Several luxury brand managers accede that the luxury goods sector doesn't require market segmentation like other categories of goods. While this viewpoint is credible in some areas, the luxury market environment has changed dramatically and consumer groups need to be monitored. Luxury brands need to understand who their customers are, where to find them and the key factors that drive their behaviour. This is an aspect of market segmentation. For example, trend-watchers from London-based company The Future Laboratory have identified two groups of young and wealthy consumers that make up the luxury consumer population. They are Young Urban Professionals (YUPs for short) and New Entrepreneurial Nomads (NENs for short). These consumer groups exhibit characteristics that make them appropriate targets by luxury brands. In addition, there is a consumer group that is found neither among the extremely wealthy consumers nor the newly wealthy youth, and which also makes up an important market segment for luxury brands. However, the affluent market has no single or defined target and no
uniform retail strategy that matches them. The key is to understand consumers and what drives them.
In order to better understand the luxury consumer market, the following indicators have been identified as having a substantial effect on the market:
Global wealth A changing global economic environment has created immense opportunities for personal wealth accumulation, and the size of the world's affluent is on a steady rise. The beginning of the noughties witnessed a significant upward movement on the global wealth index. Between 2001 and 2002, there was an 18 per cent increase in the number of millionaires worldwide, creating 514 additional billionaires with a collective holding of US$25.5 trillion in the process. This figure jumped to US$44.9 trillion by the end of 2004. Presently, the number of billionaires in the world is estimated to be more than 26 million with a collective holding of US$30.8 trillion in assets. The annual rate of increase of the world's millionaires is estimated to be 7 per cent. These categories of high net-worth individuals are defined as those with investable assets of over US$1m. This group of wealthy consumers includes a newly emerged youthful elite of millionaires who are a part of the 'new' luxury goods consumers.
Other indicators of the world's growing wealthy and their consumption patterns include the popularity and interest in art auctions running into billions of dollars and the upsurge in the demand for gemstones, such as tanzanite and diamonds. Also, the personal asset management portfolio of the global private banking industry is on a steady increase. It is also interesting to note that 80 per cent of the world's new wealthy elite acquired their wealth in the last 20 years.
European coming of age Europe has an ageing population. From the United Kingdom to Italy, Spain, Germany, Portugal, France (to a lesser extent) and the rest of the continent, this phenomenon resounds in government decisions, as well as in economic and social policies. There are more seniors in Europe than in America and Asia. People aged 60 and over make up nearly 25 per cent of the European population, compared with 16 per cent in the US. This might be bad news for several aspects of socio-economic governance, but it is welcoming news for the luxury goods sector. In France for example, individuals aged 50 years and above account for more than 30 per cent of the population. They earn 45 per cent of net domestic income; hold 50 per cent of the population's net financial assets; and represent a market for goods and services estimated at €150 billion. In the United Kingdom, Germany and other European counties, the senior citizen pattern is being set and this is an important indicator for the marketing, branding and retail strategies design of luxury brands.
The European senior consumer group wields considerable influence in the retail market. They have a high disposable income and also an inclination to spend more on luxury goods. They also have more time to shop for luxury goods in relation to their younger luxury consumer counterparts.
American baby boomer surge The United States is the biggest retail market in the world for both luxury and non-luxury goods. Retail is the second-largest industry in the United States in the number of retail establishments and employees. The US retail industry generates $3.8 trillion in retail sales annually and approximately $11,690 per capita. The affluent market is also on the increase. In 2000, the total personal wealth of Americans was more than $25 trillion, with more than 7 million households having a net worth of over $1 million, and approximately 600,000 households with a net worth of over $5 million. A substantial proportion of these consumers are the baby boomers.
The consumer segment referred to as the baby boomers are those born after the Second World War, between 1946 and 1964. They number approximately 74 million consumers and make up 2 per cent of the US population. They are the largest and most influential consumer age segment in the United States and also have the largest earning capacity and the greatest disposable income in America. With an estimated annual spending power of $2 trillion, they are a tremendously significant target group for the luxury market.
The baby boomers have moved into their prime earning years and are currently independent of children who have mostly left home. This gives them more purchasing and consumption freedom. Also the approaching retirement of most baby boomers will provide more free time to spend their money. They will also enjoy longer, more productive lives than any previous generation as a result of advanced medical care and well-being practices.
Baby boomers are driven by a different set of characteristics than the previous consumer generation of their age. First, they are more physically and mentally active, more flexible and willing to try new products and experiences, including experimenting with luxury brands. A baby boomer will likely not be locked into loyalty for Chanel or Hermès for the rest of their lives. They will likely be curious to check out the offering of John Galliano, Matthew Williamson or Vanessa Bruno. Secondly, they are not afraid of change and even crave change to fuel their energy. They are staying longer in the corporate world and several of them are even on the verge of starting new careers or acquiring new education diplomas upon 'official' retirement. Thirdly, the divorce rate among this consumer group is also on the rise. This common phenomenon also drives change. When people get divorced, they want to change a lot of things in their lives beginning from their looks to their luxury brand consumption. This factor is important for luxury brands, as Americans are known to spend substantially on beauty and image.
Japanese balance Japan is the world's second-largest economy with a consumer population of approximately 100 million people. This holds great significance for the luxury and prestige goods sector. The Japanese also have a special affinity for luxury goods. Japan also accounts for a quarter of the world's luxury-goods consumption, and therefore the state of the Japanese economy and currency value is crucial to the annual performance of luxury goods companies.
Japanese luxury consumers are highly fashionable. They are also more label-conscious and brand loyal than their European counterparts. The level of the Japanese luxury consumer loyalty to several brands such as Louis Vuitton and Chanel is so high that books have been written about it. According to statistics from stock market analysis company, Seeking Alpha, 94 per cent of Tokyo women in their 20's own a Louis Vuitton product; 92 per cent a Gucci product; 58 per cent a Prada product; 52 per cent a Chanel product; and 44 per cent a Dior product. Although Japanese consumers are sophisticated, they also value simplicity, high quality, well-crafted goods and distinctive packaging. These qualities are found among the identified European luxury brands, which Japanese consumers have a special penchant for.
The Japanese consumer demographic is also an important luxury market factor. More than 40 per cent of the population, representing 50 million people, are over the age of 50. They also control much of Japan's wealth. These consumers are more willing and able to spend freely on luxury goods and services. Japan also has another interesting consumer group, known locally as the 'parasite singles'. This group is made up of 5 million young, single working women who mostly live at home. Their high disposable income makes them a major force in the consumer economy. They are the single largest spending segment in Japan, and their expenditure on luxury goods is up to 10 per cent of their annual earnings. They also play an influential role in their parent's buying decisions.
China's might China is the largest emerging luxury goods market in the world and is also establishing itself as a superpower of the world's economy. The country currently represents 12 per cent of global luxury goods purchases and is forecast to grow 26 per cent per anum for the next four years. There are currently 300,000 millionaires in China, who make up a part of the Chinese luxury consumer population. Within the next five years, the number of people who can afford luxury goods is expected to reach 1.3 billion. This means that the Chinese consumer is important for luxury brands because of the potential that this market will have to make or break the luxury goods sector.
China has seen one of the most dramatic explosions of wealth creation in human history, notably from 1978 to date. Twenty years ago, there was no middle class in China but currently, the middle-class population is more than 100 million. Every aspect of the Chinese economy is witnessing a boom. For example, the year-on-year growth of China's economy in the first quarter of
2006 was 10.2 per cent. It has been estimated that by the end of 2007, China's retail trade will be above $2 trillion, nearly twice as high as Japan and two-thirds the size of the American market. China is also likely to overtake the European Union in purchasing power within a decade. The Chinese textile and retail industries are being fuelled by cheap labour and an endless flow of Western clients and is currently on the verge of dominating the world's textile production and exports.
Travel in and out of China is also on the rise. In 2002, China had 36 million visitors and this number is expected to rise to 100 million by 2020. This influx of visitors into China is also fuelling the dilution of cultures and the acquisition of an international level of fashion sophistication for the Chinese luxury consumer. Also between 2003 and 2004, Chinese outbound tourism rose from 20 million to 29 million and it is estimated that by 2015, more than 100 million Chinese will travel abroad annually. Chinese visitors to Europe are also expected to exceed American visitors within the next five years. About 80 per cent of luxury purchases by Chinese consumers are made while on a trip abroad, especially to Europe. Chinese consumers purchase luxury goods while abroad and return home with the products, the style and the class acquired from their travels.
The high growth rate of the Chinese economy is an enticing market for the luxury fashion goods industry. For example, China has currently surpassed Japan to become the world's largest market for luxury watches. The country takes fashion retailing seriously and plans to build Asia's largest shopping complex in Shanghai.
China also poses several challenges and contradictions for luxury brands. For example, the country has the potential of being the largest consumer market of genuine luxury goods in the world within the next decade. At the same time, China is reputed to be the largest manufacturer and supplier of counterfeit luxury goods in the world. The potential problem that this contradiction creates for luxury brands is a clash of the genuine luxury consumer population and the counterfeit consumers who might dilute the image of the luxury brands to an extent that could drive the genuine luxury consumers to seek alternatives.
Also China has a host of upcoming designers that will likely play influential roles in the world of fashion. As a country that has fashion as a part of its culture, both designers and consumers of the present and next generations are being groomed to recognize and support talented indigenous Chinese designers. The impact of the rising Chinese designers will be heightened in the next decades when the influence of Western luxury brands on Chinese consumers eventually declines. Presently, China is a retail paradise for most European and American luxury brands but the Western luxury fashion influence is likely to last less than it did in other parts of Asia such as Japan. This is because unlike Japan and Hong Kong, China did not experience colonization by a Western country, therefore the consumer aspirational element towards
Westernization is less powerful. Although Chinese consumers will continue to look towards Hong Kong, Japan, Europe and America for fashion inspiration, they will eventually recognize and embrace their own luxury fashion brands.
India's rise India is one of the emerging luxury markets gaining momentum worldwide. Although this market has been slower than China in embracing Western luxury brands, several indicators show that it is as ready for luxury fashion as the Chinese market. India has a growing literate population with potentially brilliant careers and spending power. There are currently 70,000 millionaires in India, which make up the top end of the luxury consumer population. The country's current per-capita income is $460 and the rapid growth of its services industry has contributed to more internal wealth creation. The population structure is also favourable for the luxury industry as the working-age population is growing. By 2020, 47 per cent of the population will be between the ages of 15 and 59, compared with 35 per cent in 2003. The economy is also expected to sustain an annual growth rate of 8 per cent as from 2006.
The Indian luxury consumer is also highly fashionable and is likely to make more luxury purchases than their Western counterparts in the near future. India's long-term fondness for jewellery has created a base for the upsurge of luxury brands into the lives of Indian consumers. This market substantially influences the luxury jewellery market which is expected to grow by 40 per cent annually to reach US$2 billion by 2010.
Russia's influence Russia is a current luxury retail gold mine. It is a country that provides both design inspiration and a ready luxury consumer market. Its rapid and vigorous economic growth has given rise to increased luxury consumption and expenditure, and Russian consumers currently have access to acquiring luxury goods, which were previously unattainable under the previous communist regime.
Russia's Gross Domestic Product is growing at a rate of 6 per cent per annum compared with 2 per cent in the USA. The consumer population is 145 million with Moscow and St. Petersburg representing 10 per cent of this population. Moscow's luxury market is currently worth more than US$2 billion, which makes it larger than the luxury market of New York. Moscow and St. Petersburg have joined the world capitals offering access to all international luxury brands. It is also estimated that more than one hundred thousand people of Moscow's population fall within the consumers that can afford luxury goods.
There are 88,000 millionaires in Russia and a large proportion of their wealth is channeled towards luxury fashion purchases. The Russian luxury fashion taste is also becoming more global and attuned to Western flavour. Today's wealthy Russian shoppers are among the best-informed, discerning and sophisticated luxury consumers in the world. They also purchase the most expensive products such as limited edition accessories and off-the-catwalk creations. Russian luxury consumers have a preference for products made with special materials such as pure gold and diamond encrusted hardware finishing in leather goods. They have been described as daring in their portrayal of their fashion tastes, with tendencies of being obsessed with luxury. Russian consumers are likely to replace Japanese consumers in luxury expenditure.
Several luxury brands are already present in Russian cities notably Moscow and St. Petersburg and more brands and luxury departmental stores including Britain's Harvey Nichols are planning expansion into Russia. The country is also nurturing home talent and held its first Russian Fashion Awards in 2005.
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