The Changing Face of Luxury

By Jonas Hoffmann

The conspicuous consumption of luxury goods in Europe is no longer the exclusive domain of wealthy European, American, and Japanese shoppers. Damaging economic downturns in these aforementioned regions have caused these traditional consumers of luxury goods to tighten their belts. But luckily for Europe, the luxury category continues to thrive, thanks to waves of younger, self-made shoppers from the emerging markets of Asia, Latin America, and the Middle East who have literally and figuratively arrived at Europe's gates with disposable income to spend.

These new consumers have the means to travel to Europe and the strong desire to demonstrate their financial status and good taste through their consumption of luxury goods. In fact, this new consumer class has become the luxury industry's key catalyst, propelling the sector's growth during the past 17 years from $60 billion in 1995 to $165 billion in 2012.

Wealthy, discerning, and hungry for prestige brands, these are not simply luxury shoppers—they're "luxury destination shoppers." A cursory look at the lines snaking around the high-end boutiques on the Avenue Montaigne in Paris, Madison Avenue in New York City, or Hong Kong's Canton Road reveals a pilgrimage of tourist-patrons from China, India, Brazil, Russia, and other emerging markets.

Luxury Goods and Prestige Brands Tempt High-End Luxury Consumers in ChinaAccording to a study by Bain & Company, in conjunction with the Italian luxury goods trade organization Altagamma, 70 percent of all luxury goods bought by the Chinese are purchased outside mainland China, with the majority of them acquired in Hong Kong. However, Europe remains their most popular destination, accounting for 35 percent of all global luxury sales, followed by the United States at 31 percent. Like the Chinese, Brazil’s growing affluent class now makes about 80 percent of its luxury buys abroad, designating Miami, New York, and Paris as their go-to shopping hubs of choice.

While luxury brands have made significant investments to plant their flagship stores in cities from Beijing to Mumbai, value-added taxes, import taxes, and consumption taxes paid by locals in China, for instance, can add up to a hefty premium (from 50 percent for jewelry and handbags up to well over 300 percent for luxury timepieces and automobiles) on top of the sticker price for high-end luxury products purchased at home. And it is precisely this scenario that has pushed legions of buyers with pent-up demand to shop abroad to avoid such price spikes.

According to recent data from Global Blue, a major player in the tax-free shopping space, the Chinese not only snatched the top spot as the market leader in luxury purchases last year, but they also now lead the pack as the world's largest group of tax-free consumers, followed by the Russians and the Japanese. Indeed, at Incheon Airport in Seoul, Korea, a popular transit center for Chinese and Japanese travelers, Louis Vuitton opened its first and only airport boutique. (For more on Chinese luxury consumption, see China's Newest Luxury Consumers.)

Young, Self-Made, and on the Move

Despite their desire to spend a tremendous amount of their disposable income on luxury items such as Chanel handbags, Vacheron Constantin watches, and Ferragamo shoes, the latest members of the wealthy jet set differ in several important respects from their established counterparts. For starters, they are much younger—usually in their 40s and 50s, a good 10-20 years younger than the average European luxury goods consumer. And unlike the Europeans, who prefer to keep a low profile (a factor that also extends to their shopping habits), buyers from emerging markets treat their purchases as trophies to show off their new wealth.

Europe is a Popular Travel Destination for Luxury Goods ConsumersIn contrast to affluent Middle Eastern and Russian consumers, who only represent a small percentage of their countries' populations, the pool of luxury shoppers coming out of other emerging markets offers a potentially more expansive base of shoppers. (For example, 3 million households out of Brazil's 57 million can afford luxury goods, and that number is likely to grow given that the world's eighth-largest economy boasts a median age under 30.) Unlike the old-guard luxury consumers who simply inherited wealth and power, luxury shoppers from Brazil and other emerging markets have created new wealth while carving out their own business opportunities as key participants in the world's most robust economies.

The Digital Door is Wide Open

Given their age, location, and the era in which they've come of age, it is perhaps not surprising that this generation of luxury clientele happens to be incredibly digitally savvy. According to a recent study by U.S. market researcher Strategy Analytics, the average global penetration rate for smartphone usage is roughly 15 percent. However, in countries like South Korea, where smartphone saturation is highest (67 percent of the 50 million residents have smartphones), or in Brazil, where social media has been adopted by luxury consumers on an order of magnitude that dwarfs rates in First World countries, it's no surprise that brands would start leveraging the obvious opportunity.

Clearly the Chinese rank as the world's largest Internet population and continue to adopt and adapt to new technology at a staggering rate, with over 718 million users expected online by the end of 2013. China's most popular micro-blogging site, Sina Weibo—long considered the biggest name in the Chinese Twitterverse with a reported 500 million registered users—has some new competition, as the latest iteration in micro-blogging, WeChat (Weixin), is expected to overtake them this year.

After initial hesitation, even luxury companies from Italy and France—considered to be laggards in terms of web adoption—have come to embrace the enormous opportunity to engage hundreds of millions of potential new customers via smart phones and tablets. British heritage fashion house Burberry presciently hired renowned fashion and image designer Christopher Bailey five years ago as its chief creative officer in an effort to play up its British roots and iconic products through the aggressive use of digital tools and social media. Burberry's recently re-opened London flagship "brings to life" an extension of the company's digital experience, allowing customers to connect to the boutique through numerous interactive devices that help to create an individual, customized experience.

Today's luxury market reflects the current geo-economic shift from the U.S.-Europe-Japan triad to the emerging economies of Brazil, Russia, India, and China, a trend that is expected to continue for the foreseeable future. The combined effects of economic growth, globalization, and internet/social media diffusion have created nothing less than a boom in the luxury industry. However, as the dominant luxury consumers have changed, their consumption habits are also expected to evolve over time. The arrival of new wealth centers that are redefining the profile of the luxury consumer offers tremendous opportunities. It also brings new challenges, chiefly in catering to a dynamic and fluid consumer class that carries a host of its own value systems.

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Dr. Jonas Hoffmann is professor of Luxury Marketing at SKEMA Business School in France. He has extensive experience in consulting and executive training and is a regular panellist at international luxury events. He is co-author/co-editor of Global Luxury Trends, Luxury Strategy in Action, and Sustainable Innovation Strategy (Palgrave-Macmillan).

All funds are subject to market risk, including possible loss of principal. Funds that invest overseas are subject to additional risks, including currency risk, geographic risk, and political risk. These risks are greater for funds that invest in a specific region or country than for a fund with a broader focus.

The following securities were not held by the T. Rowe Price European Stock Fund, the T. Rowe Price Japan Fund, or the T. Rowe Price Blue Chip Growth Fund, as of June 30, 2013: Burberry, Chanel, Ferragamo, Louis Vuitton, Vacheron Constantin. The funds' portfolio holdings are historical and subject to change. This material should not be deemed a recommendation to buy or sell any of the securities mentioned.

T. Rowe Price and Dr. Jonas Hoffmann are not affiliated.

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