Luxury armageddon? Or is the middle-market finding its muscle?

Early last week, the industry was still digesting Prada’s annual results… and seemed have a bad case of indigestion as a result. Why oh why, analysts asked, was Prada struggling when its luxury peers were doing so well? That most influential of influencer brands was being described as luxury’s “basket case”, with suggestions it needed to be rebuilt from the ground up.

But then came LVMH’s results a few days later. We heard about star brand Louis Vuitton “maintaining its creative momentum” (but no mention of any sales rise), and Donna Karan and Marc Jacobs damned with faint praise as they “continue to work on the evolution of their product lines”. Fendi, Céline and Kenzo were buoyant but Dior sales slipped in Q1.

Next came Burberry. That leading light of the London Fashion Week schedule had cheered investors a few months ago with a recovery in crucial Chinese ops. But this time round the news wasn’t so good. Hong Kong sales had taken another step backwards and the US was weak too. Its comparable sales fell 2% in the first half to March 31. And it expects more of the same in the second half too.

Why, why, why?

So what’s going on here? Well, let’s be clear, this isn’t luxury armageddon. Some regions are doing better than others (Japan has rediscovered its luxury vibe) and these brands are still shifting A LOT of product. Burberry’s H1 sales were £1.41bn, LVMH’s fashion and leathergoods Q1 sales were €2.97bn and Prada’s annual sales were €3.55bn.

But for a sector used to runaway growth, the kind of turnover figures many would envy are scant consolation if they’re not rising.

Prada: promising better value

One clue to what’s going on can be seen from taking a magnifying glass to the results announcements themselves and here it looks like ultra-luxe pricing, a case of brands resting on their laurels, and a slowdown in tourist spending were to blame for the weaker performances.

The solution in some cases is to lower entry prices and to innovate more. Prada, for instance, promised us greater value for money, which in Prada terms, means more bags at €1,200 to €1,400 rather than €2,000, and more “newness” to create interest. Burberry meanwhile appears to be doing well with affordably priced and/or innovative pieces like its scarves, ponchos, runway rucksacks and Banner bags.

Burberry's hit rucksack and scarves

Consumer in the driving seat

But there’s an even bigger takeaway than anything around pricing or design strategy. What is it? It may seem blindingly obvious, but it’s the fact that the consumer really is in charge now. That’s not always been the case, however much we try to tell ourselves it has been. In boom times when the key item waiting list reigned supreme, some luxury brand simply snapped their fingers for shoppers to come running. Not any more, and the formerly “squeezed middle” is benefitting from this power shift.

Yes, the extremely affluent might still be indulging their Prada, Gucci and Vuitton addictions. But the rest of us - the aspirational shoppers who have to save up, or spend a long time paying off their credit card bills - aren’t quite so ready to spend £2,000 on a bag. Mulberry had already found that out to its cost in recent years and only reported a return to growth late last year when it shifted its somewhere-north-of-£1,000 pricing policy much further southwards!

The winners (apart from consumers) are brands like Kate Spade where you can buy an on-trend-but-slightly-classic or quirky/fun bag for just a few hundred pounds; Manseur Gavriel, where you can find the extreme understatement of an ultra-luxe label like The Row but at a price tag that’s several rows down; and long-established "affordable" high-end bag brands Furla and Longchamp.

In apparel, brands like Self Portrait, are also great examples of this move to the middle, having made a major impact and even inspired its own imitators with dress that can be had for an entry price of £240 (and its new sunglasses are just £85). Other examples of the middle-market influencers trend include Needle & Thread, By Malene Birger, Karl Lagerfeld or Valentino Red that manages to offer prices well below its higher-end sister label while still feeling like a must-have/influencer.

Self Portrait: already has its imitators

And brands like these, whether they’re lower-middle, true-middle or upper-middle, are major investment targets. The recent buyouts or stake sales at Reiss, Whistles, Karl Lagerfeld and the company behind Sandro and Maje, show just how much life acquisitive global retailers, apparel giants and private equity firms think this middle-market has in it.

Most importantly, these brands don’t feel like something consumers would only buy because they can’t afford "the real thing". Instead, they’re making their own headlines style-wise and driving their own trend stories. The newly-empowered consumer who’s saying “nah” to the £2k bag or dress, is increasingly lapping up what’s they have to offer.

The fightback

Luxury brands are fighting back, of course, not just with slightly lower entry prices and lots of newness, but with much more affordable pieces. Fifteen years ago, that might have meant a not-too-impressive canvas bag. But today, there’s a lot more choice.

Designer shoes come in cheaper than the bags and are getting a lot of attention from brands (Prada’s shoe sales rose in double-digits last year as a result). And those other accessories that often felt a little detached from the overall brand image (like scarves, eyewear and make-up) are all being brought in line and all the luxury brands mentioned here are seeing rising sales in the categories.

Burberry’s initiative around scarves, adding personalisation and on-trend design details, has really benefitted that category and other ‘affordable’ ideas (like the £45-each runway collection nail colours launched immediately after the AW16 show), make it clear that such brands are now showing as much respect for the customer with only £45 or £345 to spend as the trust fund shopper who sees £2,000 as a drop in the ocean.

Global travellers

Of course, no look at the luxury market would be complete without examining who’s happening on the tourist front, It’s the other key trend affecting luxury and the luxury firms reporting in the past couple of weeks all made frequent references to tourists, or lack of them (which at least made a change from the “wrong kind of weather” line coming from the retail sector).

It seems the all-important Asian traveller hasn’t been visiting Hong Kong quite so much and has been giving the US a wide berth too due to the strength of the dollar. She/he has also been put off Europe, despite the our elf the weak euro, due to terrorism fears.

And that looks like being the dominant scenario for some time yet as the figures for March prove. Retail tax-refund services company Global Blue said only a few days ago that March was a bad news month all round for the luxury sector. Chinese travellers’ spending on luxury goods abroad fell during the month for the first time since Global Blue began tracking their activity back in 2010. Even though the figures don’t include spending in the US, Dubai or Hong Kong (as they don’t operate a tax refund system that allows travellers to get their VAT back), that’s still seismic news.

Spending by Chinese tourists fell 24% in March with Europe down by a scary 35%, on the back of further terrorist attacks, tough year-earlier comparisons and new visa rules.

This matters a lot because Chinese consumers account for nearly a third of luxury goods spending globally and for some high-end brands, tourists account for more than half the spend in some flagship stores.

Overall tourist spending fell 14% in March, a worrying reversal from the 4% rise in February. Global Blue said a fall almost as big as the Chinese one was a plunge in Russian tourist spending It dropped 22% in March, although in this case it was the weak economy at home and the value of the rouble that was to blame.

Food for thought

Of course, the luxury sector has been here before and has come back even more strongly. But given the unique set of circumstances around at the moment, I’m sure we’ll all be interested to see just how it  manages to bounce back from this one. One of Prada’s solutions is a greater focus on digital, but given that Burberry’s already there and has been struggling itself, is that really the key?

Only time will tell on this one. But do remember, on the tourist front, this isn’t just a luxury issue. Some of the spending that is classified as "luxury" will take in the middle-market too. And travellers don’t only flock to Burberry and Prada when they’re abroad. When they’re in London or Edinburgh, or York, Canterbury or Bath, they also go to Debenhams, Karen Millen, Topshop, M&S, Primark, Gap and more, so any drop in tourism is bad news for everyone.