Exane BNP Paribas has recently released its Green Book ‘The Future of Mega-Brands’, focusing on mega-brands’ prospects in four different categories: leather, fashion, jewellery and fragrances and cosmetics. Fashion is by far the most competitive category in luxury goods: barriers to entry are low and there are plenty of players.
High-end fashion brands have stayed true to their original wholesale + license business models, leaving much of the retail scene and, increasingly, consumer relevance and creative leadership to mass fashion retailers. Zara, which spends nothing on advertising but has almost 2,000 stores worldwide, is the top dog. The mid-price segment seems to be the most interesting space in apparel, as there is a quality and price chasm between high-end fashion and mass fashion.
Competition in handbags continues to rise and is breaking off into different price battlefields. Mega-brands like Louis Vuitton and Gucci are on the back foot as they are hit by a triple whammy: 1) new DOS headroom is reducing, as they grow their retail networks bigger and bigger; 2) slower GDP growth in China and in the West is creating fewer nouveaux riches, their natural constituency; 3) voracious Chinese consumers are going up the learning curve and moving on from one brand to another.
In fact, sophisticated consumers are begging to pay more in exchange for exclusivity and distinction. First in developed markets and now in EMs, these shoppers are making the fortune of higher-priced brands like Hermes and Bottega Veneta – as well as a growing list of high-end (re)invented followers riding on their success: Celine, Goyard, Moynat, Mulberry, etc.
A huge price umbrella offered by mega-brands moving upmarket stands to benefit aspirational specialists, such as Coach, Michael Kors, Tory Burch, Marc by Marc Jacobs as well as European brands like Longchamp, Furla, Moschino Cheap & Chic. As mega-brands mature and turn into cash cows, luxury leaders need to manage their brand portfolio as a BCG matrix — and use that cash to turn ‘question marks’ into ‘stars’ (and possibly get rid of a few ‘dogs’).
Much of the focus on watches has been at the high end, where booming demand has supported both incumbents and new entrants. Much of the future structural growth to be in the mid and entry price points, as hordes of new middle class consumers from China and other EMs enter the market. In this area, Swatch Group has a formidable competitive advantage, as it can build barriers to entry both on SG&A (brand advertising) and on COGS (materially lower unit costs as it enjoys scale associated with capital-intensive manufacturing).
Watches are a rare category in this respect, as other categories with relatively simple logistics and manual labour intensity (fashion, handbags, shoes, jewellery) offer only SG&A barriers to entry. The decision by Swatch to progressively reduce movement supplies to competitors is certain to prompt ‘Swiss Made’ watch market consolidation, as competitors will not only find it hard to invest the required capex but will above all find it impossible to match Swatch’s unit costs.
Watches are one of the last luxury categories to offer a ‘retailisation’ opportunity. Progress towards downstream integration will demand more mono-brand DOS (directly operated stores), but — even more so — Luxottica-style multi-brand development, both organic and inorganic.
Jewellery is one of the last luxury categories to shift to brands. Jewellery brands are few and far between. Both factors should greatly benefit Richemont Group, which enjoys a major lead over competitors.
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