For many years, the luxury goods market appeared to be impermeable to recession.
However, that situation could be about to change, warns Coface, a global leader in risk management.
In a new report, Coface says the luxury market must adapt to a profoundly changing economy if it does not want to lose its exceptional status.
Luxury is traditionally characterised by high quality products with a high price for those who want to show their social status.
Cultivating rarity and exceptionality, it is aimed at populations that are able to withstand slowdowns in global economic activity.
But this landscape is changing with a new population that wants to show its success, says Coface.
Last year, the luxury market grew by 5 percent (A$1.95 trillion), driven by rising consumption in China with a growing middle class.
Chinese consumers now account for 33% of global purchases of luxury products.
They are expected to account for 46% of the global luxury market, representing both an opportunity and a threat to the luxury industry.
With more economic uncertainty looming the middle class is more sensitive to possible losses in purchasing power, Coface notes.
Counterfeiting and e-commerce, between risks and opportunities
Luxury also faces other threats such as counterfeiting.
With the market estimated to reach US$1.8 trillion next year, counterfeiting often damages the image and can financially damage targetted brands.
Driven by the same desire for social recognition, the purchase of counterfeit luxury goods impacts both the desirability of the brand and the confidence of buyers.
For example, a recent UK study showed 66% of consumers who bought a counterfeit product without their knowledge no longer had confidence in that brand.
And 44% stopped buying brand goods for fear of counterfeiting.
On the other hand, some counterfeit goods boost the reputation of the original brand, creating a desire to own an original item of that brand, says Coface.
How e-commerce is impacting the luxury industry
E-commerce also has a very particular impact in the luxury industry.
While it represented only 10% of sales last year, it is expected to increase to 25 percent in 2025.
However, many brands resist e-commerce for fear of counterfeiting competition and above all to preserve the unique bond forged with the customer during their purchase experience in retail stores.
The health of the luxury market is therefore well linked to various global factors and is not totally disconnected from the rest of the economy.
Coface says prospects are good despite the expected global economic slowdown.
It expects global economic activity of 2.9% this year, compared with 3.2% in 2018.
Chinese economic activity, e-commerce and counterfeit products constitute risks that can penalize luxury market but also create opportunities, says Coface.
It is up to luxury brands to remain vigilant as the luxury environment evolves.