1. What are the drivers for growth of the luxury goods industry in recent years?

What is
the general outlook of this industry in the near term? (You may use some industry
statistics but please make sure you cite them properly.)

Answer:

In recent years, the luxury goods industry has seen tremendous growth. The global luxury
goods market is expected to grow with a CAGR of 2.92% during 2019-2025 (PR Newswire,
2020). With Covid-19 disrupting several industries including retail, the following growth
drivers help understand the performance of the industry pre-Covid 19:

 New Emerging Markets: According to a report by Ernst & Young in 2019, growth of
luxury goods industry, particularly the cosmetics industry, may be driven by the
emergence of new markets in countries like China, Russia, and the UAE. The report
further goes on to predict that the aforementioned markets will be 50% of sales in
personal care by 2020 (EY, 2019).
 Influence of Digital Media: According to a report by Ernst & Young in 2019, the
influence of digital media has played an important role in driving the luxury good
industry in recent years. “More than 60% of purchases are influenced by digital, and
more than 70% of consumers connect to their favorite brands through social
platforms” (EY, 2019).
 Experiential Luxury: According to a report by BCG, the rise of experiential luxury
has had a significant impact in driving the luxury good industry to new heights. The
report suggests that nearly half the consumers, predominantly the youth, are buying
fewer products and “buying experiences” instead. “By 2022, the experiential segment
is forecast to account for nearly two-thirds of the total luxury market—representing a
fundamental shift in consumer behavior, from owning to being” (BCG, n.d.).

According to a report by BCG in June 2020, sales of luxury goods have dropped from 25% to
45% in 2020 due to Covid-19. The following points relate to the general outlook of the
luxury goods industry in the near future:
 Recovering Markets: The recovery of the luxury industry directly depends on the
recovery of the markets that consume luxury goods. To explain further, China was
one of the worst hit countries initially during Covid-19, but today, China has already
recovered to a point where its GDP is expected to surpass 2019 as it continues to
 grow. “Sales of luxury goods in China are expected to rebound and end the year as
much as 10% above the 2019 mark, as more Chinese who normally shop for luxury
goods” (Willersdorf et al., 2020). This is key in determining the performance of
luxury goods in 2021.
 Adoption of Digital: Covid-19 has been an eye-opener in terms of understanding the
importance of e-commerce and online shopping. Retail going digital is not a choice
anymore, but a question of survival in the market. Hence, luxury brands need to use
tech to analyse their sales, maintain customer relations, and forecast trends in order to
stay and grow in this new era of markets.
 Sustainability in Fashion: According to a report by Ernst & Young in 2019,
consumers and investors have “demonstrated growing interest in nonfinancial
information – including the social and environmental impacts – to evaluate potential
investment opportunities and manage risks” (EY, 2019).
This gives insight into another factor that gives luxury goods an edge – sustainability.
Informed consumers are switching to more sustainable goods and products over ones
that harm the environment.

References

E&Y. (2019, March 13). 11 growth drivers fueling the evolution of the luxury goods
industry. Retrieved December 02, 2020, from https://www.ey.com/en_gl/consumer-products-
retail/11-growth-drivers-fueling-evolution-luxury-goods-industry

Luxury Market. (n.d.). Retrieved December 02, 2020, from

https://www.bcg.com/industries/consumer-products-industry/luxury-market’

PR Newswire. (2020, January 14). The global luxury goods market is projected to grow with
a CAGR of 2.92% during 2019-2025. Retrieved December 02, 2020, from
https://www.prnewswire.com/news-releases/the-global-luxury-goods-market-is-projected-to-
grow-with-a-cagr-of-2-92-during-2019-2025--300986497.html

Willersdorf, S., Hazan, J., Ricci, G., Prénaud, A., Bianchi, F., Seara, J., Yang, V. (2020,
November 17). A New Era and a New Look for Luxury. Retrieved December 02, 2020, from
https://www.bcg.com/publications/2020/new-era-and-new-look-for-luxury
2. Why would Bernard Arnault think that now is a good time to buy Tiffany? Explain from
the perspectives of LVMH and Tiffany businesses, and also the macro environment.
Answer:
Stated below are some of the reasons why LVMH is considering buying Tiffany now:
 The main reason for behind LVMH buying Tiffany and Co is that LVMH is
expanding its jewellery and watch business, which was the one of the fastest-growing
categories in luxury until the pandemic hit (Lucas & Thomas, 2020). Furthermore,
according to an article by the Financial Times, LVMH wanted to expand its busines in
watches and jewellery since it was smaller than rivals such as Richemont, which owns
Cartier (Fontanella-Khan, 2020).
 LVMH wants to leverage on the current retail market which has been vastly affected
by Covid-19 to close in on the deal with Tiffany & Co. By acquiring Tiffany & Co,
LVMH is not only expanding its business in hard luxury, but also offering Tiffany,
that had a decline in sales from 2018 ($4,442.1 mil) in 2019 ($4,424.0 mil), and
reported a sharp decline in sales in Q1 ($1,003.1 mil in 2019 and $555.5 in 2020) and
Q2 ($1,048.5 mil in 2019 vs $747.1 mil in 2020) of 2020, a chance for revival [all
financial data has been obtained from: https://investor.tiffany.com/financial-
information]
 Though LVMH is acquiring Tiffany at a relatively low-price cut, by closing the deal
now, LVMH saves a substantial amount on legal fees.
 Other macro reasons also revolve around the US elections – the election of Joe Biden
will have a significant impact on trade deals between France and the US (that happens
to be a huge market for luxury goods), that had been vastly affected when Donald
Trump was president.

References

Lucas, A., & Thomas, L. (2020, September 09). LVMH scraps $16.2 billion deal with
Tiffany. Retrieved December 02, 2020, from https://www.cnbc.com/2020/09/09/lvmh-scraps-
16point2-billion-deal-with-tiffany.html
Fontanella-Khan, J. (2020, October 29). LVMH agrees to buy Tiffany at slightly lower price.
Retrieved December 02, 2020, from https://www.ft.com/content/de56b836-d7ad-4782-8f0a-
b89f5d288d5e