luxury forecasts: optimism reigns plus strategies for global growth

DEPARTURES GLOBAL LUXURY CEO SURVEY INAUGURAL EDITION, 4TH QUARTER 2013

LUXURY FORECAST OPTIMISM REIGNS PLUS STRATEGIES FOR GLOBAL GROWTH

CONDUCTED WITH LEDBURY RESEARCH

WELCOME TO THE INAUGURAL DEPARTURES GLOBAL LUXURY CEO SURVEY This first in a series of quarterly reports assesses the state of the global luxury industry from the perspective of its business leaders. Conducted with renowned London agency Ledbury Research, the DEPARTURES Luxury Forecast examines how global luxury business leaders feel about the health of our industry and the drivers for growth as we look to the next quarter. I hope you will find these results as enlightening as we have.

— STEVEN DELUCA Senior Vice President / Publisher

SURVEY RESPONDENTS

Nearly 70 Luxury CEOs responded to our survey Position of respondent within company:

14%

14%

57%

35% OWNER/FOUNDER

CHAIRMAN

GLOBAL CEO/PRESIDENT/MANAGING DIRECTOR

REGIONAL CEO/PRESIDENT/MANAGING DIRECTOR

29%

14%

21%

14%

21%

< USD 50 MILLION

USD 50M-99 MILLION

USD 100M - 249 MILLION

USD 250M - 999 MILLION

USD 1 BILLION+

SURVEY RESPONDENTS

Nearly 70 Luxury CEOs responded to our survey Companies’ annual sales:

29%

29%

29%

21%

21%

18%

18%

7%

4%

7%

TRAVEL/HOSPITALITY

APPAREL/CLOTHING

HOME/DESIGN

JEWELRY

WATCHES

FOOTWEAR

LEATHER GOODS/ACCESSORIES

FRAGRANCE/BEAUTY

ELECTRONICS

OTHER

SURVEY RESPONDENTS

Industry breakdown:

OPTIMISM REIGNS Luxury CEOs are overwhelmingly positive about the state of the industry

TRUE LUXURY HAS EITHER TREMENDOUSLY RECESSION-PROOF, OR TREMENDOUSLY RECESSION- RESILIENT, CLIENTELE.

— SURVEY RESPONDENT

CEO FORECAST: THE NEXT 12 MONTHS

For the coming 12 months:

89% of CEOs are optimistic about the luxury industry

•  Proven history of outperforming the wider economy •  Recent rapid luxury recovery trend •  No signs of slowdown

89%

7% 4%

LUXURY INDUSTRY

65%

14%

18%

LOCAL ECONOMY

40%

46%

14%

GLOBAL ECONOMY

40% are optimistic about the global economy

65% are optimistic about the local economy

OPTIMISTIC

NEUTRAL

PESSIMISTIC

CEO FORECAST: THE NEXT 12 MONTHS

CEOs expect sales to rise by an average of 9%

Double digit growth 40% 0 - 10% growth 57%

Single digit decrease 4%

96%

4%

YOUR COMPANY

89%

7% 4%

YOUR GROUP

OPTIMISTIC

NEUTRAL

PESSIMISTIC

ECONOMIC GROWTH and online commerce are making a real di!erence to the industry What external factors are impacting luxury businesses and to what extent?

POSITIVE FACTORS

ONLINE COMMERCE +66%

US GROWTH RATE +58%

CHINESE GROWTH RATE +45%

MOBILE COMMERCE +35%

•  Online ranks #1 (more on why later)

•  58% of respondents are confident of the US’ recovery. 45% also think the Chinese growth rate is an advantage

ECONOMIC GROWTH and online commerce are making a real di!erence to the industry What external factors are impacting luxury businesses and to what extent?

NEGATIVE FACTORS

POLITICAL UNREST -60%

EXCHANGE RATE -30%

COMPETITOR ACTIVITY -30%

WORK VISA POLICIES -28%

§  60% believe political unrest is impacting them negatively, though with mixed results.

“Travel is very emotional, so when you don’t have to take a chance, you won’t. [Travellers] will absolutely stay away from unrest.”

but…

“They are not only used to bad news; they expect it. So they design a lifestyle that accommodates a certain amount of bad news.”

§  Exchange Rate, Competitor Activity, and Work Visa Policies tied for second place

FOCUS SHIFTS BACK TO NORTH AMERICA Less emphasis on emerging markets

THE US ECONOMIC RECOVERY IS IN FULL STRENGTH, AND EUROPE IS EMERGING FROM SEVERAL YEARS OF SLUMP.


WHERE WILL GROWTH come from over the next 5 years?

1.  89% expect North America to be the most important

contributor of growth

2.  East Asia, comprising Greater China and South Korea, is second

§  Inside and outside of China

§  The Chinese are now the world’s biggest travel spenders (UNWTO) on international tourism

§  Europe benefits: 5 of the top 10 countries Chinese luxury consumers visit

North America

East Asia

Western Europe

Eastern Europe

Central/South

America

WHERE WILL GROWTH come from over the next 5 years?

1.  50% do not anticipate that Middle East political

unrest will significantly impact on their businesses

2.  Japan continues to decline in importance for growth

§  But is still the world’s third largest luxury market

3.  Africa ranks as least important for the next 5 years

§  Though one respondent says, “it will probably be an important region in 10 to 20 years’ time”

Middle East

Southeast Asia

Japan

Oceania

South Asia

Africa

95%

70%

96%

83%

33%

96%

63%

TOURISTS

LOCALS

VIP

FULL-PRICE

DISCOUNT

SELF-PURCHASERS

GIFT PURCHASERS

VIPS, SELF PURCHASERS AND TOURISTS ARE FUELLING GROWTH

What customer types are fuelling this growth?

LEADING GROWTH:

THE FASTEST GROWING CONSUMER TYPE IS THE TRAVEL RETAIL CONSUMER, WHICH IS LED BY THE CHINESE TODAY.

THE RICH ARE GETTING RICHER. [THE MARKET IS INCREASINDLY DEPENDENT ON KNOWING AND SATISFYING THEM.]

— SURVEY RESPONDENT — SURVEY RESPONDENT

FUTURE STRATEGIES: Moving upmarket & Investing in digital

WHEN YOU’RE DEALING WITH LUXURY, YOU MUST NOT AT ANY POINT, DEPRECIATE THE QUALITY AND THE VALUE.


LUXURY IS ABOUT QUALITY AND SERVICE, but also Exclusivity and Uniqueness What does luxury mean to leaders of luxury companies today?

1.  Quality

2.  Service

3.  Exclusivity

4.  Unique

High prices is not a mentioned as a top term

Being expensive is not enough to be luxury

WHAT CEOS NEED TO BE CAREFUL ABOUT IS, IS IT APPROPRIATE FOR MY BRAND IMAGE TO BE UBIQUITOUS?


Source: Xxxxx xxxxx xxxxx ?

PRIORITIES: Technology Spend How do CEOs plan to evolve their businesses over the next 12 months?

Digital initiatives are the number one priority

•  Not necessarily because it always translates to direct sales

The internet has made information more accessible, and

pricing more transparent. This is good for the consumer. I

can see it contributing to growth as it has allowed us to

interact with our (existing) target audience and increase

their buying likelihood, but I don’t know if we’ve reached

people who are actual new customers.]


Similarly, another respondent

said digital is crucial but

lamented that there is

no luxurious element in social

media. It is high tech instead of high touch.


PRIORITIES: The next highest priority is improving retail distribution §  Includes shifting balance of retail vs. wholesale to directly owned retail

distribution plus expanding stores

DEPARTURES!GLOBAL!LUXURY!CEO!SURVEY | !"

INVEST IN DIGITALIMPROVE RETAIL

BUILD ASIAINCREASE ADVERTISING

BRAND COLLABORATIONS

IMPROVE SERVICES

SHIFT FOCUS BACK TO ESTABLISHED MARKETS

BRAND AND PRODUCT EXTENSIONS

LUXURY COMPANIES

are mixed on widening their ranges

57% want to increase brand extensions

Enable brands to “touch di!erent people with di!erent interests at di!erent stages of their lives”.

•  Bentley’s limited edition handbags

•  Bugatti’s launch of a collection of men’s clothing and accessories.

43% want to decrease brand extensions

Brand extensions can go wrong. Poor execution, moving into a completely unrelated or non-relevant product category, increased visibility, can impact the brand negatively

*Mentioned mainly by those in Home/Design

OPERATE AN INCREASING NUMBER OF PRODUCTS/

SERVICES THROUGH BRAND EXTENSIONS

DECREASE BRAND EXTENSIONS & FOCUS MORE ON CORE CATEGORY EXPERTISE

57%* 43%


While price alone does not define

luxury (see slide 9), price a!ects

the perception of the product.

LUXURY COMPANIES

are focusing on going up the wealth ladder

Universally, respondents agreed their strategy is to raise prices and focus on high-end

INCREASE FOCUS ON LOWER PRICED PRODUCTS/

SERVICES TO ATTRACT A WIDER CUSTOMER BASE

RAISE PRICES AND/OR INCREASE FOCUS ON HIGH-END PRODUCTS/SERVICES TO TARGET THE WEALTHIEST CUSTOMER SEGMENT

14% 86%

LUXURY COMPANIES

are mixed on global consistency

61% of our survey’s respondents believe it is vital to have a consistent o!ering globally for brand image consistency

39% are taking a localized approach, tailoring products and services to the tastes of emerging markets

TAILOR PRODUCTS/SERVICES TO THE TASTES

OF CONSUMERS IN EMERGING MARKETS

VITAL TO HAVE GLOBALLY CONSISTENT OFFERING 39% 61%*

Emerging market customers currently make up almost 50% of global luxury sales. Should luxury brands should tailor their products and services to individual local markets, or to o!er the same experience worldwide?

*Mentioned mainly by those in Apparel/Clothing

LUXURY CEOS

overwhelmingly believe country of origin counts

How important is country of origin in the luxury business?

93% of respondents believe “Made in” is important today, with virtually no change in the next decade.

§  Provenance represents knowledge that is passed on through generations

§  Being “Made in” a brand’s home country therefore conveys a sense of authenticity which cannot be replicated

% IMPORTANT

NOW IN 10 YEARS

93% 89%

CONCLUSIONS & IMPLICATIONS

VIP customers are fuelling growth

•  Focus on: 1.  Service: quality & speed 2.  Unique, higher-end pieces 3.  Premium price points / raising prices

Emerging markets are less important for their home market than they are for the tourists they create in Western markets

•  Make your Western stores not only speak the language of the tourists, make sure the o!erings speak to tourists’ tastes and other tourist-friendly services are in place

Digital continues to grow

•  Though its primary importance continues to be as a branding vehicle and information source rather than a strong sales channel (online sales will continue to grow in importance, however)

Global consistency in o!ering still seen as important, but regional customization is also a force

•  Maintain and monitor a ratio between the two

Authenticity remains key

•  Retain focus on original production standards and country of origin

•  Enter brand extensions with thought to e!ect on brand dilution to core, a"uent market

DEPARTURES GLOBAL LUXURY CEO SURVEY INAUGURAL EDITION, 4TH QUARTER 2013

LUXURY FORECAST OPTIMISM REIGNS PLUS STRATEGIES FOR GLOBAL GROWTH

CONDUCTED WITH LEDBURY RESEARCH

luxury forecasts: optimism reigns plus strategies for global growth

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