Digital reinvention fuels a fast-growing luxury sector

Luxury goods have long evoked craftsmanship and exclusivity. Now digital transformation and shifting demographics are changing the way luxury good companies interact with their customers.

It’s a particular boon for publicly listed luxury goods companies.

What’s changed? Curated digital experiences, in which polished retail theater adapts to the online world (think high-production-value live streaming, and digital salespeople with one-on-one client relationships).

The strategy has proved a big success, drawing in new consumers increasingly comfortable paying for big-ticket items online. Bain & Co. consultants recently predicted¹ that websites could become the leading channel for luxury purchases, with an estimated 32%–34% market share by 2030.

Beyond the digital innovations, growth drivers include:

• An expanding customer base (from around 400 million people in 2022 to an estimated 500 million by 2030), increasingly dominated by the wealthy
• Pent-up demand, from U.S. and European consumers with still-ample disposable income
• A rising emerging market (EM) consumer

Fundamentals for the luxury goods businesses are strong. We believe demand will remain robust. And in an environment of broadly higher inflation, the sector could sustain the pricing power it has commanded for decades.

The power of the wealth effect

The luxury market’s growing consumer base is increasingly concentrated among the wealthy, whose spending is less sensitive to economic downturns. The wealthiest 2% of global consumers accounted for 40% of luxury spending in 2022, up from 35% in 2009, according to analysts at Bain & Co. Bain projects that the global luxury market will reach €1.5 trillion in 2023, an 8%–10% increase over 2022.

Competition to win customers may intensify if economic growth slows in 2024 (as we expect it will) and aspirational luxury consumers reduce their spending. The likely outcome: The strongest luxury brands will get even stronger.

Generational shift, rising EM consumer

As the industry’s digital shift helps spur new customer engagement, a generational shift is underway as well. By 2030, Millennials (born between 1981 and 1996) will account for 50%–55% of luxury market purchases, while Gen Z (born between 1997 and 2012) will account for 25%–30% of luxury market purchases. Post-pandemic, we see more younger consumers with a growing interest in sustainable lifestyles. This sensibility plays well to the luxury sector’s appeal—“buy less, buy better.”

Across generations, EM consumers are gathering strength. Emerging economy countries could gain around 70 million middle- and high-income consumers by 2030, Bain estimates. Although China’s stalling recovery (and especially its struggling property market) has recently depressed consumer sentiment, Chinese consumers’ luxury spending will likely recover through 2024.

Newer luxury markets, such as India and EM Southeast Asia and Africa, look promising. Among the rising stars, India stands out. It could see 35–40 million new mid- and high-income consumers between 2022 and 2030, implying that its luxury market could expand to 3.5 times today’s size by 2030.

Pent-up demand, drawn-down savings

In Europe, consumers appear set to spend some of the excess savings they have accumulated since the outbreak of COVID. Between the end of 2019 and the second quarter of 2023, Euro Area households accumulated savings of around €1 trillion more than they would have otherwise. The European Central Bank estimates that this is approximately 12% of their average disposable incomes.

So far, the overall amount of excess savings has not declined. Indeed, households in the highest income quintile own about half of those excess savings. We do not believe money put aside during the pandemic will support a broad surge in consumption. But even allowing for a considerable degree of consumer caution, some of the savings will likely be spent, supporting continued spending on high-end goods.

U.S. households also seem set to continue spending, especially those at the top end of the income spectrum. The recovery in equity markets this year has pushed net worth of the top 10% back toward all-time highs. Interest income from higher yielding assets should augment income. Home equity is the equivalent of 116% of GDP, a staggering ratio by historical standards. Ultimately, luxury good sales will be a function of underlying demand, not of the ability of U.S. households to pay.

Attractive investor entry point

Of course, spending on luxury goods is not immune to the economic cycle, even for wealthy consumers. Amid uncertainty about the European economy and concerns about China’s growth outlook, luxury stocks sold off in recent months. The top 10 names lost USD 150 billion in market value, or roughly 13%, since the end of March. Investors looking to benefit from the industry’s long-term growth prospects may find an attractive entry point.