The luxury sector has also seen a fragmentation of its traditional market as the growing divide between the wealthy and the rest is also mirrored within the ranks of the rich. The line drawn between the truly rich, or ultra-high net worth individuals with assets more than $30 million, and the merely well off became particularly clear during the recession. Worried consumers in the latter group eschewed costlier purchases, which in turn affected the large number of companies catering to this so-called “aspirational” market. However, companies that catered to the very top of the pyramid fared much better. Brands like Hermes, or the jeweler Cartier, for instance, emerged from the recession relatively unscathed.
As the storms of the recession battered the economy, ravaging fortunes and destroying balance sheets, an interesting debate broke out about the fortunes of the luxury sector during the downturn. On one side ran the argument that the luxury industry is recession proof. On the other side stood the naysayers who argued that luxury goods, by their very definition, would experience a drop in consumption. So which argument carried the day?
The doom and gloom brigade had plenty of facts to buttress their case. The global sales of luxury products fell by over 6% in 2008. Sales plateaued in Europe. Iconic brands like Christian Lacroix downed shutters, and marquee ones like Tiffany’s and Saks saw their stocks plunge during the crisis. Even the playgrounds of the rich, it seemed, had been overrun by the specter of the crisis.
But the sector had its champions too. Hermes, the cream of the sector, saw its profits surge by 14% during the worst of the recession. The sales of high end automobiles surged in 2009-2011, as strong growth in Asia propelled automakers like BMW and Mercedes. Private jet makers too saw Asian demand counteracting a softening U.S. market.
The apparent dichotomy in fortunes was explained by the fact that the rules of the luxury game have changed, and those that change with it thrive, while the rest are left by the wayside.
The first of these changes is the by now well worn story of the rise of the East. While Japan has always been a major market for luxury goods, the rise of China, and to a lesser extent India, has turbocharged sales in the region. The Asia-Pacific region now accounts for a third of global luxury sales, and contains more high net worth individuals than Europe. The number of newly minted rich in Asia saw a 9.7% increase in last year alone. All these factors ensured that the fundamentals for growth in the Asian luxury market remained strong during the recession, and the sector is likely to prosper as growth in the Orient rises once again from the moderate (4% in 2009) to stratospheric (up to 92% by 2015) levels. Moreover, the theory of conspicuous consumption is particularly salient to Asia, as legions of the newly minted wealthy flock to snap up the latest offering from marquee brands, jostling to establish, and maintain, their position in the social pecking order.
Finally, to abuse a tired cliché one more time, necessity is the mother of invention, and the mechanisms the sector adopted to survive the recession are likely to persist well into the near future. The use of social media driven campaigns are only going to rise as we go forward, especially as luxury brands target the Asian millionaire, who is often younger than his European counterpart. In addition, even staid brands, like the nearly century old Faberge, are increasingly taking to the web to sell their wares. Expect a leaner, snobbier, and more digitally conscious luxury sector in the years ahead.