 265 M&A deals in the luxury world were recorded in 2018, 73 of which focused on luxury fashion and took place mainly in Europe (Deloitte 2019). Large groups continue to acquire fashion companies with valuable reputations, assets and legacies. They provide them with substantial financial resources to promote their brand and develop their vision worldwide. Companies have begun to acquire new and consolidated brands to pursue different identities and continue to grow by serving multiple segments.

In Europe, two market leaders, the conglomerates LVMH and Kering (formerly PPR), have acquired numerous brands in different sectors ranging from wine to jewelry, but mainly focused on fashion. Today, they have a rich portfolio of brands and the structure of the luxury market is almost oligopolistic.

The name LVMH itself came about through the merger of Moët Hennessy and Louis Vuitton in 1987. In 1988, LVMH acquired Céline and from 1999 onwards, it began a complete internationalization process, acquiring 25 leading brands. In fashion and leather goods, the House has 18 brands, which in 2018 had sales of 18,455 million euros: Berluti, Celine, Christian Dior, Emilio Pucci, Fendi, FENTY, Givenchy, Kenzo, Loewe, Loro Piana, Louis Vuitton, Marc Jacobs, Moynat, Nicholas Kirkwood, Patou, Pink Shirtmaker and RIMOWA.

Kering’s first major acquisitions were the Gucci Group and Yves Saint Laurent in 1999. This was followed by Bottega Veneta and Balenciaga. Partnerships have also been formed with artists such as Stella McCartney and Alexander McQueen.