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Tomorrow’s Consumer: The Future of Retail, Luxury, and Consumption
July 21, 2022
7 min read
The pandemic has transformed and accelerated retail trends across the globe, and the luxury sector is no exception.
Unique domestic markets, China’s growing domestic sales, the e-commerce boom, the rise of the Gen Z consumer, and the ESG imperative (yes, even in luxury) are just some of the factors changing the way luxury brands market their products and the way consumers buy them.
AlphaSense recently partnered with HSBC to present Tomorrow’s Consumer: The Future of Retail, Luxury, and Consumption. Erwan Rambourg, HSBC Global Head of Consumer and Retail Research, shares his insights about the luxury retail market in 2022 and what to expect going forward.
- Chinese consumers account for 25% of the world’s retail, and their growing middle class indicates more growth ahead for luxury demand in mainland China.
- While e-commerce is booming in many retail sectors, luxury has proven to be one area where consumers still prefer in-person shopping.
- M&A in the luxury sector has been largely driven by family-owned businesses.
- Luxury brands, historically ESG laggards, are facing an increasing imperative to show how their companies are meeting ESG standards.
- The U.S. has proven a solid emerging market in luxury retail, with Gen Z and Gen Y likely to facilitate its continued growth.
The 4 Cs of Consumer and Retail: China, Channels, Conscience, Consolidation
Rambourg set the stage with HSBC’s framework for looking at consumer and retail markets of the future: The Four C’s — Chinese, channels, consolidation, and conscience.
Let’s take a look at each of the C’s in more detail.
Mainland China earned their own category in the framework through their domination of the market. They currently account for 25% of overall global retail sales. HSBC research shows that this is driven by an expanding Chinese middle class. With US and continental Europe’s middle classes showing downward or sideways trajectories from 2010 to 2030 (forecasted), China stands as the only major market in the world with a middle class that’s getting bigger.
As such, they’re dominating consumer discretionary sub sectors — luxury included. HSBC reports that 97% of surveyed Chinese consumers expect their buying power to increase over the next year. More than a third expect a wage increase to drive them to buy more from luxury brands.
This trend has potential not only to feed into global markets but to boost domestic retail as well. Thanks to worldwide shutdowns facilitating more local commerce, domestic players in China have begun to give global brands “a run for their money.”
Two major results: a jump in domestic travel sales (Rambourg attributes much of that to the growth of Hainan), and pressure for price harmonization after decades of global brands charging more in mainland China than other places around the world. Further, the shift to acceptance of e-commerce during the pandemic has helped domestic retailers in China to thrive.
HSBC predicts China will continue to represent the bulk of worldwide sales and retail growth in years ahead.
As Rambourg shared: “If you’re not penetrating mainland China appropriately, you’re going to lose out dramatically in terms of both sales and profits.”
The overarching theme of retail channels over the past two years has been the shift away from brick-and-mortar sales toward e-commerce. While retail has been trending in this direction for some time, COVID-19 has acted as a dramatic accelerator. Today, e-commerce as a percentage of consumer goods sales is booming.
In addition, products driven by repeat purchases (Rambourg used a coffee pod example) are being increasingly purchased through automated online subscriptions, giving e-commerce a higher baseline.
Luxury, however, has proven to be an exception to the e-commerce takeover.
According to Rambourg, jewelry, watches, high-end handbags and the like are still warranting in-person retail. This isn’t too surprising, considering the level of investment and common emotional attachment to these kinds of larger purchases — ones most consumers only make a few times in their lifetime.
An important thing to note, however, is that in-person retail today is not the same as it was pre-pandemic. The elevated levels of personalization that consumers have come to expect online must now be replicated in brick-and-mortar retail spaces. Brands are meeting this new expectation with location-specific features in different stores and other efforts to engage individual customer segments.
The takeaway: no matter what channel consumers are using to shop, they expect an experience tailored to their preferences and needs.
M&A has boomed during the pandemic with one major trend emerging: scale as an advantage. With consumers looking increasingly to “buy less but buy better,” larger brands have been beating out newer and/or smaller competitors.
HSBC research outlines the four factors defining this advantage:
- Voice: As part of a large brand, you have the means to make yourself stand out in crowded markets.
- Authority: You have the resources to influence market direction and control how you’re represented to consumers.
- Synergies: You have diversified expertise that allows you to move and adapt in the market more quickly.
- Talent: Large brands can attract and retain better talent that drives the virtuous cycle of scale advantage.
Luxury M&A specifically has been driven by family-controlled businesses. In unpredictable markets, families have begun to think long-term about diversifying their assets. They’re pursuing targets that enable them to be less dependent on one or two brands in their group to reduce overall financial risk.
For M&A investors in the luxury space, then, the question is less about traditional opportunity indicators and more about what would motivate these families to buy or sell. Of note: HSBC sees the window for pandemic-driven M&A as still open, with continued high levels of M&A activity continuing in the near future.
Conscience refers mostly to ESG, which has now been a global corporate priority for the better part of a decade. HSBC’s recent consumer surveys in China, the U.S., U.K., Brazil and other markets (unsurprisingly) confirmed this. ESG is top of mind for regulators, companies, and consumers alike. In the U.S. alone, 84% of consumers aged <55 report they are more likely to buy sustainably-made products.
As Rambourg aptly put it in his presentation: “ESG is now an obligation for everyone.”
Luxury brands, which have not traditionally operated with ESG in mind, are working to catch up. Luxury leaders like outdoor apparel brand Patagonia have demonstrated how high-end brands can emphasize ESG by extending the life cycle of their products.
It may not be quite as easy for others in the luxury space, but it will be an imperative going forward.
What to Expect for Luxury Brands in 2022
Despite news headlines that suggest otherwise, worldwide luxury sales remain solid. First quarter luxury sales in 2022 were strong and are expected to be the same for the quarter just ended. HSBC analysts expect 2022 to surpass average growth shown through 2010-2019.
Of note, the U.S. has emerged as a true emerging market in the luxury space. The past three years in particular have shown strong luxury growth. According to Rambourg, bearish individuals may attribute this to help from stimulus checks and other pandemic-related factors that have helped Americans save.
HSBC, however, is more optimistic. It sees this growth as a result of cultural changes in the U.S. Gen Y and Gen Z consumers — who have better brand awareness than generations before them — will account for more than 70% of the luxury market by 2025. The guilt factor behind luxury purchases has also seemingly faded, according to HSBC findings.
Global luxury brands are taking note, looking to capitalize on the opportunity presented by new and increasing interest from American consumers.
Putting it All Together
Despite a worldwide pandemic and related factors that one may assume would have a negative impact on the luxury sector, sales in this space have shown resilience. Rather than curbing spending in unpredictable economies, global consumers are taking a more intentional approach to their purchases and expect their own buying power to continue to grow.
In the months and years ahead, we’ll see luxury brands focus on a growing Chinese market as well as emerging interest in luxury brands from younger U.S. consumers.
Finally, consumers will hold luxury brands accountable to meet ESG standards as well as the levels of personalization provided by the e-commerce experience. Luxury brands, largely built on history and traditional retail trends, must now evolve to stay competitive in the future.
To uncover new opportunities in luxury and other markets, it’s essential to stay ahead of emerging trends and the most important happenings across the investment world. In our four-part HSBC series, we cover market-moving trends like urbanization, demographics, and inflation, so you can keep your finger on the pulse.
Access the full webinar here: Tomorrow’s Consumer: The Future of Retail, Luxury, and Consumption
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