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(originally published by Booz & Company)


Forecasting the Winners in Luxury’s Slow Recovery

Retailers are courting the next generation of aspirational buyers.

A year and a half ago, amid fear and uncertainty triggered by the worst financial crisis since the Great Depression, the luxury goods market contracted significantly, demonstrating that it was no longer impervious to the vicissitudes of the economic cycle. Now, with the International Monetary Fund forecasting global GDP growth of 4.5 percent in 2010, and stock markets around the world rallying more than 60 percent above their lows, a recovery appears to be under way.

But many luxury goods and services companies are unlikely to prosper in the new era of luxury about to unfold, mainly because they are pursuing strategies that do not reflect the way the downturn has changed their core markets. Instead, an outsized share of the growth will be captured by companies that understand the markets’ shifts and are devising and quickly executing a new, carefully balanced strategy to exploit them. In the more mature markets, winners will be the companies that retain the brand loyalty of the very rich while reengaging with a chastened base of aspirational buyers. The adaptations required by these strategic shifts will, moreover, serve these companies in good stead as they look to tap into the increasingly vital, and distinct, luxury markets of developing countries.

There are already clear signs that segments of the luxury markets are rebounding modestly — even as other retail segments continue to stagnate. Some luxury goods purveyors have dramatically outperformed discount retailers since the March 2009 bottom. Beginning its climb from this low, Hermès reported a 55.2 percent jump in net profit in the first half of 2010, driven by a 23 percent rise in first-half sales growth. In June 2010, all LVMH divisions grew revenue year over year, with Louis Vuitton recording double-digit revenue growth. Meanwhile, Walmart sales for the second quarter of 2010 grew only 3 percent.

Some high-end automakers also seem to be shrugging off the effects of the recession. At the Frankfurt Motor Show in September 2009, car buffs were treated to an exceptional crop of new luxury sports cars, including Maserati’s GranCabrio, Ferrari’s 458 Italia, and Bentley’s Mulsanne, with estimated price tags of US$150,000, $250,000, and $300,000, respectively. In June 2010, Mercedes-Benz reported double-digit percentage growth for the eighth month in a row, with 113,3000 units delivered — the best recorded June sales in the company’s history. Although sales were up in every region compared to last year, rapid growth in China was a key factor in the group’s record-breaking figures. During the first six months of the year, China experienced 120 percent growth. Closely following were other BRIC countries: India (up 83 percent), Russia (up 76 percent), and Brazil (up 73 percent).

The cloud hanging over the heads of luxury marketers is the likelihood that the global recovery will be shallow, slow, and patchy, according to the consensus of economists. Some are forecasting that the global luxury market’s full recovery will happen in 2011, but others predict it will be a few years beyond that.

This forecast translates to an uneven outlook for the highly differentiated and stratified luxury markets. As financial crisis uncertainties wane, the very rich, who are less exposed to the vagaries of the economy, have already resumed purchasing the most expensive offerings of the most elite brands. But the fears of less-wealthy consumers — the so-called aspirational buyer segment, which represents 60 to 75 percent of the $225 billion global luxury market — have not been so easily allayed.

Aspirational buyers flocked to the lower and middle product and service tiers of luxury companies during more prosperous times, providing the impetus behind a majority of the growth in the overall luxury market. But their purchasing power was hard hit during this recession, and many of them reduced or eliminated spending on luxury goods and services. The major question for luxury markets today is whether these aspirational buyers will resume spending at a pre-recession clip or thrift will become the new normal.

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