The idea has been circulating for some time that when it comes to luxury, the United States is still a developing market. And while Erwan Rambourg, author of Future Luxury: what future for the luxury business, points out that this characterization isn’t quite true to begin with, the pandemic may put the idea to rest for good.
After a sharp contraction in 2020, the global luxury market surpassed pre-pandemic sales levels in 2021 – a resurgence fueled by the United States and China, according to Bain & Company. Bain reports that the Americas is now the world’s largest region for luxury sales, accounting for $101.9 billion (31%) of the total world market.
To understand this momentous structural change and its implications for the future of luxury, Rambourg spoke with Anish Melwani, Chairman and CEO of LVMH Inc., the US subsidiary of the global luxury giant. LVMH, at an event organized by the Institut français Alliance française (FIAF) in New York in November 2021. The two discussed the changing attitudes of American consumers towards luxury and how the pandemic has reshaped the luxury market in the United States, including:
- The pandemic has made it clear that Luxury e-commerce is not an oxymoron, with shoppers becoming increasingly channel independent, even for high-end purchases;
- Homebound American consumers have found refuge in the “dream” of luxury during the pandemic, which has led to increased brand engagement and spend; and
- With tourism and business travel down, secondary markets like Atlanta and Houston have risen to prominence, and this kind of geographic reshuffling will continue.
The pandemic propels new growth in luxury in the United States
LVMH occupies a dominant position in the world of luxury, with some of the biggest names in fashion, spirits, cosmetics and jewelry. But even for these brands, the United States has been a tough nut to crack. The problem is less about the undeniable power of names like Louis Vuitton and Hennessy than about the nature of the American market.
“Sidney Toledano, who was our general manager at Dior for many years and now leads our fashion division, has always said that the United States is a valuable marketexplained Melwani at the FIAF event. “It’s the market for TJ Maxx, off-price retailers, brand centers. Fundamentally understanding of luxury has not permeated American culture nearly as much as European culture, especially Western European culture. This is the promise of this market — if it could reach even 50% the level of cultural penetration that exists in Europe, then the demand potential is extraordinary.”
It turns out that the global pandemic has given the United States a huge push toward realizing that potential. “The post-COVID premise is a little awkward, especially if you’re based in Asia today, but the rest of the world has reopened somewhat and we’ve seen quite a bit of activity [in the luxury sector] in Europe and even more here [in the U.S.]said Rambourg. “When I published my book a year ago, a lot of people were like, ‘You’re so naive, you’re too optimistic.’ The reality in hindsight is that I probably wasn’t optimistic enough Asia recovered pretty quickly, we saw good potential with local European consumers, but most of the positive surprise came from luxury demand in the United States”
Melwani believes that LVMH has made ten years of progress over the past of them years in terms of penetration of the American market. “People had disposable income but nothing to spend it on,” he noted, not to mention that with so many scary things going on in the world, consumers were looking for ways to feel good. This spending effect has been reflected in a number of categories over the past two years, but the luxury sector in particular has been helped by the fact that despite a general economic slowdown, equity and property markets remained solid.
“We have just done consumer research and preliminary results show that two-thirds of customers we’ve seen during this pandemic say they’re more committed to luxury than ever before“, Melwani said. “They weren’t necessarily new to luxury; 98% of them had bought luxury [items] in the past, but they became more engaged — they visited our websites more often, they made appointments to enter, they waited in line.
“People were looking for things to inspire them and make them feel good,” he added. “Luxury is above all a dream. Now [that consumers] have taken the time to really engage with the luxury houses and luxury storytelling I think this gives the industry the opportunity to foster the penetration of luxury into American culture.”
Responding to the Rise of Secondary Markets and Agnostic Consumers
Beyond expanding the reach of luxury among American consumers, the pandemic is also transforming the shape of luxury in America, both in terms of store footprints and digital engagement.
Melwani said LVMH sees its physical presence deployed from major cities. At the same time that traffic is down in places like Manhattan, visits are up in what were once considered secondary markets – cities like Atlanta, Houston, Troy, Michigan and Phoenix. “It’s evidence of deepening penetration across the United States,” Melwani said. “People now see luxury as something they can buy close to home, and not just as a pleasure when they go on a business trip to New York or a vacation to Las Vegas or California.”
This trend is pushing LVMH to reconsider the distribution of its stores in the United States. While most of LVMH houses are already present in these secondary markets, in many of them brands are moving out of the wholesale mindset and even considering stand-alone stores: “It is network improvement in these areas that historically would not have justified this level of investment in staff,” he said.
At the same time, the pandemic has forced all luxury brands to reconsider their stance on e-commerce and abandon old stereotypes about what people will and won’t buy online. “I have colleagues in Europe who say, ‘Who wants to buy a $25,000 watch online?’ They say this as they watch $25,000 watch sales online. [Whether online is compatible with luxury] is really a rhetorical question at this point,” Melwani said.
Indeed, Melwani and his executives have come to the same realization as their counterparts in the retail industry – consumers, even luxury consumers, are becoming increasingly channel agnostic. In fact, Melwani said that in one of his houses the company found that ten% of its online business came from their top 2% physical customers.
“The customer doesn’t see themselves as an online shopper or a physical shopper,” Melwani said. “Customers shop in stores when they can, when it’s convenient and when it’s something they want to do. But sometimes it’s two in the morning, they’re awake and they want to go shopping. They are not separate customers.
What will last and what will fade
This is of course a unique moment in time. As for the long-term impact of the pandemic, Melwani said he believes some of the “euphoric spending” that helped propel luxury to new heights last year will fade as the pandemic wanes. prolongs and inflation affects stock markets.
“I have some concerns for 2022,” he said. “My observation was that luxury is much more sensitive to the “wealth effect” than to the “income effect”. You can raise taxes by a few percentage points and nobody changes their spending habits significantly. On the other hand, when the market drops 15%, everyone feels poor all of a sudden. Even though the market had been up 30% before that, all of a sudden it causes a reduction in expenses from an emotional point of view.”
But Melwani doesn’t think a potential drop in 2022 will reverse the growth the United States has seen over the past two years, even if spending in other discretionary categories like travel and experiences returns. “Once you discover luxury, once you find out what it means in terms of quality, in terms of heritage, and decide to make it part of your identity as an individual, it doesn’t is not so easy to reverse this,” he said. “If you’ve developed as part of your identity that you now wear Dior sneakers, for example, and you wear them at home, aren’t you going to wear them on your first vacation? in a fancy hotel? Or are you going to want to continue projecting this identity that you have developed? My guess is more the latter than the former.