Luxury Goods Sector Analysis

Updated: Aug 21

Written by Adedolapo Lijirin


Abstract


UK’s Luxury goods industry is the second largest in Europe and sixth globally. Growth in the industry has been induced by the recent fall in the pound which saw some of the big names in UK luxury market like Burberry, Ted Baker, Harrods, etc. report a surge in sales.


This spontaneous increase is a result of a greater number of tourists visiting the UK as it became the most affordable luxury market. The effect of globalisation can be felt in the industry as it gives shoppers access to markets outside their home country of which the UK luxury goods market is benefiting, especially from Chinese shoppers.


Consumer perception and consumption of luxury goods are changing from what it used to be. More people now value craftsmanship over price and experience over acquiring a product which will change the way the industry operates. The winners will include the travel, hotel, and dining sectors while retail will struggle to keep people flowing into the stores to purchase a product. In order to present a comprehensive analysis, findings from four research articles have been used.


The purpose of this report is to examine how globalisation has influenced the UK luxury goods market, identify changes the industry is experiencing, and attempt to establish how these affect businesses and the industry as a whole. Finally, recommendations will be made for businesses and potential entrants into the industry.

It is hoped that this report will inform readers and businesses about the apparent changes taking place in the luxury industry in order to make informed strategic decisions.


Introduction


A luxury good is defined in economics as a good with a demand that increases as people’s income increases. To put it simply, people’s consumption of luxury goods become greater when there is more money in their pocket. A good example is China’s sudden surge in demand for luxury as its economy continues to grow.


The UK luxury sector is the sixth-largest in the global market with America in the lead, while in Europe it is the second largest. UK based luxury brands like Burberry and Michael Kors are major brands performing well globally. However, China is developing rapidly as it experienced year-on-year growth.


The fashion/leather sector grew 24% in 2016 after losing a share of the market due to poor performance from leading retailers like Armani, Polo Ralph Lauren and Prada. The perfumes/cosmetics sector increased by 32% due to high performance from Estée Lauder and L’Oréal Luxe. The watches/jewellery sector performed badly with 9% after failing to keep-up with smartwatches.


1.1 Globalisation


Globalisation has changed the operations of different industries and consumer attitude to shopping. Wide access to goods means that consumers no longer have to purchase only in their domestic market.


The luxury industry in the UK is mostly driven by tourists from around the world who come on holidays, especially those from China. Recent research by Deloitte showed that 47% of luxury sales were made in foreign markets or at the airport. The UK luxury sector experienced significant growth following the result of the Brexit referendum. Wealthy tourists from Europe, Asia and America flocked to the UK for their luxury shopping because the fall in pounds made UK luxury more affordable (Deloitte UK, 2017).


More than 260,000 Chinese tourists made a visit to the UK spending more than £500 million during their visit (VisitBritain, no date). The year 2017 saw a 4% uplift in tourist visits to the UK, Chinese tourists being a big part of that, and a 2% increase in spending. This is estimated to increase further in 2018 (Mintel LTD, 2017). Following the fall in the value of pounds which made the UK the most affordable luxury destination and increased the spending power of foreigners, luxury brands like Burberry and Harrods have enjoyed a surge in profit.


Being the second-largest world economy and growing, China is having a prominent impact on the UK and global market. Luxury businesses in the UK are tailoring their operations to suit Chinese holidaymakers. Harrods, for example, launched a £200 million project to redevelop its store for the purpose of attracting wealthy Asian shoppers. In addition, it installed Chinese credit card terminals to better serve affluent Chinese speakers. According to managing director Michael Ward, ‘Chinese customers are Harrods’ second-highest spenders after British shoppers, and research showed that £1 in every £5 that Chinese visitors spend in Londonis spent at Harrods’ (Sito, 2017).


1.2 Changes in the luxury goods industry


One of the significant change in the industry is how people’s perception of luxury has shifted over the years; gone are the days when luxury was all about exclusivity and price. Now more people can access luxury fashion and used luxury cars online for a cheaper deal which is why consumer expectation of luxury is not just how expensive it is.


A survey by Mintel in June 2016 showed that consumers favour craftsmanship over the cost of the product; 58% of people surveyed said they value the craft and authenticity of a product over the price tag which means people are more likely to acquire a luxury good that the quality is apparent.


So, what does this mean for the industry? It means that companies in this sector can no longer hide under their famous brand name (Mintel, 2017). It is imperative for brands to show beyond doubt that their products are authentic luxury in terms of quality, materials used, design and finishing. This builds pressure on businesses claiming the luxury tag for their products and charging high prices. However, it erects a barrier for new entrants into the market which could be seen as favourable for big players in the sector considering the intense competition already existing in the industry.


In addition, how people consume luxury has changed because they have substitute product for the experience. Acquiring a product is not as important as the experience of acquiring that product; also, more consumers are choosing to spend on luxury travel and dining out instead of products just for the experience. Current researches show that most consumers agree with the hypothesis that shopping for luxury experiences is more worthwhile than purchasing an actual luxury product.


Mintel’s research showed that younger people between the ages of 16-24 are highly likely to shop for experience rather than for a product. They are likely to spend on luxury holidays and expensive dining than buying products in-store which is good for the travel sector. However, businesses in the retail sector will be negatively impacted, therefore there is a need to invest in customer experience to lure luxury shoppers into stores and encourage returned business especially among young consumers.


Recommendations


To survive the constant change in the luxury goods sector, it is recommended that luxury brands:

  1. Adapt to the growing needs of younger consumers by upgrading their styles to keep up with changing trends and adopting the use of technology.

  2. Harrods has led the way in acclimatising to globalisation, it is recommended that other luxury brands follow this by modifying their offerings and services to cater for the needs of tourists, especially the Chinese because as stated by Michael Wells, ‘The future is in the East’.


Conclusion


The luxury goods industry is certainly changing from what it used to be. Traditional product acquisition approach is no longer in play rather the growing development in technology and change in trends has transformed the industry. These changes are expected to go on as consumer expectations grow higher and younger, tech-savvy generation of luxury consumers begin to dominate the market.



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