Nature gives you the face you have at 20 years old. It's up to you to deserve the face you have at 50." This phrase, attributed to Coco Chanel, can be perfectly applied to the empire that the French designer helped build. As if it were a gift of nature, at the end of the nineties a series of economic and political factors opened the doors of the luxury market to a new group of consumers who joined it with the faith of the convert. For years, just by turning on the light in the stores, Louis Vuitton, TAG Heuer, Ralph Lauren, Hugo Boss or Tiffany, among other big brands, had their products taken from their hands. The days of wine and roses, however, are over and in recent years the pace of sales growth has slowed noticeably. From now on there is no longer that tailwind and each company is going to have to work out its future, just as Chanel predicted. At stake is a business that moves around 1.5 billion euros each year (more than the GDP of Spain) and that generates tens of thousands of jobs.

“The global market for luxury goods is facing the first structural crisis in its history after 10 years of growth. There is a 'new normal' in the sector, with growth of between 2% and 5% per year compared to the 10% pace of the last decade”, warn experts from The Boston Consulting Group (BCG) in a recent report developed in collaboration with AllianceBernstein.

The big brand sector is very heterogeneous. In 2016, the segment that grew the most was luxury cars (8%). High-end hotels, cruises, beauty products, beverages and food also performed relatively well. However, the core part of the business, luxury personal goods (clothes, bags, shoes, jewelery and watches), performed flat or even negative if exchange rates are taken into account. “This is the third consecutive year of very modest growth and represents a new environment in which luxury companies no longer benefit from a favorable market and unrestrained consumer spending. Brexit, the elections in the United States and terrorism have generated great uncertainty, eroding consumer confidence”, they argue from Bain & Company.

Beyond the specific factors that hit this business last year, analysts who cover companies in the sector, such as Thomas Chauvet, from Citi, warn that the problems "are not cyclical, but structural." The first and most important has to do with China. Consumers in this country are responsible for between 30% and 35% —depending on the statistics consulted— of the annual sales generated by the luxury industry. The feared forced landing of the Asian giant has not occurred, but its growth no longer has the frenetic pace of five years ago. “A good part of the demand comes from China and the slowdown in its economy is clearly being felt. In addition, the anti-corruption campaign launched by the Beijing government is also being noticed, especially in segments such as watches and jewelry. Before, it was quite common to bribe officials with expensive gifts to win contracts," says Beatriz Catalán, manager of Ibercaja.

The luxury industry relies heavily on so-called “shopping tourism”. That is why the chain of attacks, mainly in Paris, the mecca of brands, is a serious blow to the sector. “The arrival of Chinese tourists to France and Germany in the third quarter of 2016 fell by 34% and 17% year-on-year, which has been transferred to sales both in urban stores and in duty-free shops”, Francesca di Pasquantonio, an analyst at Deutsche Bank, points out in the latest sectoral report published by the German bank.

Parallel to this trend, the volume of purchases of luxury goods in China in 2016 exceeded purchases made abroad by five percentage points, the first time this has happened since 2001. “There is a redistribution of the market, a change of trend in Chinese consumption patterns that must be taken into account”, says Arantxa Piñeiro, from Banco Sabadell.

If the obstacles faced by the luxury sector are compared with the recent crises in other industries such as finance or real estate, the result seems like child's play. However, reconversion is always more complex in those businesses that have only lived through glory days. And it is that viruses always attack more viciously when antibodies have not previously been developed. Between 1994 and 2007, 87% of the companies in this business were able to grow, and more than half did so at rates above 10%; By contrast, last year, less than 50% of companies improved their sales, and only 14% did so at a double-digit rate. “There is no doubt, there will be winners and losers in this new context. Strategy and leadership will be decisive”, Bain & Company analysts warn.

If you had to bet on a winner, everyone would point to LVMH. The French giant is worth 95.7 billion euros on the stock market and invoices 37.6 billion a year. The global presence and its diversification in brands and products make it more resistant to the new environment. However, its chairman and largest shareholder, Bernard Arnault, delivered a very conservative message at the recent meeting with analysts to present the 2016 accounts. “I am very cautious in relation to 2017. It is a caution that I have transmitted to my teams. Our stores are full, but I think we have to be extremely vigilant because, from experience, every year that we find ourselves in this situation, the final balance of the year is usually not good, ”he acknowledged.

High rotation

Historically, management turnover in the luxury industry has been higher than in other sectors. As Frabrizio Ferraro, professor of strategic management at IESE, recalls, "it is a business in which the consumer demands constant innovation in products, and that volatility in demand ends up taking its toll." The novelty is that this rotation has acquired almost revolutionary dyes in the domes of the big brands in recent months. Tiffany has been the last to strike down its CEO, Frederic Cumenal, after presenting poor results. Before the mythical jewelry brand, the rosary of layoffs had already affected some of the top executives of Ralph Lauren, Hugo Boss, Burberry, Richemont, Ferragamo, Coach and Kering, among other brands.

“We believe that in 2017 we will see more changes. The fall in sales has played an important role in these changes, but it is also true that there was a certain complacency in the sector because for many companies the only concern for years was how to produce more”, according to Antoine Belge, an analyst at HSBC. “In some cases, these management changes are driven by generational changes, since it is increasingly important to understand the habits and needs of the youngest, especially in Asia, where mobile shopping is widespread and where there is a different approach to the concept of luxury”, he adds.

The priority task of company managers is to review the cost structure. The long growth phase led companies to embark on an unbridled race to open stores. The result of this euphoria is a saturation of premises in certain countries. In order to maximize income and improve sales rates, initiatives such as moving to better locations, renegotiating rents, reviewing the surface area of ​​stores and, in the worst case, closing less profitable locations, are becoming common within the sector. "Cities like New York, London and Paris can maintain the density of luxury stores, but brands must urgently analyze the efficiency of their networks of establishments, especially in Asia," they underline in BCG.

Along with the rationalization of their premises, another of the pending challenges for luxury firms is digitization. Due to the exclusive nature of the products and services it offers, the sector has been more reluctant than others to promote online sales channels, but this strategy is beginning to change. In 2009, digital revenues only accounted for 2% of the total and in 2016 they already represented close to 8%. “This figure makes digital commerce the third largest market for personal luxury goods after the US and Japan. In the coming years, Internet operations will continue to gain ground on sales in physical stores, ”Bain & Company predicts.

The luxury business has significant barriers to entry. Creating a brand takes many years and requires significant investments in marketing. Furthermore, unlike other sectors, digital disruption —except in the field of watches with products like the iwatch— is less aggressive. However, experts warn that companies must prepare for an environment of greater rivalry. “Technology has created lower barriers to entry in manufacturing, distribution and communication, leading to a more competitive landscape. In addition, the luxury spending pie now has more diners as consumers are increasingly betting on luxury-related experiences [travel or gastronomy], thus diverting part of their spending away from high-end products. It goes from having to being”, they point out at Citi.

Consumers of luxury goods want to stand out from the rest. This demand causes that with certain frequency a new brand emerges that breaks the market with a new proposal. A recent example of a new player is Golden Goose. This brand of urban sneakers —with prices of up to 400 euros— was founded in Italy in 2000 and already has a turnover of close to 100 million. Its success has attracted the interest of Carlyle, one of the most important venture capital firms in the world, which has just acquired 100% of the capital after disbursing 400 million. “Every year new brands emerge. Many are no more than a seasonal phenomenon, but the year they become fashionable they can snatch 40 or 50 million billings”, acknowledges Fabrizio Ferraro.

One of the great concerns of the industry is how to attract younger consumers. In order to capture their attention, some firms are branding familiar faces of the millennial generation. Coach, for example, has made a multi-million dollar contract to the singer and actress Selena Gomez. For her part, Tiffany just launched an ad campaign—including her first Super Bowl ad—with Lady Gaga.

This strategy, however, is only the first step in winning new followers to the cause of luxury. "The sector must think seriously about how to attract tomorrow's clients," they warn from Citi. “Millennials are making a disruptive impact in many ways. In particular, they are facing massive unemployment, particularly in Europe; they have a higher level of education than their parents, are more involved in politics and have a higher social commitment. These characteristics force luxury goods companies to pay more attention to issues such as authenticity, the origin of the items or sustainability”. The US bank also highlights that young people are more sensitive to the cost of products, since they have more information through the Internet "and reject certain price structures of the big brands."

America's potential

The Asia-Pacific region will continue to be the main growth engine for the luxury industry. A Capgemini study expects that by 2025 the number of people with a financial wealth of more than a million dollars in this area will double, reaching 11.7 million people. with a combined volume of 42 billion dollars.

Despite this growth, experts believe that there are also great opportunities for the sector in the US “Regardless of the potential of China, we believe that American consumers will continue to be the second catalyst in this industry. Affluent citizens of this market, particularly those of Hispanic or Asian origin, are willing to spend more of their money on luxury items. In addition, we see that the electoral result in the US will be more favorable [tax cuts] than detrimental to the big brands”, highlight the HSBC analysts.

The luxury industry may have a rebound. In fact, this year a better harvest is expected due to factors such as the recovery of raw materials, which benefits the purchasing power of Russian or Latin American consumers. However, companies cannot fool themselves and must accept the new normality of the market. Returning to Chanel's repertoire of phrases: "You don't have to waste time crashing into a wall in the hope of transforming it into a door."