Luxury goods industry is not dead

After years of strong growth, the luxury goods industry has entered a phase of consolidation. Luxury goods companies recovered sharply from the crisis, with demand fuelled by a booming Chinese appetite. In just over a decade, China became the largest customer of luxury, representing more than 30% of purchases, versus 1% in 2001. However, this stopped in 2012 on China's crackdown on gift giving, as well as various adverse events and new consumption patterns.

The industry has not yet fully recovered and some specialists and market observers believe the luxury business model is broken.

Are people throwing the baby out with the bath water? Probably, as highlighted by Q3 results from LVMH , the industry bellwether. LVMH delivered a solid performance in a volatile environment, beating organic growth expectations by 2%. Also, LVMH said demand from China increased at a double-digit rate, versus flat in H1 2016. Long-term luxury growth is still strong – supported by innovation, more online penetration and supportive demographics. Global middle class spending could grow at a CAGR of 5% over 2009-2030, per the OECD, driven by Asian middle class growth of 9% CAGR. We recently travelled to Asia and no company we met said the current downturn was structural, despite the shift in Chinese consumption – buying experiences versus goods. Also, brands and distributors flagged the reservoir of emerging middleclass shoppers was significant.

Is luxury dead? Is it going to structurally underperform the global economy? Our opinion is it faces a cyclical period of consolidation. Strong brands should navigate through an adjustment of product and distribution strategies, supported by significantly stronger balance sheets than during the crisis.