Global Powers of Luxury Goods 2014 In the hands of the consumer To start a new section, hold down the apple+shift keys and click To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. to release this object and type the section title in the box below. Fashion & Luxury Inspired insights, crafted results To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Contents Global Powers of Luxury Goods 2 Global economic outlook 3 Global trends affecting the luxury industry 8 Top 75 highlights 12 Retailing activity 22 M&A activity 23 Q ratio analysis 28 Study methodology and data sources 30 Endnotes 31 Contacts 32 Global Powers of Luxury Goods 2014 1 To start a new section, hold down the apple+shift keys and click To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. to release this object and type the section title in the box below. Global Powers of Luxury Goods Deloitte Touche Tohmatsu Limited (DTTL) is pleased to present the 1st annual Global Powers of Luxury Goods. This report identifies the 75 largest luxury goods companies around the world based on publicly available data for the fiscal year 2012 (encompassing companies’ fiscal years ended through June 2013). What is luxury? While we all recognize luxury, definitions are hard to It excludes the luxury categories of automobiles, agree on. Some define luxury by a list of attributes, travel and leisure services, boating and yachts, fine others by price, and still others by exclusivity of art and collectables, and fine wines and spirits. distribution. The issue has become more complex as corporations took ownership of many luxury brands, The report also provides an outlook for the global and as lower price points and broader distribution economy, an analysis of market capitalization in the put ownership of many luxury items into the hands industry, an overview of M&A activity in the luxury of the masses. goods sector, a discussion of major trends affecting luxury goods companies, and a look at the retail This report frames its discussion around and e-commerce operations of the largest 75 luxury Euromonitor’s definition of luxury goods products, goods companies. which includes aspirational or premium brands as well as traditional ultra-luxury. (Please refer to the “Study methodology” section for more details). It focuses on four broad categories of luxury goods: designer apparel (ready-to-wear), handbags and accessories, fine jewelry and watches, and cosmetics and fragrances. 2 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Global economic outlook As the global economy recovers, the global luxury The reform program proposed by the Chinese industry is growing accordingly. Not unexpectedly, government is radical yet cautious at the same time. growth is disproportionately focused on the Asia Pacific On the one hand it proposes increased competition for region. Although economic growth has lately slowed state-owned enterprises (SOEs). On the other hand, it in much of Asia, this is to some extent offset by the fails to propose privatization of SOEs. On the one hand rise in income inequality. Thus, income available to it proposes to protect private property rights, but on upper income households is growing faster than overall the other hand it fails to give up state ownership of income. The near term future of the luxury market land. On the one hand it does much to decentralize will depend, in part, on how the global economy economic power by empowering the private sector. evolves. In the pages that follow, we offer our view Yet on the other hand, it pulls more power into the on the economic outlook for the major markets and hands of the central government, often at the expense the potential impact on purveyors of luxury products. of local and regional governments. As such, it is a Ours is a baseline view. Yet it should be noted that mixed bag of reforms. unexpected political decisions, by leaders or voters, could relegate our predictions to the rubbish bin. Still, Despite a bit of ambiguity, it is clear what the we hope that what follows offers a useful road map. government generally hopes to achieve. The reforms, if implemented successfully, should lead to faster China economic growth, less financial risk to the economy, China is the world’s fifth largest luxury market and a shift in growth away from investment in fixed according to Euromonitor and, sadly for luxury assets. In addition, the reforms tackle a variety of producers, the Chinese economy has slowed social issues. The reforms will lead to greater fairness considerably. The critical manufacturing sector has by promoting more income equality as well as a been stung by slow overseas growth, a rising value of more powerful and less corrupt judiciary. Finally, the yuan, and rapidly rising wages, all of which have the reforms are somewhat conservative in that they hurt export growth. Instead, the economy has relied should help to stabilize the economy and society heavily on domestic demand, especially investment in by engendering greater predictability. There should fixed assets. This has been fueled by massive borrowing be more transparency of financial markets and SOE by local governments, corporations, and individuals finances, more professional management of SOEs, less investing in the frothy property market. Unfortunately, reliance on the decisions of fickle local officials, and the growth of debt, mostly off the balance sheets of more reliance on market forces to determine allocation banks (in the so-called shadow banking system) has of resources. created a sizable risk to the Chinese economy. This threatens to either derail economic growth or cause As for the luxury market, it depends on a robust further problems in an economy already suffering from consumer market and continued growth of the upper serious imbalances. Although the massive investment income cohort. On the one hand, the reform agenda in fixed assets has maintained employment, it has often proposed by the government should shift growth away generated negative returns. It has not contributed to from investment and toward consumer spending. On the ability of the economy to grow. The government the other hand, efforts to reduce income inequality will likely have to bail out troubled financial institutions, could lead to disproportionate growth of lower to force them to reduce lending, and thereby cause a drop middle income cohorts—although it will probably take in economic growth. The best way to avoid a serious a few years before this is manifested. In addition, the crisis would be to implement significant reforms of government’s recent crackdown on corruption has the financial system as soon as possible. As such, the resulted in a sharp drop in official gift giving. Going government recently announced a range of reforms forward, this could have a negative impact on the intended to create a more normal economy. luxury market. Global Powers of Luxury Goods 2014 3 To start a new section, hold down the apple+shift keys and click To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. to release this object and type the section title in the box below. Japan Japan is the world’s second largest luxury market after Third, one of the positive effects of Abenomics the United States, according to Euromonitor. Yet, during has been a sizable boost in asset prices due to the the past five years, luxury sales have grown more flood of liquidity from the new monetary policy. slowly in Japan than in any other Asian market. The A rise in asset prices is especially helpful to upper problem was stagnant growth for much of that time. income households and could contribute to a rise in However, things started to change last year following luxury spending. the implementation of a new economic policy known as Abenomics. Having grown rapidly in the first half Finally, the longer term benefit of Abenomics will of 2013, Japan’s economy slowed in the second half. require radical deregulation of the economy. The details Still, economic performance in 2013 was the best in of what the government intends remain unknown, years. This was largely a result of the monetary policy and the government has delayed implementation component of Abenomics (the other components of some aspects of deregulation. Absent significant are fiscal stimulus and deregulation). The monetary reform, Abenomics will not have a lasting impact on policy has involved sizable asset purchases by the productivity growth and economic growth. central bank designed to suppress bond yields, create inflation, suppress the value of the yen, and boost Eurozone consumer and business willingness to spend. So far it According to Euromonitor, the Eurozone includes has been a modest success. Inflation is finally returning four of the top 10 luxury markets in the world. to Japan, albeit modestly. Bond yields remain low, These are Italy, France, Germany, and Spain. They thereby creating an environment of low capital costs are, respectively, the 3rd, 4th, 7th, and 9th largest which encourage investment. The yen has significantly luxury markets in the world. The UK, which is not depreciated, thereby helping export competitiveness part of the Eurozone, is the 6th largest luxury market. and helping to revive Japan’s manufacturing sector.