This site uses cookies

To give you the best possible experience, the GAM website uses cookies. You can read full information of our cookie use here. Your privacy is important to us and we encourage you to read our privacy policy here.


Luxury brands and European consumers: Returning to their roots?


Select your country

GAM Investments’ Swetha Ramachandran says luxury brands are growing in relevance to a new generation of luxury shoppers in Europe - thanks to wider accessibility from their digital transformation as well as their embrace of new models such as resale, which appeal to an increasingly sustainability-minded shopper.

16 April 2021

Europe has long been ‘home’ to the luxury industry, germinating a variety of brands that have, over time, acquired an iconic status in their respective categories: from leather goods (Hermès) to jewellery (Cartier) to sports cars (Ferrari). Yet, increasingly, the European consumer has become a minor consumer of the brands that originated in their countries – relative to the Chinese and US consumer who collectively dominate circa 60% of total spend on luxury goods. Emerging data is beginning to highlight that the pandemic may have caused an unexpected shift in consumer priorities in Europe, with local consumers beginning to re-engage with brands they had previously taken for granted. An emerging preference for timelessness and trusted quality, combined with the eventual deployment of substantial ‘excess’ savings when economies eventually re-open, could once again make the European consumer an important force for luxury brands to reckon with. The backdrop of a growing interest in sustainable lifestyles among younger consumers plays well to the sector’s strength: ‘buy less, buy better’.

2020: When life went local

Chart 1: Distribution of the luxury goods consumer

Source: Bain & Company. As at 31 December 2020. For illustrative purposes only.

It is no secret that pre-pandemic, the roaring trade in European luxury stores was driven largely by tourists, mainly from China, who were attracted by meaningful price differences available on the same products in Milan or Paris relative to stores back home during their travels on the continent. Consequently, the collapse of global leisure travel in 2020 was particularly damaging to luxury sales in Europe with this crucial tourist demand absent for most of the year. Still, local consumers in Europe remained highly resilient: according to Bain estimates, purchases by European customers declined by only 10-15% (compared to the industry globally down by between 20-22%). Moncler, an Italian outerwear brand, commented that typically the end of the year would have seen close to half of their business derived from tourists, in 2020 it was no more than 10%. Despite this, the company reported modest declines in Europe (excluding Italy where the bulk of tourist sales were made) – indicating a strong acceleration among the local consumer base. Similarly, Hermès’ European decline of -10% in Q4 shows, in their own words, the ‘loyalty’ of their European consumer base. Conversely, Gucci’s 45% revenue decline in western Europe over 2020 was a function of its over-reliance on the tourist trade and under-engagement with local consumers, which it hopes to reverse going forward. LVMH’s quarterly update reveals that the overall size of its European business is ‘only’ 18% below its 2019 levels, as of the end of March 2021, despite more than half of sales in European stores made to tourists who have all but disappeared – corroborated by management comments on an observed ‘surge in the local client base in Europe’.

Digitising the shop window

In the middle of the most severe global health crisis in a century, what caused this re-engagement of the European consumer with luxury? We believe a few contributing factors can be identified; firstly the stable or growing disposable income among the target consumer base as they shifted their spending from experiences (holidays, restaurants) to goods (jewellery, accessories, homewares). In times of crisis, trusted brands tend to fare significantly better than new, untested brands due to consumers’ preference for certainty in an uncertain world, a point echoed by the CEOs of L’Oréal and Pernod Ricard alike. Yet evidence suggests one of the biggest catalysts for the re-engagement of the European consumer with luxury has been the ongoing digital transformation of shopping habits. Nearly ten years’ worth of e-commerce penetration occurred in ten months of last year alone, with consumers increasingly comfortable paying for high ticket items online. The luxury industry adapted its ‘selling ceremony’ and retail theatre to the online world – making use of live-streaming techniques and converting sales associates in stores to digital salespeople establishing one-on-one relationships with clients – in other words, good old-fashioned clienteling adapted to a digital world. By making luxury brands more accessible to local consumers who may previously not have wanted to (or been able to) browse in a store crowded with tourists, brands have been able to recruit new customers. German-based online retailer Mytheresa was able to grow its active customer base by 22% in 2020 through offering curated digital experiences as well as exclusive capsule collections from Valentino and Moncler, among others.

Consumption: more considered, less casual

Europeans are increasingly discovering luxury brands at a younger age than they previously used to, thanks to the rise of the resale (pre-owned or second-hand) market. Shoppers aspire to own fewer, though better items – this explains the recent trading up seen across the industry to the top tier of brands. A recent BCG survey found that in the past year, nearly 50% of pre-owned shoppers had tried a new brand. Pre-owned consumption, which is most dominant among the younger US and European consumers. It could therefore be seen to be a key driver of future customer acquisition for luxury brands. Nearly two in every three consumers say they would buy more from fashion brands that partner with second-hand players.

No winter lasts forever

Even as Europe is not out of the woods yet, pandemic-wise, an accelerating vaccine roll-out is set to support a wider economic re-opening in the coming months. The euro area and the UK together are estimated to comprise circa 18% of global private consumption. Based on the US, which is in an earlier stage of re-opening, European consumers are similarly set to unleash significant amounts of ‘excess savings’ via pent-up demand into the real economy, providing a catalyst for a catch-up in luxury consumption that was deferred last year.

Chart 2: The recent change in European savings rates

Source: Eurostat, ONS, Morgan Stanley Research. As at 31 December 2020. For illustrative purposes only.

Household balance sheets were already in healthy shape prior to entering the pandemic, thus fiscal support from governments across Europe has boosted household savings rates to extraordinarily high levels. Even allowing for a degree of consumer caution and higher than normal saving into the recovery, we believe a significant consumer recovery can be expected. While consumers are likely to spend more on leisure and hospitality into the recovery, it should be noted that the total amount of available spending is greater than pre-Covid-19, which supports spending on both goods and services.

New roads lead to Rome

Luxury brands are growing in relevance to a new generation of luxury shoppers in Europe - thanks to wider accessibility from their digital transformation as well as their embrace of new models such as resale, which appeal to an increasingly sustainability-minded shopper. Brands are aligning their value proposition more closely to the aspirations of local consumers, in an environment where the return of long-haul tourist travel may yet take some time to recover. The pandemic has fundamentally reset many companies’ former strategies – heavy reliance on tourists, absence of localised product and merchandising – and given them an impetus to go back to their roots, where they may find they can nourish and cultivate a future generation of European luxury consumers.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.
Swetha Ramachandran

Swetha Ramachandran

Investment Manager

Related Articles

The Great Reflation Debate – Market Noise or Structural Change?

Adrian Owens

The Disruptive Strategist – Crypto, NFTs and Blockchain

Mark Hawtin

The Disruptive Strategist – The SPAC revolution: Stock picking like the eighties

Mark Hawtin

Investment Opinions