Russia, China and a feeble U.S. continue to affect luxury for the rest of 2014

From Prada to Ferragamo, most of the major luxury brands in the fashion, watches and jewellery sectors have been reporting negative growth in China, not only due to the clamp down on corruption but also due to an ebb in purchasing power. Luxuy brands have been investing heavily in China, especially in building their retail network and logistics, not taking into account that their stores would turn into shopping windows for wealthy Chinese who are increasingly making purchases of luxury goods abroad, where the same products are 30 to 40% cheaper.

Even if the E.U. and the U.S. sanctions have yet to be applied on a larger scale due to the conflict in Ukraine, Russia’s luxury consumption has been growingly inhibited, both locally and abroad. The deteriorating state of the Russian economy which had been worsening even before the Ukrainian conflict and last summer’s set of measures by President Putin to curb corruption have also impacted negatively luxury sales. Unlike China, where some luxury sectors have yet to be affected (cars, travel etc), in the case of Russia, all luxury sectors have been registering negative performances.

The recent financial reports by most of the major luxury brands are also highlighting the feeble recovering of the U.S. luxury market, the recovery of which seems to have been overrated by many analysts. The anti-luxury sentiment coupled with a weak purchasing power are hindering the much expected recovery of the market. The only sector which seems to benefit from a recovery in the U.S. is outgoing travel, the number of wealthy Americans who travel abroad registering a constant increase in the past year.

The virtual wipe-out of Ukraine’s luxury market is not to ignored. Since the debut of the crisis, sales of luxury in Ukraine have been brought to a standstill and most of the wealthy oligarghs who had supported the former president have fled the country. Ukraine’s luxury market which represents 30% the value of the Russian luxury market will continue to have a global effect on the luxury market.

Other stagnant luxury markets such as South Korea, India and the imminent slow down in Brazil will also pose major challenges for luxury companies to maintain positive financials in 2014. Japan, Indonesia, Malysia and Mexico are among the few international markets which are likely to produce positive results, however, too small in size to offset the negative effects kindled by Russia, China and Ukraine. Colombia, Peru, Chile, Nigeria and Angola are among the few international emerging markets which still present exceptional opportunities for development of luxury. 

Concentrating on developing the retail presence at major U.S. department stores and improving retail infrastructure in Europe which has become a key shopping hub for many emerging markets will be the two winning strategies that companies should adopt for the rest of 2014. Most effective communications strategies will be cross-collaborations between brands from different luxury sectors. Developing exclusive limited edition products for certain distribution channels, i.e. department stores, airport chain stores and e-shops will also prove successful.

The trend favouring ”affordable luxury” is likely to gain pace for the rest of 2014, therefore, major luxury brands should ensure a good product selection for this target segment, without highlighting these products in their communications. This applies to all product categories, especially leatherwear, apparel, jewellery and watches.

Oliver Petcu

Louis Vuitton store Kiev (photo Kyivpost)