The Clearsale Blog

Jun 16, 2020 Industry Profiles

Luxury Industry Statistics and Insights in 2020

Luxury Industry Statistics and Insights in 2020

There’s no sugarcoating the fact that the luxury industry has been hit hard by the spread of COVID-19. When we emerge from this global health crisis, the world and the luxury industry may not be as it was.

But every setback brings an opportunity. For luxury brands accustomed to connecting with consumers in high-end retail locations, mandatory business closures and stay-at-home orders can be taken as a chance to strengthen their e-commerce operations.

Even before the pandemic, consumers – especially younger generations – were showing an increased willingness to purchase big-ticket items online. A handful of luxury brands have found success offering innovative online shopping experiences, and that trend is sure to expand regardless of the post-pandemic timeline.

In this guide, we’ll survey the state of the global luxury market, focusing on how COVID-19 has reshaped it. We will discuss some new opportunities that have arrived as the pandemic has accelerated a marketplace shift toward e-commerce. Then, we’ll offer some practical pointers on how luxury brands can reach more customers by catering to the specific needs of upscale buyers online.

Finally, we’ll talk about the risk of fraud in e-commerce and present some proven strategies for reducing fraud, false declines, and chargebacks, in light of changing consumer habits.

Luxury Goods Industry Snapshot

Like many industries, the state of the luxury goods industry in 2020 is a tale of two realities: one before the spread of COVID-19 and one after. We’ll share some data from prior to the pandemic to provide a sense of what has been lost and what may be gained back.

Last released in 2019, Deloitte’s annual report, “Global Powers of Luxury Goods,” paints a picture of a thriving industry. The top 100 players in the business reported growth in their luxury sales, with half of those recording year-on-year growth in the double digits.

Deloitte concluded that “the luxury goods market looks positive,” despite a slowdown in economic growth in major markets such as the U.S., Europe, and China, and uncertainty due to factors such as Brexit and protectionist economic policies in the U.S.

According to Deloitte:

  • Aggregate luxury goods sales reached $247 billion worldwide at the time of the report.
  • Composite year-over-year sales growth was 10.8%.
  • Composite net profit margin was 9.8%.

As recently as January 2020, just before COVID-19 went worldwide, the Luxury Institute’s “State of the Luxury Industry 2020” report noted that luxury brands around the globe were “benefiting from positive macroeconomic tailwinds conducive to growth.” Record-high stock prices and rising home values were increasing the wealth of affluent consumers, and a strong jobs market was bringing more luxury buyers into the fold.

Luxury Institute surveyed more than 3,000 affluent consumers (within the top 10% of household incomes in their country). Slightly more than half said they had spent more on luxury purchases in 2019 than the year before. The luxury goods categories that showed the highest percentage of increased consumer spending were beauty and skincare, fashion apparel, automotive, jewelry and watches, and shoes. Meanwhile, luxury consumers appeared to be spending somewhat less on art, wine and spirits, and handbags.

The Luxury Consumer (Pre-COVID): Generational Differences

As the 2010s drew to a close, the profile of the typical luxury consumer was in flux.

A growing number of high-net-worth individuals worldwide come from the millennial generation (generally defined as people born between 1981 and 1996).  A 2019 study by the Boston Consulting Group (BCG) and the Italian luxury brand committee Altagamma reported that millennials represent about 32% of the luxury market now, but will grow to command 50% of the market by 2025.

Affluent millennials (and the older members of Generation Z, who are also making their presence felt in the luxury market) have different buying habits, values, and interests than their Baby Boomer counterparts. In an interview with a Forbes market researcher, BCG’s managing director said millennial and Gen Z luxury buyers:

  • Appreciate innovative collaborations between admired celebrities and luxury brands, such as the partnership between Chanel and Pharrell or Kanye West’s work with Adidas.
  • Consider the resale value of their luxury purchases more often than Baby Boomers (50% compared to 24%). Millennials are also more likely to buy second-hand luxury items, not necessarily because of cost, but because they are considered rare or vintage.
  • Seek out brands that prioritize sustainability. When it comes to sustainability, millennials are more concerned about the environment (42%) and animal welfare (26%), while Baby Boomers are primarily concerned with ethical manufacturing (32%).

Other industry observers have also pointed out that wealthy millennials are less interested in showing off their wealth with pricey items and more inclined to spend on high-end experiences like extravagant travel, trendy music festivals, and “glamping.” (Of course, it’s worth noting that millennials do enjoy documenting their experiences for others to follow on social media.)

Rise of the HENRY

In the search for new customers, luxury brands have their eyes out not only for those who are affluent but those who are on track to become so. These are the so-called HENRYs (high-earners-not-yet-rich). Luxury brands believe that if they can onboard HENRYs now, they can secure long-lasting and profitable client relationships with the wealthiest consumers of the future.

Deloitte defines HENRYs as earning between $100,000 and $250,000 per year.

“As HENRYs are a critically important customer segment, loyalty could be built by endorsing their core values, such as authenticity, relatability, commitment to do the right thing, and following sustainable practices,” writes Deloitte. “Consequently, brands have started to deliberately focus on values shared by this aspirational demographic.”

HENRYs – millennial HENRYs, in particular – are digitally savvy and enjoy shopping online, Deloitte reports. They are heavily influenced by technology and use social media when making buying decisions.

HENRYs may represent the future of luxury, but their wealthy status is not assured. While HENRYs like to spend on high-end items and experiences, many HENRYs do not “feel” rich. This group has little savings, high debt, and a need to keep working to keep spending. The coronavirus-driven economic downturn may see many HENRYs tighten up their spending in response to concerns about their employment.

How COVID-19 Is Reshaping the Market for Luxury Goods

Writing in late March, Bain & Company analysts predicted global luxury sales will decline between 25% and 30% in 2020 as a result of COVID-19.

The Bain analysts wrote that the luxury industry has felt the impact of the pandemic from its earliest days as the virus spread through China, a country that accounted for 90% of global luxury market growth in 2019. Italy, home of many of the top luxury brands on the planet, was also an early hotspot.

The coronavirus has kept luxury buyers at home and out of showrooms, boutiques, and high-end shopping centers. Almost every luxury brand in China had to close stores temporarily, Bain reports, with brands in Europe and North America following suit.

“Unsurprisingly, consumer confidence had begun to weaken in those territories even before governments put restrictions in place to stop the virus’s advance across the continent,” the Bain analysts wrote.

It’s not just the inability to travel locally that is hurting the luxury market. A luxury industry executive told Forbes that around 40% of all luxury goods spending is related to travel, including purchases made in airports and duty-free stores, on cruise ships, and at vacation destinations. With global travel near a standstill, it’s unclear when these sales can resume.

The Psychological Toll of COVID-19

The coronavirus pandemic has shaken many people’s sense of physical and financial comfort. As the world emerges from the pandemic, it may be that even the wealthiest among us will never be the same, psychologically. Normal life will resume, but it may be a new normal.

According to a McKinsey report, some luxury brand CEOs are anticipating a post-crisis “trend toward sustainability and the desire for more-responsible consumption.” The heavy emotional toll of the pandemic may shift consumers toward “silent luxury” where craft and heritage matter more than conspicuous displays of wealth. This dovetails nicely with the eco-minded backlash against “fast fashion” as consumers seek out items that will last more than a season.

Opportunities for Luxury Brands During and After the Pandemic

The news is not all doom and gloom for fashion brands, even in the midst of a once-in-a-lifetime global crisis. For one thing, people reach for comfort in difficult times. For affluent consumers, shopping for high-end products may provide a distraction from fear or boredom, as well as a sense of normalcy. Indeed, Chinese consumers reportedly flocked to luxury boutiques as soon as the country’s lockdown was lifted.

There’s also evidence that some consumers are using the pandemic as an opportunity to splurge. The impulse to practice “retail therapy” may create new luxury consumers during the pandemic.

Finally, with the stores closed, many consumers are purchasing luxury products online for the first time during the pandemic. Prior to this year, the majority of luxury consumers preferred to buy in brick-and-mortar stores. That preference may change permanently as affluent consumers get a taste of e-commerce.

E-Commerce Trends in the Luxury Industry

Luxury brands have been relatively slow to adopt e-commerce strategies. This may be because, until recently, the typical luxury consumer was reluctant to buy online.

According to the Luxury Institute’s 2020 report, 62% of affluent consumers said they preferred making purchases in stores. The percentage of those favoring the in-store experience is even higher in key markets such as South Korea (82%), France (71%), and China (70%).

But luxury consumer preferences are quickly changing.

In Bain & Company’s 2019 report on the worldwide luxury goods market, analysts noted that the retail channel grew 4% in 2018, but online luxury shopping grew 22%. At the time of the report, online sales represented 10% of all luxury sales. The top luxury category sold online was accessories, Bain reported, and the beauty, jewelry, and watch categories were all on the rise.

By 2025, the Bain analysts predicted, the online channel will claim a quarter of the luxury market’s value, and even brick-and-mortar sales will involve a digital component.

“Approximately half of all luxury purchases will be digitally enabled thanks to new technologies along the value chain, and nearly all luxury purchases will be influenced by online interactions.” – The Future of Luxury: A Look into Tomorrow to Understand Today, Bain & Company

Consumers, in general, are becoming more comfortable with buying big-ticket items online. According to data released in summer 2019, almost half of consumers said they were more willing to purchase a high-dollar-value item online than the year before.

Luxury brands are moving to make up for their slow start on the e-commerce front. Kering (owners of Gucci, Yves Saint Laurent, and Balenciaga, among other brands), has grown its digital operation considerably. The conglomerate’s digital team comprised only four people in 2017; now, it has over 80. In 2019, Kering ended its joint ventures with third-party online sellers to better control and monitor the online experience—a savvy move in an industry where the customer experience is expected to be at least as luxurious as the products themselves.

Prada is taking similar steps to transform itself for the era of online shopping.

How the Coronavirus Pandemic May Accelerate the Adoption of E-Commerce in the Luxury Market

E-commerce has been one of the few bright spots in the global economy during the COVID-19 pandemic. Out of necessity (and perhaps, boredom), more people are turning to the internet to purchase items they customarily bought in stores. Statista reports that online retail platforms saw a 6% global traffic increase between January and March 2020.

A certain amount of this consumer behavior may remain locked in after the pandemic passes. And even after the stay-at-home orders are lifted, many people may be reluctant to venture out of their homes unnecessarily until they’re sure the coast is truly clear. In addition, the in-store shopping experience may feel like less of a luxury with safety measures in place, such as the need to maintain distance between customers and staff and the required use of face masks.

Most luxury industry observers agree the pandemic will hasten the already-underway market transition to e-commerce.

Two industry insiders told Forbes “e-commerce is likely to be the clear winner” of the COVID-19 crisis. In a snap poll by the International Institute of Management Development, 72% of participants said luxury brands that do not currently sell online – including automotive brands – should reconsider their position.

Tips for Selling Luxury Goods Online

It’s one thing to click “buy now” on a $15 t-shirt or a $120 pair of running shoes. It’s another thing entirely to load a $2,000 designer dress or a pair of $700 heels into your online shopping bag. Even shoppers with near-unlimited supplies of disposable income may be reluctant to commit so much money to purchase products they haven’t touched, tried on, or discussed with a brand representative.

For as long as the industry has existed, the experience of shopping for luxury goods has been a critical element of the luxury consumers seek out. Purchasing an item of clothing or jewelry for several times the price of normal retail should feel special. This is why luxury brands spend millions refining the layout of their stores and training their sales associates.

Is it possible to provide a premium shopping experience in an online environment? Several innovative luxury brands have demonstrated that it is.

If your luxury brand is considering entering the e-commerce marketplace for the first time (or upping your investment in e-commerce), here are a few suggestions for connecting with an upscale audience online:

  • Choose carefully between selling on your own sites and using existing platforms. Many luxury brands feel bargain-oriented e-commerce giants like Amazon don’t fit their image or the expectations of their discerning customers. But there are a few online platforms for luxury goods, most notably, Net-a-Porter. Sites like Net-a-Porter give you a readymade infrastructure to sell your luxury goods, but keep in mind they may deprive your brand of the ability to control the customer experience. True exclusivity – through your own shopping site and apps – may be more in line with your brand.
  • Focus on “m-commerce” as well as e-commerce. Millennials and younger generations are as likely, if not more, to research items and make purchases on their mobile devices as they are on desktop computers. Your e-commerce site must be mobile-optimized to provide a frustration-free shopping experience.
  • Don’t skimp on customer service. The personal touch is a hallmark of luxury. You can give your customers access to knowledgeable, helpful sales representatives through text and video chat and social media. Try to anticipate your customers’ questions with thoughtfully written, on-brand copy.
  • Consider free shipping and returns. Just because affluent customers can afford shipping costs, it doesn’t mean they will be happy to pay for shipping. Free shipping and easy returns are considered part-and-parcel of modern e-commerce.
  • Invest in high-definition, professional photography. Online shoppers want to see your products from every angle and in context (it’s much easier to picture the size of a tote when it’s shown in a video being carried by a model).

Card-Not-Present Fraud in Luxury E-Commerce

Card-not-present (CNP) fraud is a significant risk for all e-commerce merchants. Fraudsters use stolen credit and debit card information to make unauthorized purchases online. While card-present fraud continues to decline, CNP fraud is climbing and is expected to continue to rise for years to come, costing e-commerce merchants billions of dollars worldwide.

Not surprisingly, luxury items are at the top of the list for online fraudsters. There are multiple reasons for this: The products are expensive, they are often small and inexpensive to ship or transport, and there’s a strong resale market.

Writing for CSO, ClearSale Executive Vice President Rafael Lourenco says that, while all verticals can become fraud targets, some deal with more fraud attempts than others. Luxury goods, such as apparel, jewelry, and beauty products, fall into the latter category.

Lourenco says the middle range of the luxury market may be especially appealing to fraudsters: “Thieves may target mid-range items because there are more buyers, for example, for deeply discounted $3,000 handbags than for those originally priced at $15,000.”

The Cost of CNP Fraud in the Luxury Industry

The most obvious cost of online fraud for luxury retailers is the value of unpaid merchandise. Cardholders can get their money back from fraudulent charges through the chargeback process, but merchants cannot always recoup the expense of products that have already been shipped.

E-commerce merchants must also shoulder the cost of chargeback fees. Every time a bank reverses a payment due to fraud, the merchant must pay an additional fee. Acquiring banks charge higher fees to merchants with higher chargeback ratios. Acquiring banks may cut off a merchant entirely if the merchant accrues too many chargebacks (making it impossible for the merchant to accept credit cards).

(Learn more about chargebacks, their costs, and how to reduce them in our comprehensive explainer piece, “What Is a Chargeback? Everything Merchants Need to Know.”)

Considering the cost of chargeback fees and lost merchandise, luxury e-commerce retailers may be tempted to implement strict anti-fraud measures. But overzealous fraud filters may cause more problems than they solve.

The major risk with strict fraud filters is false declines. False declines occur when fraud protection systems block legitimate transactions. Global losses due to false declines are considerable. The latest data indicates that e-commerce fraud will cost merchants $6.4 billion by 2021. Meanwhile, losses due to false declines will grow to $443 billion – rendering the cost of fraud paltry by comparison.

False declines are so expensive because they discourage customers. A false decline is a frustrating and humiliating experience for an e-commerce customer.

More than 80% of cardholders who experienced a false decline said it wasn’t just inconvenient – it was embarrassing and aggravating. In Javelin’s survey of 3,200 U.S. consumers, 32% said they wouldn’t shop with a merchant again following a decline.

In the luxury industry, a single customer can be worth hundreds of thousands or even millions of dollars over their lifetime. But false declines spoil the flawless, white glove treatment affluent consumers expect. So do intrusive, needlessly complicated checkout processes designed to prevent fraud.

Here are five strategies for reducing false declines, chargebacks, and CNP fraud while selling high-end luxury goods online:

1. Identify the Merchandise with the Highest Fraud Risk

Small-yet-valuable items such as watches, jewelry, and designer handbags may draw the most attention from fraudsters looking to score big on the resale market. Consider tracking chargebacks and friendly fraud to identify trends and commonly targeted merchandise.

2. Don’t Rely Solely on Red Flags for Transactional Decisions

Wealthy customers often exhibit the same behavior as fraudsters, such as frequent international purchases, high dollar-value purchases, and non-matching delivery/billing addresses. Brand-new luxury customers may also get swept up in automated fraud filters.

Merchants need an advanced fraud protection solution that can distinguish between criminals and legitimate customers based on a broader analysis, ideally one that involves expert manual review of orders.

3. Monitor Customers’ Shopping and Browsing Behavior

Legitimate customers often (but not always) have extensive browsing histories on the e-commerce sites of their favorite luxury brands. Loyal fans of a luxury brand tend to visit a site multiple times before making purchases. On the other hand, fraudsters tend to immediately add expensive items to their carts on their first visits without additional shopping or browsing.

(Again, though, this is not always the case, which is why manual review is so important when automated fraud warning systems are triggered.)

4. Keep in Contact

After receiving a suspicious order, merchants should call customers directly to confirm the purchase. This is the kind of personal touch luxury consumers expect. When calls are framed positively, and as a service to protect the customer, they can improve the client-merchant relationship and protect against fraud.

5. Implement a Solution That Offers a Fraud Protection Guarantee

A guarantee protects merchants from the expenses of fraud-related chargebacks and false declines while allowing for safe international expansion and continued growth.

A Guaranteed Fraud Solution Built for the Luxury Industry

At ClearSale, we understand that selling luxury goods online involves unique, high-stakes challenges in combatting CNP fraud. Your customers expect flawless service, and your expensive products command high resale values. Because you process fewer transactions than mass-market sellers, you have fewer chances to get fraud screening right.

ClearSale is the fraud protection leader in the fashion and luxury industries. We hold an 85% market share in Brazil, one of the 10 largest luxury markets in the world, and our solution is supported by leading brands worldwide, such as Prada, Chanel, and Ray-Ban.

We are proud to help our customers achieve the highest approval rates and the lowest false positive rates in the industry. How do we do it?

Unlike our competition, we do not automatically decline orders. We work to maximize automatic real-time approvals and minimize false positives, supported by the right technology and a manual review methodology.

ClearSale has the largest manual reviewing team in the world, with more than 700 fraud analysts, guaranteeing timely decisions and the flexibility to deal with sales volumes for every client.

We also offer two levels of fraud protection to ensure you only pay for approved transactions.

In times like these, the reputation of your brand, the loyalty of your customers, and the security of your revenue is more important than ever. Click here to speak to a ClearSale expert about protecting your luxury e-commerce business from CNP fraud, chargebacks, and false declines.

Knowledge-Base

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