Interested in the luxury market? Let’s have a look in this article at the growth potential of this market, the advantages and risks associated with it, as well as how you can best profit from it.
What is the luxury market?
The luxury market refers to a segment of the market that specializes in selling high-end and expensive products or services that are not considered necessities for most consumers. These products and services are often associated with exclusivity, prestige, and superior quality. This market can include a wide range of products and services such as high-end fashion, luxury cars, premium watches, jewelry, gourmet food and wine, luxury travel, and high-end real estate.
Consumers who purchase luxury goods and services are typically willing to pay a premium price for the perceived quality, craftsmanship, and exclusivity that these products and services offer. The luxury market is often driven by factors such as brand reputation, social status, and lifestyle, and caters to a niche market of affluent consumers who can afford to pay for such premium products and services.
State of the luxury market
The state of the luxury market is generally strong, although it has been impacted by the COVID-19 pandemic. Prior to the pandemic, the luxury market was experiencing steady growth, driven by rising wealth and consumer demand in emerging markets, particularly in China. However, the pandemic resulted in a sharp drop in luxury sales, particularly in the first half of 2020, as lockdowns and travel restrictions impacted consumer spending.
Despite the challenges posed by the pandemic, the luxury market has shown resilience, with sales rebounding strongly since the latter half of 2020. The recovery has been driven by a combination of factors, including pent-up demand from consumers, the rise of e-commerce, increased consumer focus on luxury experiences and sustainability, as well as more people belonging to the middle-class, especially in Asia. Research shows that more than one billion Asians are expected to enter the global middle class by the year 2030.
The middle class in Asia is expanding at rates that are far quicker than those in Western nations, and Asian consumers have an increasing effect on the choices that are made about the development of products and services around the globe - especially when it comes to the luxury market. As a result, businesses are increasingly placing a higher priority on breaking into these markets and catering to the varied requirements of the Asian middle class.
The expansion of the middle class in Asia will provide chances for businesses to market their goods and services to customers who are willing to pay a higher price for more quality goods and services. In addition to its demographic potential, the Asia-Pacific region is likely going to become a popular destination for foreign investment in the near future, which might contribute to the development of luxury products and services production.
Luxury market - What are the growth opportunities?
The luxury market presents several growth opportunities, including the following:
1. Emerging Markets: The luxury market has seen strong growth in emerging markets such as China, India, and Southeast Asia. As the economies of these countries continue to grow, there is an increase in the number of wealthy individuals who have a higher disposable income to spend on luxury goods and services.
2. Millennials, Gen Z, and Gen Alpha: Statista says that by 2025, Millennials and Generation Z could make up 45 percent of the luxury market, and will continue to lead the growth this year over the short term. However, Gen Alpha, the generation born after 2010, is a growing demographic that is starting to have an impact on the luxury market. While this group is still quite young, they are starting to influence purchasing decisions and are expected to become an increasingly important segment of the luxury market in the years to come. According to the 21st edition of the Bain & Company–Altagamma Luxury Study, the 'Gen Alpha' generation is projected to expand at a rate that is almost three times faster than that of preceding generations until the year 2030, when they will account for one third of the market.
3. E-commerce: The luxury market has been slow to adopt e-commerce, but this is changing, especially since the COVID-19 pandemic. Many luxury brands are investing in their e-commerce capabilities and digital marketing strategies, allowing them to reach a wider audience and sell their products online. Moreover, with the help of new technologies, such as metaverse as well as virtual and augmented reality try-on technologies, luxury brands are increasingly offering immersive unique client experiences.
4. Personalization: Consumers are increasingly looking for personalized and unique products and experiences. Luxury brands can capitalize on this trend by offering customization and bespoke products and services. E-commerce and new technologies are great for making it easier for luxury brands to personalize the customer experience such as offering personalized product recommendations, promotions, and services for instance.
5. Sustainability: The demand for sustainable and ethical products is growing, and luxury brands can respond by adopting more environmentally and socially responsible practices like sustainable sourcing, recycling and upcycling, energy and water efficiency, carbon neutrality and social responsibility for instance. Moreover, embracing sustainability can also present a unique opportunity for luxury brands to differentiate themselves in the market and enhance their brand image as responsible and forward-thinking. The growing focus on sustainability is expected to continue as younger consumers, who are more concerned with social and environmental issues, become a larger share of the luxury market.
6. Travel and tourism: The luxury travel market is expected to continue to grow, as more people seek unique and exclusive experiences. Luxury travel experiences are typically characterized by high-end amenities, exceptional service, and unique, customized itineraries that cater to the individual needs and preferences of the traveler. Luxury hotels and resorts, private jets, and luxury cruises are just a few examples of the products and services that cater to this market.
7. Luxury services: In addition to luxury goods, there is also a growing market for luxury services such as high-end concierge services, personal shopping and styling, luxury real estate, private clubs, and exclusive events. These services offer affluent consumers a personalized and exclusive experience that caters to their unique needs and desires. These services often come with a high price tag, but for those who can afford it, they offer a level of convenience, exclusivity, and prestige that cannot be found in standard service offerings.
Overall, the luxury market presents several growth opportunities, and brands that can adapt and innovate to meet the changing demands of their consumers will be well-positioned for success.
What are the risks of investing in the luxury market?
As with any investment, there are risks associated with investing in the luxury market. Some of the potential risks include:
1. Economic downturns: Luxury goods and services are often seen as discretionary spending, and as such, they are more vulnerable to economic downturns. During times of economic hardship, affluent consumers may be less likely to spend money on luxury items and experiences.
2. Changing consumer preferences: Consumer preferences and tastes can change rapidly, and luxury brands must be able to adapt to these changes in order to remain relevant. Brands that fail to keep up with changing consumer preferences may see a decline in sales and profitability.
3. Counterfeiting and intellectual property theft: Luxury brands are often targets of counterfeiting and intellectual property theft, which can damage their brand image and reputation, as well as their sales and profitability.
4. Competition: The luxury market is highly competitive, with many established brands competing for market share. New entrants into the market can also pose a threat to established brands.
5. Currency fluctuations: Luxury brands often operate on a global scale, and as such, they are vulnerable to currency fluctuations. Changes in currency exchange rates can impact the cost of production, as well as sales and profits.
Investing in the luxury market can be lucrative, but it is important for investors to carefully evaluate the potential risks. That’s why you should conduct thorough research on the market, individual brands, and economic conditions before making any investment decisions.
How can you invest in the luxury market?
There are several ways to invest in the luxury market, each with its own advantages and risks. Some of the most common ways to invest in the luxury market include:
1. Buying individual stocks such as Rolls-Royce, Hermès and Yves Saint Laurent, depending on which sub-sector you want to focus on.
2. Focusing on a conglomerate of several luxury brands such as LVMH, Kering, and Richemont.
3. Investing in luxury ETFs can provide investors with exposure to a diversified portfolio of luxury brands, such as Amundi S&P Global Luxury UCITS ETF.
4. Using CFD or Contract on Differences on luxury stocks or ETFs over the short term to speculate on the direction of the market and/or hedge your long-term positions.
5. Investing in luxury real estate such as high-end residential or commercial properties such as Mandarin Oriental Hotel Group.
6. Investing in luxury goods such as art, jewelry, and rare collectibles, such as Cartier and Remy Martinas.
7. Investing in luxury services such as high-end hotels or luxury travel companies, such as Ferretti.
Before selecting a firm to include in your portfolio, you should keep in mind the importance of doing extensive research on not only the financial performance and development possibilities of each company, but also the larger market conditions and trends. Additionally, it is essential to constantly diversify your portfolio in order to reduce the risk as much as possible.
Also, keep in mind that the regulated broker ActivTrades provides you with the opportunity to open a trading account with leverage and margin so that you can capitalize on the luxury market in the short term. You also have the option to open an investing account for the longer term so that you can buy approximately 1,000 shares without using leverage.
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