Global luxury market worth 224 billion, top 20 brands

The global luxury goods market last year grew by 3% to a size of €224 billion. Accessories remains the largest luxury product segment, while airports and online market places continue to increase market share. The Chinese market has been slow to grow, but consumer spending is expected to increase, while Europe and Japan are mainly tourist growth based. LVMH, Richemont and Hermès are globally the largest luxury brands.

The luxury and cosmetics industry has enjoyed double digit growth over the past decade fuelled by the “retail rush,” providing retailers the opportunity to capture the world’s growing middle class through brand extensions and the quest for the highest product positioning. To gain insight in the future of the industry, accounting and consulting firm EY each year conducts in-depth research into the key trends, (financial) developments and market share of players. The recently released 2015-edition, titled ‘Seeking sustainable growth: The luxury and cosmetics financial factbook 2015 edition’, reveals that the industry has matured, with growth dropping off while brands seek to secure their positions and grow sustainably.

Luxury market size
In 2014 growth within the industry remained low at 3%, in line with the previous year's 3%, taking the total market value up from €218 billion to €224 billion. According to the researchers the period to 2017 will see relatively strong growth of between 4% - 6%, driving the industry to a value between €250 - €265 billion.

Shopping channels
In terms of luxury market segments, the largest personal luxury good by type is the accessory market with 29% of total market share, followed by apparel at 25%. Hard Luxury and Beauty make up the following two largest segments at 22% and 20% respectively. All other types jointly account for 4% of the sector. In terms of growth of market share, accessories have seen the most consistent and strongest growth, reaching a CAGR of 11% from 2010 through 2014, while its 2014 growth remained above the market’s total average at 4%.

From a shopping channel perspective, Monobrand stores represent close to 30% of the channels through which luxury goods are sold. Department stores come in a close second at 27%, followed by speciality stores at 25%. Two channels that have been seen significant market growth in recent years are the airport and online channels, now at 5% respectively. The online luxury goods market increased its total share from 4.5% recorded last year – increasing 12 fold in the past eleven years, while the airport channel generated a CAGR of 11.0% from 2011 through 2014 and now also represents 5% of total luxury sales.

Chinese market flattens
The Chinese market has in recent years enjoyed strong growth, up from €13 billion in 2011 to hit €15.3 billion in 2013. Since then however, the market has seen a flattening out, with the market projected to end 2014 at €15.3 billion. The main reason for the slowdown according to the analysis is a lack of demand for watches, men’s wear and leather goods. Further factors affecting the market are increases in diversity for preferred brands introducing competition, while value for money has increased in importance over logos. The Chinese economy too has seen a significant slowdown, prompting some to become more frugal. 

Compared to the US market, which contributes €72 billion to the total industry, China and Hong Kong come in as the second largest market at €23.2 billion, followed by Japan at €17.9 billion.

Tourists and consumers
Considerable variation exists between demand generated through tourism (area) and that generated by consumers (nationality). In Japan for instance, the majority of demand growth stems from tourism (6%) over consumer (1%). In Europe too, much of the growth in demand comes from tourists (4%) over consumers (1%). China, the Americas and the rest of the world are all consumer driven markets: in the Americas for instance, 6% is consumer growth while 2% is tourist lead, and in Mainland China, 8% of growth comes from consumption while tourist growth is forecasted to drop -3% this year.

Top 20 luxury firms
In the analysis, EY also identifies the 20 largest luxury companies by market capitalisation. Topping the list is LVMH – the company behind iconic brands as Louis Vuitton, Givenchy, Christian Dior, De Beers and Moët & Chandon – with a value of almost €84 billion. The French conglomerate is followed by Richemont (#2) at €44 billion – both firms have enjoyed long term growth rates (LTGR) of 3%. Hermès comes in at #3 with almost €32 billion while Luxottica (#4) has a market capitalisation of €27.5 billion. The 20 billion segment is finished off by Kering (#5) and Swatch (#6) – each with upper 2% growth rates. The €10 billion plus players include Prada (#7), Michael Kors (#8), Burberry (#9), Ralph Lauren (#10), Coach (#11) and Tiffany (#12).

WACC and LTGR
A deeper dive into the financials of the top 20 players reveals however that the weighted average cost of capital (WACC) and long term growth rates performance diverges across the board. LVMH (#1) and Richemont (#2) both have enjoyed LTGR’s of 3%, although Richemont has about 1% more WACC. Hermès (#3) has a LTGR at around 3.5%, its WACC is though around 1% lower than LVMH. Brunello Cucineill (#19) has enjoyed strong growth in the long term, notching 5% and being the furthest out from the around 3% norm. Of the big players, Luxottica (#4) and Coach (#11) are the slowest growers at around 2.5% each.