Thursday, 21 July 2011

In the Lap of Luxury

Fashion, as commented previously on this blog, comes, unfortunately, with a price tag. Luxury goods make up a large part of the fashion market, in value if not volume. Luxury brands play an important role in defining trends globally. The market has consistently been expanding over the last few decades, and has seen unprecedented growth in the last few years, barring the effects of the recession in the western world. The growth seems to be driven primarily by increasing income levels in the developing world. This new driver has significant impact on the industry and bears testimony to the rapid development in the "emerging economies".

Growth in this sector is typically fed by a strong business and trading environment. It is associated with prestige value and status symbol. Technically speaking, luxury products are Veblen goods with a high price-elasticity of demand. Catering to the upper classes in society, the industry is cyclical in nature and shows a close correlation with macro-economic changes. During the economic recession, the industry suffered a massive setback in countries of North America, Western Europe and Japan, which were severely affected, and where lavish lifestyles were curbed. These markets are picking up again, but the sector relied upon the rising demand from countries like China to tide over the setback.

Recent reports expect the global luxury goods market to reach $300 billion by 2015. China has emerged as one of the largest new markets, owing particularly to the large number of young millionaires in the country. It takes a large amount of initial capital and advertising to establish a presence in this sector and brands that have been around for the last 10-15 years are flourishing in China. Younger people with money to spend means increased brand awareness and spending. It isn't just the old French and Italian brands doing steady business here. A range of new Hong Kong based brands are very popular among the Chinese.

Another large and rapidly growing market is India. In the last few years, various brands ranging from Gucci to Dior to Louis Vuitton have established offices and stores in the country. The demand comes mainly from the younger generations of newly wealth-ied business families. A strange feature of the Indian market is that India's share of the global luxury goods market is smaller than the share of Indians in the global market. A certain status is sought in society through frequent trips abroad and this seems the ideal time to make purchases. Studies show that most Indians who purchase luxury products prefer to do so while travelling abroad, even if the same is available in India, as a status symbol. Thanks to this kind of tourism purchasing in various countries, Europe enjoys the largest share in the global market.

Growth in these emerging economies is led by improved living standards, aspirational purchases and increasing awareness. There is a marked demand for haute couture clothing in these countries. One study reports a growth rate of almost 16% in these markets. It is difficult to say whether the growth will be sustainable and how this sector will pick up in the recovering Western economies. In my opinion, the growth from Indians, Chinese and others will continues to rise with incomes, but it will be a long while before the emerging economies can capture a significant share of the global market. How long? That I cannot say. I can however state that these countries are far more experienced in pret and affordable fashions, which I shall describe in my next post. As for this one, your comments and opinions are most welcome.

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