How winners are standing out from losers in troubled luxury market

Watches of Switzerland posted flat sales for the year earlier today, becoming the latest luxury retailer to report underwhelming financial figures of late.

The watch retailer’s report follows the same trend of Burberry, Mulberry, LVMH and Gucci owner Kering, which all reported sliding sales. 

Burberry boss Jonathan Akeroyd recently warned that trading for the first half of the year was likely to remain challenging as the slowdown in demand continues.

Meanwhile, Kering chair François-Henri Pinault blamed the “sluggish” market conditions for a performance that “considerably worsened” during the first quarter.

And Mulberry chief executive Thierry Andretta said the retailer had “not been immune” to the downturn in luxury spending in recent months despite its brand awareness.

While customers may have splashed the cash in the post-pandemic glory days on the likes of a Gucci bag or a Rolex watch, aspirational spending has now retracted as rising interest rates and the cost-of-living crisis push shoppers further away from non-essential, big-ticket items.

So what are the biggest challenges facing luxury retailers? Which brands have remained favourites? And is there light at the end of the tunnel for this sector?

‘A smack in the nose’

The common denominator across most recent trading updates is that the US remains the strongest market overall, while the UK and Europe have fallen behind, and China has proven more challenging than expected.

Looking at the UK specifically, waning demand is the result of many factors. The abolishment of VAT-free shopping after Brexit in 2021, decreased discretionary spend and the increased importance of value have all meant the UK has been a poor market for luxury brands for years.

More generally, Shore Capital director Clive Black says the US has remained the most stable market over the past few years, but luxury retailers have underestimated the importance of value – even among their super-wealthy customers.

“A number of retailers understandably wanted to protect their margins and costs, but I think they underestimated that even rich people, who can simply afford what they want, have started to think about value,” he says. “People thought the prices were too high and there wasn’t value there.

“We’ve gone into more settled waters now. The brands have had a bit of a smack in the nose and they need to recalibrate their value proposition around pricing. I think that will make for a more settled trading environment.”

Despite each territory facing different challenges, Black says that if luxury players have learned their lesson about value and the global, macroeconomic environment improves, they have every chance of winning back spend.

Belts and braces

With the average price of luxury goods in Europe having increased by 50% since 2019, according to HSBC data, this once historically resilient sector has struggled to win the hearts and spend of a reduced cohort of customers still willing to spend big. 

GlobalData Retail managing director Neil Saunders says that as value becomes a priority and prices increase, lower-priced accessories have been the category’s strongest-performing products.

“Luxury accessories – things like belts, bags and glasses – continue to perform well as a lot of consumers see these as investment pieces,” he says. “They also buy accessories to refresh existing garments and change up looks.”

With luxury items often regarded as investment pieces, data provided by Similarweb demonstrates that traffic to luxury websites has dropped 10% overall year on year, with customers opting to make such purchases in store rather than online. 

Similarweb senior insights analyst Daniel Reid adds that those brands managing to remain in demand tend to have a strong beauty offering, which provides a more entry-level price point.

“In the luxury segment, the largest growth brands are Tom Ford, Hackett and Chanel,” he says. “While all three offer clothing ranges, they also specialise in fragrances, which aligns with a noticeable trend of increased sales in ultra-premium fragrances, particularly for Tom Ford and Chanel.

“This suggests a growing demand for their fragrances within the ultra-premium category.”

While accessories and beauty remain popular, lower-end purchases alone will not turn the fortunes of the luxury giants. Until consumers are making bigger purchases again, the picture is unlikely to change drastically.

Battling brands 

While geographic and financial challenges remain a topic of conversation, in this ever-competitive market the big question is: who is doing it best?

Hermès is one luxury brand that has managed to thrive despite the slowdown, with fourth-quarter revenue increasing by 17.5% for the Birkin bag brand.

With a made-to-order strategy, the French design house has retained its air of exclusivity over the past few years compared with some of its rivals.

Other brands continuing to perform well are those currently considered trendy and desirable – boosted by celebrity endorsements and a strong social media presence – such as Jacquemus and Van Cleef & Arpels.

A senior source at a major UK bank says the mid-market luxury brands, such as Gucci and Burberry, are having a particularly tough time.

She says this is due to their consumers being “aspirational millennials”, a demographic that has suffered when it comes to rising mortgage rates and higher outgoings than ever before.

However, Black says there remains an affluent demographic who are always “getting richer” and that the underlying market for these businesses remains robust.

Watches of Switzerland boss Brian Duffy says it is all about looking ahead with “cautious optimism”. Despite some big players undeniably struggling more than others, the overall feeling is that this sector will return once more to the lap of luxury.