Luxury forced to expand its offer to the middle classes

by Pascale Denis

Faced with the slowdown in the global luxury market, the big names in the sector are changing their strategy to meet the aspirations of the emerging middle classes, particularly in China, and the needs of European customers put off by prices deemed prohibitive.

Between 2014 and early 2016, Louis Vuitton, Gucci and Prada considerably expanded their ranges of bags sold between 2,000 and 3,500 euros, anxious to preserve their image of luxury and exclusivity and leaving the so-called "accessible" luxury niche to Americans. Michael Kors, Kate Spade or Coach.

But today, the trend has reversed, notes Mario Ortelli, an analyst at Bernstein. "There is a marked acceleration in the diversification of the leather goods offer at more accessible prices."

The deposit represented by the Chinese clientele, which accounts for more than half of the global luxury market, has shifted towards the middle class - with less purchasing power - to which the brands must adapt.

Developing an accessible offer is "absolutely necessary", according to Qiong er Jiang, CEO of Shang Xia, the Chinese brand of Hermès.

"There are 1.5 million customers in China whose income exceeds $500,000 and everyone is fighting to get them. But below that, there is the new middle class, which represents 246 million people," he said. she underlined during the "Luxury Forward" conference organized in December in Paris.

EXPECTATIONS

"In China, growth is increasingly driven by consumers from the middle class. The spending of very well-off households, already largely equipped, has already started to slow down, as in Western countries", observes Luca Solca, analyst of Exane BNP Paribas.

Louis Vuitton, which surprised the market with a rebound in sales in the third quarter, benefited from an improving economic environment in China. But the claw, main profit center of LVMH, also benefited from a paying strategic positioning.

The trunk maker has, according to observers, better anticipated than its peers the need to move from a model of expanding its network of stores to a strategy guided by supply, and has managed the expansion of its range well.

“Of all the players in the sector, Louis Vuitton offers the best response to the needs of the rising middle classes, especially young people, thanks to a more extensive offer of entry-level bags and small leather goods,” note HSBC analysts.

The average consumer of a brand like Vuitton, far from counting among the wealthy luxury customers, has annual incomes of around 35,000 dollars.

By acquiring the German luggage specialist Rimowa, the LVMH group, while betting on the growth of world tourism, is also part of this strategy of extending its accessible offer. The launch of Louis Vuitton perfumes also meets these expectations.

MASSIVE PRICE INCREASES

This development should also make it possible to win back local customers, particularly European ones, who have sometimes fled the market due to massive price increases.

"The value for money is decreasing with local customers, particularly in Europe", underlines Olivier Abtan, partner of the Boston Consulting Group, referring to surveys carried out by the consulting firm with customers.

Between 2000 and 2011, the price in euros of a Tod's moccasin more than doubled, that of a Burberry "trench coat" was multiplied by five while that of a Rolex watch was multiplied by seven, according to the statements of a luxury expert who wished to remain anonymous.

Hermès thus hinted that it was not ruling out going into cosmetics, while the CEO of Cartier, Richemont's flagship brand, acknowledged this summer in an interview with the Swiss press that the rise in the price of watches had been excessive in recent years.

Like its competitors, Cartier has expanded its range of entry-level watches. For the first time, it launched a new steel model in 2016, whereas the novelties have until now always been presented in precious metals, the steel version being available later.

Brands must also attract the younger generations, these "millennials" aged 18-35 who consume differently and increasingly prefer to spend on travel or restaurants rather than luxury goods.

“They can do this by rethinking their offer with cheaper products or new categories, such as gift items, household items or perfume-cosmetics,” notes Olivier Abtan.

After annual increases of around 6% until 2014, driven by the conquest of China, massive store openings and major price increases, luxury has entered an era of weak growth which should, according to the cabinet Bain, close to 2% in the years to come.

(Edited by Dominique Rodriguez)