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Luxury brands turn focus on entry-level products

"The global fashion industry is up for good times in 2017 amid signs of a rebound in consumer markets in Mainland China and Hong Kong. In recent past, global giants such as Prada, Burberry and Richemont had tough times operating out of Mainland Chinese as consumers scaled back spending on luxury goods amid Beijing’s anti-corruption campaign and cooling economic growth. For some luxury brands, year 2016 was one of the most difficult as fluctuating currencies, a wave of terrorist attacks across Europe and the Brexit shock led to a new era of volatility. "

 

 

Luxury brands turn focus on entry level

 

The global fashion industry is up for good times in 2017 amid signs of a rebound in consumer markets in Mainland China and Hong Kong. In recent past, global giants such as Prada, Burberry and Richemont had tough times operating out of Mainland Chinese as consumers scaled back spending on luxury goods amid Beijing’s anti-corruption campaign and cooling economic growth. For some luxury brands, year 2016 was one of the most difficult as fluctuating currencies, a wave of terrorist attacks across Europe and the Brexit shock led to a new era of volatility. “Indeed, this has been one of the toughest years ever for the global fashion industry,” analysts at McKinsey said in a recent 92-page report.

Turn of events

Luxury brands turn focus on entry level products

 

Luxury fashion companies were likely to see annual revenue growth of just 0.5 per cent, the report said, noting that it had surveyed responses from 400 companies. Executives interviewed by McKinsey were pinning their hopes for a turnaround in 2017. McKinsey forecast sales growth this year of 3.5 per cent, up from 2 to 2.5 per cent growth in 2016. Many of them have already undertaken significant cost-cutting and restructuring exercises, and are now primed to capture the benefits.

Richemont, known for its Piaget and IWC timepieces and Cartier diamond necklaces announced job cuts, early retirement packages, and abolishment of chief executive’s position, along with retirement of eight directors in 2016. Luxury goods sales to Chinese shoppers, who make up roughly a third of global consumption, will shrink for the first time in modern history in 2016, predicts Bain. They estimated luxury goods sales in Hong Kong fell 15 per cent for the full year 2016. The drop can be partly explained by Hong Kong’s US-dollar linked currency, which appreciated in line with the US dollar’s 6.6 per cent gain against the yuan.

Hermès, traditionally among most resilient companies, said in September it would abandon its 8 per cent annual sales growth target for 2016, while German upmarket brand Hugo Boss AG in December said its 2016 operating profit would likely drop 17 to 23 per cent. Selected currency movements are affecting consumption in 2016. Brexit, the US presidential election and European terrorism all impacted consumer confidence and touristic flows, according to Bain.

Following years of retail expansion across China, top labels such as Gucci and Louis Vuitton closed some boutiques in smaller inland cities in 2016, in a bid to trim back their retail network and restore scarcity value.

A shift in focus

Brands are now focusing more on entry-level products. Richemont’s Piaget recently launched a lower priced sports line to tap into shifting spending habits, while Prada has been focusing on HK$1,000 to HK$2,000 bags. Discounts will become more prevalent in China going forward thanks to the growth in outlet malls, McKinsey said. Macquarie analyst Daniele Gianera believes luxury brands that innovate are more likely to win market share in the long run. Once customers have bought your signature line items, they want something new. Many consumers are redirecting their spending towards experiential luxuries, such as travel, entertainment, fine dining and fine art. The trend visible among US consumers for the past half decade is becoming increasingly common in China, Gianera said.

 
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