To Keep Its Old Glory and Still Chase Young Shoppers, the Luxury Industry Is Changing Fast

And 2017 was the year all those changes arrived at once.

Luxury is "cool" again (Luxury is back in fashion). That is how Bain & Company opened the press release for its 2017 Global Luxury Goods Worldwide Market Study, published on October 25.

The Bain report is one of the industry's main reference points, and this year its numbers look fairly cheerful: the luxury market as a whole grew 5%, to 1.2 trillion euros; the average operating margin was 19%, close to the 23% of 2012, when Chinese shoppers were spending wildly; and 65% of luxury brands posted positive results, 15% more than last year. Best of all, for the first time in ten years the industry's growth came from selling more goods rather than from raising prices.

You have probably also heard that the three big luxury groups are recovering.

In the first half of 2017, sales at LVMH, Kering and Richemont all grew by double digits — 14.7%, 28.2% and 10%. The third-quarter figures already published suggest that pace will hold at least through the end of the year. Bain expects the industry to keep growing 4% to 5% a year for the next three years, and the personal luxury goods market to reach 295–305 billion euros by 2020.

But 2017 was also a puzzling year.

LV worked with Supreme, as though the two had never quarrelled. Few people asked whether Supreme had stopped being cool, or whether the marketing idea behind the collaboration had swallowed the design itself. What got talked about instead were the mobbed queues and the noise on social media, and the money the tie-up might bring in. The joint collection reportedly sold more than 100 million euros' worth. In October, Supreme took a $500 million investment from the private equity firm Carlyle Group, giving up 50% of its equity at a valuation of $1.1 billion.

Luxury brands that swear by the in-store experience have started building their own e-commerce, with a heavy tilt toward social marketing. LVMH, Hermès and Kering, long at war with Alibaba over fakes, have brought their labels onto Tmall one after another and opened sales channels on WeChat. Around both Chinese and Western Valentine's Day you can see more limited-edition handbags, more promotion by Chinese fashion bloggers, and more ads in WeChat Moments. Just as hard to keep up with are the celebrity brand friends and brand ambassadors — every time a new endorser appears on a brand's official Weibo account, fans set off another round of celebration and name-calling.

Green pledges and fast delivery are advancing side by side. In October, Gucci's chief executive, Marco Bizzarri, said the brand would stop using fur from next year, and its parent, Kering, came to China during Shanghai Fashion Week to introduce its new environmental app, "My EP&L" (My Environmental Profit & Loss). Yet only six months earlier Gucci had joined the fashion e-tailer Farfetch to launch a "90-minute home delivery" service.

Buying rivals has become the strategy of more and more companies. By the count of the fashion outlet ladymax.cn, confirmed acquisitions of luxury and fashion brands this year have passed 30. The biggest was the purchase of Dior for 12.1 billion euros by the Bernard Arnault family, which owns LVMH; others include Coach Group's $2.4 billion purchase of Kate Spade and Michael Kors's $1.2 billion purchase of Jimmy Choo.

Copying and clumsy cultural borrowing are also on the rise. In the spring/summer 2018 collections there was Gucci vs. Dapper Dan and Raf Simons vs. Bonnie Cashin; there was Chanel's boomerang, which offended Aboriginal Australians; and there was the Dolce & Gabbana China ad that ran into a racism row.

The luxury industry is changing hard. As we wrote in last year's year-end review: an industry used to moving slowly wants to keep its old glory and keep up with the internet at the same time, and the change has finally come — and cannot be stopped.

More Young People Are Buying Luxury, and the Lines Between Classes of Spending Are Blurring

Gucci's sales growth has stayed above 30% in every quarter this year, and touched 59%. At an industry summit held last week by the American fashion trade paper WWD, Bizzarri told an envious audience the "secret of success": besides Alessandro Michele, the creative director who made maximalism and nerd-chic fashionable, he also has a "shadow committee" of people under 30.

"What they do is give a different point of view — either discussing the same subjects the Gucci board discusses, or telling me directly what they think about a particular detail," Bizzarri told qz.com.

The turnover of luxury shoppers really is the main engine of this market's growth. According to the Bain report, Generation Y (born 1977 to 1995) and Generation Z (born 1995 to 2010) contribute about as much as China does, 32% of the whole luxury market. And of the 5% growth of the past year, 85% came from these two generations together.

"This is a particularly interesting moment for luxury. Millennials think about spending and shop in ways utterly unlike the previous generation, which forces luxury brands to rethink what they should be offering customers," said Claudia D'Arpizio, the report's lead author.

These young people differ in at least four ways:

• The previous generation cared whether the material was rare and the product made to order; the new one cares whether a brand expresses its values and its outlook in a distinctive enough way;
• By definition, luxury used to mean well-made, finely crafted goods in the core fashion categories, priced beyond most people's reach; now it means an assortment of settings for spending, carefully matched and combined to express a point of view;
• Instead of "rare means valuable" and a logo to show off, people now prefer to talk about creative crossovers and the luxurification of entry-level products;
• Instead of an exclusive spending spree, today's shoppers are also readier to state their own views through the styles they pick.

In short, young people are turning the elite feeling in luxury spending into personal expression, and the point of buying has moved from advertising a shared identity and rank to voicing shared values.

One word keeps reappearing in this part of Bain's argument: "curated." You can read it as "carefully planned," or call it guided spending. If young customers like expression, interaction and experience, then luxury brands must offer all three to win them. This industry has always been good at telling stories, but the way it tells them has to change — not from the top down, talking to itself, but as a conversation between equals.

That partly explains why some fashion critics think Gucci's creative director is more a curator than a designer, why Kering stresses sustainability so heavily, and why LV tried to work with Supreme.

Besides age, the other interesting change is in spending tiers. Since the 1990s, luxury spending has been through three phases. In Bain's scheme, the pyramid has three levels: the base (accessible) is the "affordable luxury" that ordinary shoppers can buy too; the middle (aspirational) is mid-range goods slightly beyond their means; and the top (absolute) is the goods only the rich can afford.

Over the past 30 years, the booms and slumps of the luxury market have had little to do with either end of that pyramid; they have tracked the swelling and shrinking of middle-tier spending. After the 2008 financial crisis, middle-tier spending power fell worldwide, and for a while the whole industry was held up only by China's grey-market buying and by the new money made in the internet and property.

China's middle class is still seen as the strongest force behind growth. But worldwide, the strict order of class-based spending has broken down. The "new normal" is that the three tiers each keep their own circle and yet overlap.

For now, though, that overlap still looks like a marketing illusion, made by brands to widen their audience, grow bigger and sell more.

The LV–Supreme collaboration is the textbook case. LV used it to reach the young, and once Supreme's bright red box logo was printed on an LV trunk, the brand was "elevated" a tier. But nothing has really changed about how fixed those tiers are: the kids who buy LV and the rich people who buy Supreme still live in two entirely different worlds.

Why Luxury Is Turning Into Streetwear, and Why Mediocrity Now Counts as Interesting

Faced with changing customers, changing shops and changing marketing channels, luxury brands look rather passive. They hold the initiative in only one place: the product.

Yet rather than work harder on the design itself, brands still seem to prefer the short cut — using a crossover, say, to win on product and word of mouth at the same time.

At 3pm on June 29, 17 hours before the LV and Supreme limited collection went on sale, 150 people were already queuing on the corner of Surrey Street in London. On July 3 the same thing happened in the 798 Art District, north of Beijing's Fifth Ring Road. It was too hot and the queue was too long, so Skywang, a video blogger who had gone to buy, gave up and filmed a few young people who had already got hold of the pieces instead. They all looked to be barely past 20; two items per person was the limit, so many bought one T-shirt and one backpack each, though the T-shirts went first. "LV x Supreme — this is the closest Supreme has ever been to us," Sky wrote under the video.

That 85% in the Bain report comes largely from people like Sky and the young shoppers he filmed. To catch this group's attention and turn them into customers, luxury brands launched many similar collaborations this year. In June, for instance, Gosha Rubchinskiy showed his spring/summer 2018 collection in St Petersburg and threw in eight pieces made with Burberry.

High-end brands have also started putting money into the kinds of products streetwear sells: T-shirts and sneakers. By the report's count, the market for luxury T-shirts reached 2.5 billion euros this year, up 25% on last year; luxury sneakers reached 3.5 billion euros, up 10%.

This creates a problem. Luxury brands, whose job was to perfect craft, push creative frontiers and test the edges of art and design, are now spending their energy on basics. Add the flattering filter of social media and mediocrity has even become interesting. A recent example is Balenciaga's colourful platform clogs made with Crocs; the same wave brought the ugly "dad shoe" and Birkenstocks.

As Luke Leitch, a columnist at 1843, the magazine published by The Economist, put it, "In 2017, mediocrity hit the fashion industry as hard as shoulder pads did in 1987." Vetements has worked in turn with mass-market labels such as Champion, Levi's and Reebok, and J.W. Anderson has joined the designers who collaborate with Uniqlo. In an interview, Anderson said it was the first time he had designed a collection he would wear himself: "Right now I just want something real."

An interesting thing to say — who exactly dresses unreally (or un-mediocrely) every day? Was the fashion industry designing for those people before?

From "Location, Location, Location" to "Online, Online, Online"

"The new sales channel should not be built like a temple, but like a home," the Bain report argues. Put plainly: luxury's sales channels are slowly turning to face the customer, and the online channel, which talks to people more efficiently, has become the fastest-growing of them all.

By the report's figures, online sales of luxury goods grew 24% year on year, to 23 billion euros — twice the growth rate of the airport channel.

These channels take several forms at once — brand websites, third-party e-commerce, retailers' own sites — and together they work as an "all-round supplement" to physical shops. Third-party e-commerce has done most to drive online sales, but brands have finally begun building their own shops in earnest. Not long after launching, those already account for 31% of online sales.

By region, the United States still takes 47% of luxury's online sales, but Asia and Europe are growing faster. China accounted for 32% of luxury spending last year, which is why it has become the main battleground for online business.

In the past four months, Gucci and LV have both launched online shopping in China, Hermès has started selling watches through its WeChat official account, JD.com has put $400 million into Farfetch and launched a standalone luxury shopping app, Toplife, and Tmall has opened a luxury channel, Luxury Pavilion, followed by an online luxury pop-up, Tmall Space. The Chinese e-commerce platform Secoo, meanwhile, listed in the United States.

Worth noting, though: because the new young customers are seen as a group that wants things now, luxury's online platforms have also joined a race to behave like fast fashion.

In April, the fashion e-tailer Farfetch and Gucci launched a service called "90-minute home delivery." In September, Net-a-Porter and Mr Porter followed with a home-delivery service for VIP customers called "You Try, We Wait."

José Neves, Farfetch's founder and chief executive, explained in an interview with fashionunited.com: "Time is the new luxury, and it is something we want to do more with. Say one day you are rushing to a dinner and you happen to need a particular dress or a particular pair of shoes. That is when you would use this service."

But few people ask whether faster gratification creates new problems for designer fashion. "It is hard not to wonder whether instant gratification has simply piled up a great deal of surplus stuff. In fact, people going to events and socialising do not have to buy that many clothes. Dress is a cue in how people deal with each other, and if that is so, clothes should be treated as a long-term investment — otherwise your own identity will not last either," said Vanessa Friedman, a columnist at The New York Times.

Who Really Makes the Trends — Designers, or Celebrities and Influencers?

Fashion as entertainment has come up again and again this year. Early on, when Dolce & Gabbana showed its autumn/winter 2017 collection at Milan Men's Fashion Week, it hired 49 "influencers" and "celebrity children" with millions or tens of millions of followers on social media worldwide to model the clothes — 43% of everyone on the runway.

Three Chinese celebrity bloggers walked the show: Chen Xuedong, who has 24.64 million Weibo followers; Sheng Yilun, the actor who became famous through the web series Go Princess Go and has 4.68 million; and the fashion blogger gogoboi, who has 7.02 million.

In the 1960s, a famous face was hired to interpret a brand's values — think of Audrey Hepburn and Givenchy's little black dress. Today the celebrity's more important job is to gather quickly the attention that has become more scattered and more expensive, and so to add to a brand's (short-term) sales. As a marketing channel, in other words, celebrities have been fast-fashioned too.

The most startling examples this year, in how often and how many China ambassadors were swapped in, are Dior and Chanel. Dior named Angelababy (Yang Ying) and Huang Xuan "China brand ambassadors" on April 8 and May 5, gave Zhao Liying the same title on September 25, then made Chen Feiyu "menswear China millennial ambassador" on October 18. Besides Zhou Xun as "China image ambassador," Chanel has three "China watch image ambassadors" alone — Bai Baihe, Liu Wen and Chen Weiting — plus Liu Shishi as "China makeup image ambassador" and Liu Wen again as "China fragrance and beauty ambassador" and "China watch image ambassador."

Part of what this shows is how luxury's system of values has been bent by new technology and by the turnover of its customers. Managers seem trapped in a circle: a value system built more and more around targets means they badly want to use as many celebrities as possible to seize attention fast, but that runs against the extremity, refinement and rarity luxury tradition reveres, and against the brand value it has tended carefully for centuries.

The swarm of endorsement titles is what that dilemma has bred. The job has been sliced into "endorser," "brand ambassador," "brand image ambassador," "product-line ambassador," "brand friend" and more, and the titles pinned on all sorts of celebrities. Many brand ambassadors appear only on Weibo and take no part in shooting the advertising campaigns; on brands' global websites, some of their names are misspelled and some have no English title at all. Which is another sign that their real job is to move goods in the short term rather than to "carry the spirit of the brand."

There is nothing wrong with celebrity endorsement in itself. Once luxury brands took outside capital and went global, they were bound to step down from the altar and cut into the mass market. The question is how luxury chooses to enter that market. As a small elite that is supposed to set the fashion industry's highest standards in business ethics, creative design and brand values, what values does it actually convey when it leans so hard on celebrities, rich kids and famous people's children, and puts product and design second?

If you insist on judging the strategy by financial results, one set of numbers in the Bain report may explain part of the problem: in 2017, 65% of luxury brands grew their sales, but only 35% also earned a positive return on operating profit.

Or take the line the fashion critic Tang Shuang quotes in her article Why Luxury's Local-Celebrity Strategy Deserves Caution, from Christian Blanckaert, a former president of Hermès: "The real danger lies in the flattening of sensibility, the impoverishment of language, the loss of culture, and the spread of the sound bite."

Cover image from Supreme and Dior.