Luxury and fashion facing a geographical shift
Geopolitical tensions generated by Russian invasion of Ukraine, the aftermath of the pandemic and the fear of an imminent recession are strongly affecting the luxury sector. While a year ago the recovery seemed to be on track, today the industry is facing chronic instability, forcing it to rethink its outlets and redesign its geographic network, as illustrated by the participants of the Milano Fashion Global Summit 2022, which was held virtually on October 25.
China is the big question mark. "Although there has been a lifting of the restrictions in recent months, accompanied by positive indicators, with a peak in sales in July and August, I believe that in the short term China may represent a threat and will also impact estimates for 2023. After double-digit growth in the last two years, next year we'll be looking at a single-digit increase," said Francesca Diviccaro, head of the retail and luxury sector at the IMI corporate & investment banking division of Intesa Sanpaolo bank.
The analyst nevertheless continues to see the country as an opportunity. "The biggest luxury market in 2025 will be China, driven by the prosperity of the middle class, by the younger generation, but also by a recovery or a start of business in second-tier cities," she said. A position shared by the CFO of Kering, Jean-Marc Duplaix, who thought during the recent publication of the group's quarterly results that, despite the economic slowdown and the problems related to Covid, China still had potential.
For his part, Dolce & Gabbana CEO Alfonso Dolce believes that "it will take at least six to eighteen months to regain full balance and to see a new China again, which will probably be stronger than before." "This recovery will allow for a new economy of scale with different characteristics, even more qualitative, where the consumer no longer buys a product, but a sense of belonging to a lifestyle, to a dream, and in our case to an Italian dream," he emphasized.
The scenario has also changed a little in the United States, the industry's new Eldorado for a little over a year. While sales of luxury goods performed well in the first half of the year, growth was marginal between July and September, as Americans preferred to shop in Europe, benefiting from a strong dollar. "Even though much of the demand has shifted to Europe, North America remains a strong market, as it is underpenetrated by the luxury sector," noted Chiara Rotelli, executive director, senior analyst for luxury goods at Mediobanca.
"The U.S. remains an important market for retail development, also offering the opportunity to grow in scope," she continued. From New York, where they have established themselves in large numbers, labels are now migrating to other cities, such as the Stone Island brand, which just opened a store in Chicago, or Zegna, in San Francisco. Kering also has a major opening plan in this region, as Jean-Marc Duplaix has suggested. According to him, "clearly, the United States and the Americans have been the locomotive of the sector in recent quarters. It is a market that has changed for the luxury industry, which is very promising, with a very strong potential in the long term."
We are witnessing the great return of the Old Continent. "Geographically, with the return of tourist flows and the recovery of local consumption, it is Europe that has carried the luxury market in 2022, whereas it was at the bottom of the pack in 2021," said Francesca Diviccaro. "This is the region where we had the most questions about the short term, given the economic and geopolitical situation," admitted Kering's CFO, while being pleased that the group has continued to invest in Europe.
Alongside these three strategic markets for the world of luxury, other regions are confirming their potential or are emerging as interesting future opportunities. "There are markets that need to be particularly monitored. One has already exploded, the whole area of the United Arab Emirates and Turkey, which are surfing on the spending of Russians," says Francesca Diviccaro. The Zegna Group's CEO, Gildo Zegna, does not hesitate to say that "the Middle East is the new China".
With European restrictions on Russia since it invaded the Ukraine, most luxury goods companies have stopped their activities in the territory, although they have retained their assets there. On the other hand, brands such as Sephora and Inditex have sold their activities there. Some regions such as the United Arab Emirates, which have not imposed sanctions, have since attracted Russian billionaires and their investments. Oligarchs and entrepreneurs have found refuge in Dubai.
"The United Arab Emirates are no longer separate countries but constitute an ecosystem with its own economy, within the same large territory", said Alfonso Dolce. "The evolved markets are no longer represented only by the big cities, but by the extension of the territories of aggregation of the big cities, which creates new macro-areas developing in their peripheries or other regions," he continued.
According to Francesca Diviccaro, "there are indeed other markets where we can see interesting growth paths, including Japan, South Korea and the regions of South America". Alfonso Dolce agreed. "There are new markets that are opening up beyond the capitals. For example, in Brazil, there are at least seven or eight cities that represent the country's new economy, such as Goiânia, which is driven by significant real estate development." The executive suggests we follow these cities "where there is still a desire to consume, with a clientele that is trying emotional purchase for the first time".
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