The global personal luxury goods market – including leather accessories, fashion, hard luxury and fragrance and cosmetics – is expected to reach €253 billion ($272.4 million) in 2015, according to a report.

This represents 13 percent growth at current exchange rates, while real growth is significantly slowing to 1-2 percent, says the Bain & Company report.

The Middle East personal luxury goods market plateaued in 2015, impacted by a reduction of spend by tourists, notably in the UAE, while domestic market remained strong.

The overall global luxury industry will surpass €1 trillion in retail sales value in 2015, says the report. The luxury industry as tracked by the company comprises 10 segments, led by luxury cars, luxury hospitality and personal luxury goods accounting for 80 percent of the total market.

Global currency fluctuations and continued jet-setting of “borderless consumers,” aided the personal luxury goods market growth, says the 4th edition of Bain’s “Luxury Goods Worldwide Market Monitor,” released recently in Milan in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers industry foundation.

While global tourists flocked to Europe and Japan to capitalise on a weak euro and yen, the Americas region, stagnant in real terms, was strongly inflated by the super dollar, thus capturing more than a third (34 percent) of the global market in 2015.

Meanwhile, Asia registered the worst historical performance (at constant exchange rates), driven by the lackluster trend of mainland China and the sharp drop in sales in Hong Kong and Macau.

“For the last several years, we’ve referenced ‘luxury’s new normal’ with a deceleration of the personal luxury goods market. Now, we are starting to feel the impact of that slow-down,” said Claudia D’Arpizio, a Bain partner in Milan and lead author of the study. “The challenge for luxury brands in this environment is how to successfully navigate through hard-to-predict volatility.”

THE GREAT MALL OF CHINA

According to Bain’s research, Chinese consumers continue to make up the largest portion of luxury purchases (31 percent) globally, followed closely by Americans (24 percent) and Europeans (18 percent).

Chinese consumers are flocking to mature markets in droves, especially Europe, where an analysis of European tax-free shopping data, conducted in partnership with Global Blue, shows Chinese tax-free purchases increased by 64 percent, particularly among the accessible and aspirational luxury segments, thanks to a weak Euro.

Americans also increased their tax-free spending in Europe by 67 percent, aimed largely at the high end of the luxury spectrum. Meanwhile, Russians cut their European spending by 37 percent, and spending among the Japanese in Europe also withered by 16 percent, the report says.

“Undoubtedly, Chinese consumers play a primary role in the growth of luxury spending worldwide,” said Federica Levato, principal at Bain and co-author of the study. “For years, we have known that they spend far more abroad than in Mainland China, but what’s changing is that they’re spending little money in historically popular destinations, such as Hong Kong and Macau, and are instead gravitating to new locales, such as Europe, South Korea or Japan, to benefit from currency fluctuations that drive favourable price gaps.”

Category wise, jewellery has continued to outperform the other personal luxury goods in the Middle East, it says.

“Going forward, we expect the Middle East market to show new signs of life driven by mall openings, but the region’s growth will occur at a much slower level versus the last five years. A sustainable high single digit growth rate will become a new normal for the market with important implications of the required capabilities for success,” says Cyrille Fabre, partner and head of Bain's retail and consumer products practices in the Middle East.

DISTRIBUTION TRENDS

Wholesale is still the dominant selling channel within the personal luxury goods market, capturing 66 percent of market share. However, retail continues to gain share, despite a slowdown in network expansion.

Simultaneously, e-commerce grew to 7 percent market share in 2015, nearly doubling its penetration since 2012.

With the growing middle class in economies such as China seeking good quality and good value, the off-price channel has more than doubled to nearly €26 billion. Mark-downs are also increasing in prevalence across more than 35 percent of the luxury market, with a strong relevance in department and specialty stores, as well as online.

THE PRICE OF LUXURY

According to Bain, the number one challenge facing most luxury brands is establishing the right pricing model. The rise of e-commerce and global tourism growth create greater transparency around international price differentials. Additionally, price-conscious luxury shoppers are struggling to reconcile the price of luxury products with their real value. As a result, luxury brands must assess how to mitigate volatility and how best to deliver at local and global levels, the report says.

This includes managing inventory to accommodate fluctuations in tourism and coordinating pricing and mark-downs across markets and channels. Luxury brands also face a host of tough issues such as rethinking their store footprint and the role of their stores in a world of growing digitalization, as well as figuring out how to delight local customers even as masses of tourists flock to stores in mature markets.

“Relentless price increases over the last decade, aimed at creating a more exclusive position in the market and maximizing touristic flows are now starting to backfire on luxury brands,” says D’Arpizio. “They face the long-term challenge of re-building credibility and trust among consumers, rather than simply making shortsighted, tactical pricing adjustments to benefit from market fluctuations.”