The global luxury goods market is witnessing a substantial cooling period in 2024, marking a significant departure from the consistent growth witnessed over the last three yearsThis transitional phase, characterized by a contraction in consumer base, is starkly highlighted by the loss of approximately 50 million luxury consumers within just two years, signaling a transformative shift and igniting concerns over spending habits and brand loyalty.

According to a comprehensive study conducted by the Italian Luxury Goods Manufacturers' Association in collaboration with Bain & Company, the luxury segment is beginning to feel the ramifications akin to those experienced during the 2008 financial crisisBain's partner, Dapizio, underscores that while ultra-wealthy consumers still exhibit resilient spending patterns, the highly sought-after Gen Z demographic has been largely left behind

Dapizio notes that even affluent shoppers are becoming increasingly discerning, often questioning exorbitant price tags if they feel undervalued by brands.

This scenario paints a picture of a bifurcated marketCategories like watches, leather goods, and shoes are experiencing a pronounced slowdown, while segments such as high-end jewelry, fragrances, and eyewear are robustly performingBain projects that in 2024, only about one-third of luxury brands will achieve positive growth, which is a significant decline from the two-thirds of brands that accomplished this milestone in 2023.

In response to these shifts, luxury companies are reassessing their consumer engagement strategiesAccording to Jiang Yunying, a partner at Roland Berger, high-end clientele will remain the central focus for luxury brands in the upcoming yearThe retention of loyalty and engagement among core consumer bases will be critical over the next two to three years.

The performance of the top three luxury conglomerates further delineates the ongoing structural changes within the luxury goods market

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For instance, Richemont's stock saw an upward shift of 12.07%, while competitors like LVMH and Kering faced downturns of 16.27% and a staggering 44.21%, respectivelyThis divergence in performance is tied to the core business models of these giants, with Richemont focusing on jewelry and watches, in contrast to LVMH and Kering, which primarily derive revenue from fashion and leather goods.

In Richemont's recent fiscal report, the jewelry segment, which includes well-known brands such as Cartier and Van Cleef & Arpels, demonstrated robust health, contributing a remarkable 69% to the company's sales and showcasing a growth of 6%, with operational margins soaring to 33.1%. Conversely, Kering's luxury leather good brands like Gucci reported steep declines, with sales shrinking by 25% for Gucci and 12% for Saint Laurent within the third quarter.

Interestingly, the affordable luxury sector is proving remarkably resilient

Despite a slight overall revenue dip of 2% for LVMH in the first nine months of 2024, its fragrance and cosmetics division showed consistent growth over three consecutive quartersSimilarly, Kering's eyewear division surged with a 32% year-on-year increase, underscoring a thriving market for smaller luxury items.

The consumption narrative is evolving, shifting from mere ownership of iconic luxury goods to a fluid lifestyle approachModern consumers, particularly younger demographics, are increasingly purchasing luxury products to express their individual taste and lifestyle preferences, rather than solely to project social statusFor many in the younger cohorts, enjoying luxury goods serves as a form of self-reward and fulfillment of personal aspirations.

However, luxury brands now face a pressing question: Should they cater to the super-rich, or seek broader market appeal? Traditionally classified as Veblen goods, luxury items have flourished with rising prices paralleling demand

This dynamic has allowed luxury conglomerates to cash in significantlyFrom December 2019 to September 2024, luxury prices soared by an average of 54%, enhancing profit margins dramatically for brands such as LVMH and Richemont, which reported operating margins of 27% and nearly 40% net profit growth, respectively.

Nevertheless, the current market climate reveals that this neutral pricing strategy has begun to backfire, contributing to a 2% dip in global luxury industry sales in 2024, with the overall consumer base shrinking by 50 million individuals, representing one-eighth of global affluent consumersPrada’s CEO recently acknowledged that the considerable price hikes have proven to be a grave misjudgment, as consumer perceptions of value failed to align with steep price tags.

New reports from Boston Consulting reveal that about 350 million global luxury consumers are spending under €2,000 annually, yet these consumers collectively contribute around 60% to the total market share

Conversely, just 2% of the consumer base, categorized as Very Important Clients (VIC), accounts for a stunning 40% of global luxury consumptionThis stark contrast in spending patterns compels brands to make crucial decisions regarding their target demographics and market strategies.

In 2024, luxury brands focused on the ultra-high-net-worth individuals showed exceptional performanceNotably, Brunello Cucinelli, selling cashmere sweaters for $6,000, reported a 12% sales increase during the first nine months, while Hermès also achieved a commendable 14% rise in revenueEven among VICs, there is a growing skepticism towards brand experiences, with many expressing that the uniqueness once associated with luxury is erodingJiang Yiwen observes that high-net-worth consumers are adopting more rational approaches to luxury purchases, considering not only full-price items but also those in lower price brackets and discount offerings.

Yet, Jiang emphasizes that slashing prices may not be the optimal route for luxury brands, noting that distinctiveness and brand positioning should remain intact

The challenge is to convey core values among segmented consumer groups while avoiding the pitfall of developing low-priced product linesIf luxury brands impose higher prices, they must offer innovative or surprising experiences to justify such costs, according to luxury analyst Soka from Bernstein.

As highlighted in Bain's report, smaller luxury items and entry-level products are still favored among the Gen Z cohort, suggesting that luxury brands need to bolster their efforts to capture and retain this ever-evolving consumer segmentThis balancing act between classic prestige and contemporary innovation is essential in navigating the future landscape of the luxury market, particularly in China.

In terms of geographic performance, Bain’s 2024 report identifies Japan as a leader in luxury growth for the first half of the year due to currency advantages and a surge in tourist spending

However, this momentum has tempered somewhat with recent price adjustmentsEurope continues to see steady growth across quarters, although at a more normalized pace, while regions like the UK and Scandinavia have seen tepid performance due to limited tourist flowsThe Middle East exhibits a mixed visitor inflow contingent on regional tensions.

On the other hand, the United States market remains resilient, demonstrating quarterly growthAccording to Schwartz, a senior economist at Oxford Economics, the buoyancy of the American consumer market has been bolstered by a over 20% increase in equity markets over the last two years and surging property values, offering affluent families ample financial cushionThis serves to augment their spending capacity despite potential market fluctuations anticipated in 2025.

Looking ahead, emerging markets such as Latin America, India, Southeast Asia, and Africa are poised for explosive growth, with projections suggesting that over 50 million new middle- and upper-class luxury consumers could emerge by 2030, presenting new opportunities for expansion