LUXURY’S ERA OF UNCERTAINTY

Shares in French company Hermès were recently pushed to an all-time high thanks to strong growth that is defying a widely reported global luxury slump. Automaker Ferrari’s 2023 Q4 results also topped expectations, boosting momentum going into the new year. Lamborghini reportedly had its best year ever in 2023, selling more than 10 000 cars to break through five figures for the first time ever.

In the world of luxury timepieces, demand for new high-end luxury watches remains strong and poised for growth, if reports from companies such as Swatch Group and Watches of Switzerland are anything to go by. At the same time, however, Kering — which owns luxury brands in fashion, jewellery, and leather goods, including Gucci, Balenciaga, Bottega Veneta, Saint Laurent, and  Brioni — reported a 4% decrease in overall revenue, even as its eyewear division hit record highs, buoyed by acquisitions.

Across the luxury sector, there is a lot of optimism, but growth is uneven and uncertainty reigns. Signs abound that the post-pandemic luxury boom is going bust. But, while the sector navigates economic headwinds there are also other factors at play, indicating some fundamental changes that will most certainly redefine the luxury landscape going forward.

By and large, the luxury categories and brands that appear to be resilient at present have an upscale positioning and are achieving a softer landing than those that are more aspirational. In fashion, specifically, these are brands that benefitted from a post-lockdown-induced return to dressing up. That is changing now as consumers place far more value on casual luxury basics — clothing they can wear every day. Aspirational customers are cutting back amid economic pressure and substantial price hikes over the past two years. Expect this trend to intensify, with top customers becoming the focus.

According to industry executives surveyed in a report by McKinsey & Company in collaboration with Business of Fashion, consumers can expect further price increases as companies in the fashion category try to bolster profits in an uncertain economic climate. Elsewhere, in spite of warnings of a cooling market, watchmakers are hiking prices, too. Swiss brand Patek Philippe, for example, raised global prices by about 7% just last month, according to Bloomberg. In the pre-owned luxury watch market, a return to normalcy is on the cards after a post-pandemic bull run. It’s a shift from a seller’s to a buyer’s market. According to Geoff Hess, Sotheby’s head of watches in the Americas, speculators are leaving the building. Watches are once again “an interest class as opposed to an asset class”, he told Robb Report.

While luxury brands shift focus to their traditional high-net-worth customers to drive growth in the short term, climate change, AI, and changing demographics are realities they will likely want to keep an eye on. The market is undergoing a radical transformation and the definition of luxury itself is changing.

By next year, Bain & Company predicts that millennials and Gen Z will represent 70% of all luxury spending. These are generations that are prepared to pay premium prices for sustainable and ethical products. For them, traditional notions of luxury such as legacy, prestige, and status are of far less importance. They come with a new set of values: sustainability, inclusivity, traceability, and circular innovation. This is what they define as “luxury”.

For example, the continued lack of diversity in the upper echelons of luxury fashion is not going unnoticed. With last year’s appointment of Seán McGirr at Alexander McQueen, all six fashion brands owned by Kering are run by white men. It’s not a good look when designers are the most visible brand representatives. To quote our very own Thebe Magugu from a recent article in the New York Times: “So many people feel they actually don’t belong in this industry, which is supposed to be for everyone, because it dresses everyone.” In the same article, writer Vanessa Friedman argues that creatives with similar back-grounds “come with similar perspectives — and similar designs”. This can’t bode well for the creative outlook of luxury fashion, and it’s rather questionable how long it will be before consumers abandon the big brands that ignore them for smaller brands that are more aligned with who they are and what they care about.

Some brands in the luxury sector are evolving fast. Swatch Watches famously has its Bioceramic sustainable watches, for instance, and the luxury car industry is moving at a pace to incorporate electric and hybrid models. Prada’s first foray into fine jewellery back in 2022 came in the form of a collection made of 100% recycled gold. While such efforts are welcome, the uncertainty in the luxury market, coupled with the rise of a new, ethical consumer, poses a plethora of challenges and opportunities for traditional players. At the same time, it could be a boon for younger brands whose story is not tied to heritage or prestige but rather an authentic grounding in new luxury.