The New Road of Luxury Is Paved With Inspiration

The year 2024 signals, if not a full-blown crisis, at least a recession for the luxury goods industry. According to data from the Bain-Altagamma Luxury Goods Worldwide Market Study, released by Bain & Company together with Fondazione Altagamma, sales in fact fell by 2% – partly due to the recession in China and high inflation in many countries around the world that has generated mistrust among consumers. Additionally, some policies made by industry players, specifically regarding pricing, have raised doubts even among the most loyal and exclusive customers. Which are the actual issues, though, of an industry that is extremely vital for the global economy, particularly for Europe and Italy, and what paths can be taken to reverse the trend in the future? We cover this and more in the following interview with Emanuela Prandelli, LVMH Associate Professor of Fashion & Luxury Management within the Department of Management & Technology at Bocconi University.

So the luxury goods industry, which had emerged unscathed from even the Covid-19 pandemic, is now struggling? 

Certainly the industry is experiencing some obvious difficulty, but it is hard to say whether it is a cyclical phenomenon or is, instead, destined to become more structural. However, I believe that there are signs of change in consumer behavior that are likely to endure. 

What caused this decline?

The industry has progressively changed its own basic configuration. We have gone from a market with a classic pyramidal shape, with a wider base and narrower tip, to a sort of hourglass.

In other words, there has been a growing polarization of consumption, with mid-level brands suffering the most. It is a polarization determined also by the growing consumer trend of so-called mix and matching, or simply putting looks together with pieces from different brands and price points. One example is pairing a Zara t-shirt with a Chanel bag. This phenomenon is also favored by the growing amount of information available, especially through social media, which has increased the self-confidence of users. This has pushed customers, especially those more willing to spend, toward increasing autonomy in building their own personal style. 

This trend of polarization is not attributable to just luxury goods then.

Exactly. Let’s take design, for example. On the one hand, there are exclusive luxury brands that, in addition to their creative and manufacturing expertise, possess vast financial reach and can afford to invest considerably in boosting their own image. On the other, there are giants – such as Ikea and Maison du Monde – which offer great variety at low prices. Consumers often decorate their homes by mixing elements that come from both of these market segments, integrating both affordable products and unique pieces to characterize the personality of their living spaces. The brands in the middle are the ones that suffer. Returning to the discussion from earlier, once upon a time a Chanel customer would never have worn a Zara item, whereas today they would – indicating a more open culture toward fashion fusion. 

Let's go back to the hourglass…

The economic crisis has led to rising interest rates and an increasingly accelerated inflation rate, which has significantly reduced the purchasing power of many households. Therefore, many customers who once found themselves in the, let’s say, “aspirational” range were squeezed downward, while those who found themselves in the higher range were much less affected by the economy. The neck of the hourglass, i.e. the middle part, has thus grown longer and thinner. The luxury goods industry has thus increasingly been propped up mainly thanks to a small percentage, the so-called 1% of customers, which represents most of the revenue. Companies go to great lengths to maintain the loyalty of these customers.

However, it is safe to say that now even this 1% is showing signs of anxiety.

For years, the high-end fashion houses have been battling each other, increasing prices disproportionately because these customers were always considered inelastic to the various price increases, to the point of allowing the houses to take things way too far. Somewhere along the line, however, some people opened their eyes and began to wonder what the point was of paying increasingly high prices from one season to another, often for the same exact item. 

What other types of consumers have been missed? 

The so-called “aspirational” consumers, who individually bought much less than the top customers but together had a certain weight on revenue. They realized that even if they had continued to save, they would hardly be able to afford higher-end products (whose prices are continuing to skyrocket), so they began to shift their purchasing power to other categories – experiences primarily, such as travel and restaurants, as well as second-hand items. Consider also that in this trend of polarization, many brands have eliminated their second lines, or those with more affordable prices. This was to avoid cannibalization. If the consumer has to set aside a considerable amount of money for luxury goods, there is also the possibility that a share of preferences will shift toward the jewelry segment, which retains its aura as an investment good. 

Other industries are likely to suffer the same fate, like tourism for example.

Exactly. Some destinations have increased prices to such an extent in order to continue attracting the wealthiest and most inelastic clientele that they have led to a reversal of course. During the last tourist season, there were quite a few unsold rooms in some locations. It is inevitable that by taking things so far, even the most inelastic demand ends up breaking. Many brands’ strategies from the last few years ended up provoking this effect of overall alienation. The spiral has been interrupted, in both cases.

There are, however, exceptions to every rule. Which brands have proved to be more resilient to this crisis?

Some brands come to mind, such as Hermes, Loro Piana, Cucinelli and Chanel. They have been less affected by the economic situation and in some cases have even increased revenue, but they have one thing in common – they are considered "timeless". Their products are uninfluenced by fashion trends, remaining relevant for decades and consequently maintaining their value. 

So far we have talked about the "internal" reasons that led to this state of difficulty. However, there are also some external reasons. 

China's purchase freeze was the turning point. For years, the luxury goods market has largely relied on purchases by Chinese consumers, but current government measures have begun to redirect them toward buying local brands. The Korean market is definitely smaller, but still appealing and steered toward innovation. The US market is certainly attractive for many. However, approaching the latter requires extensive financial resources due to its vastness and complexity.

A "hunting season" is therefore about to begin for new, young customers. How can they be won over?

Young people are abandoning the idea of aspirational consumption and replacing it with that of inspirational consumption; an elevated price point is no longer enough to be considered desirable. New consumers focus on values and choose brands not only based on the product’s features, but also on the value instilled by the specific product or, rather, instilled by the specific brand – and upon which these consumers can reflect.