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How Niche Brands Survive Among the Competition?

The 9th edition of Altagamma Consumer and Retail Insight, held at the Fondazione Cariplo Congress Center in Milan, discussed the luxury sector. The evolution of consumer and retail

Altagamma Chairman Matteo Lunelli and Managing Director Stefania Lazzaroni presented two new studies at the event:

"True-Luxury Global Consumer Insight" in cooperation with Boston Consulting Group (hereinafter referred to as "BCG")

"Luxury Retail Evolution" in collaboration with Bernstein and several major Italian brands in lifestyle, premium, and consumer goods retail

Official report

At the opening of the conference, Matteo Lunelli, Chairman of Altagamma, emphasized that "the consumption propensity of high-end consumers is growing in double digits. The number of points of sale is stable, increasing in size significantly, and creating unique experiences that are increasingly personalized and unique. Consumer habits, values, and omni-channel distribution methods are changing, while new collaboration and integration strategies are emerging both downstream and upstream of the supply chain."

To summarize the key highlights from both reports:

Big brands "fight" for stores; how can small brands respond?

Official report

Luca Solca, Senior Luxury Industry Analyst at Bernstein, presents the first report, Luxury Retail Evolution, saying that "big brands have begun to gradually build larger, more meaningful, and more profitable stores... which is the right thing to do, because in a world where you can shop from your phone, and the stores have to be good enough to be worth going to. The problem is, the smaller brands can’t afford the cost of these stores."

Luca Solca investigated the evolution and prospects of the retail strategies of luxury companies and found that since 2019, the store network of major luxury brands has shrunk by about 1%. Luxury retail is still concentrated in relatively few cities, with the top 25 cities holding about 40% of luxury stores. Milan's failure to crack the top 10 is partly due to the shrinking size of the famous fashion district, Via della Spiga, and the relatively few major brands opening stores at the local airport.

Official report

Above: The top 25 cities have about 40% of luxury stores.

At the same time, the flagship stores have grown in size and quality over the years, with large and very important stores incorporating elements of the brand's specific DNA and the local city in which they are located in the store architecture. However, these large stores "do not represent a loss". On the contrary, due to the corresponding investment in communication, the turnover may reach hundreds of millions of euros, and the profit margin is very high. At the same time, these new flagship stores have also become destinations for many tourists due to their huge scale, which far exceeds the normal function of the store.

Official report

Above: FY 2022, FY 2022, FY 2022, and EBIT Margin of Major Luxury Companies

Retail upgrades extend from flagship stores to events, pop-up stores, exhibitions, collaborations, and more. Competition is expanding, putting pressure on smaller competitors. And in the luxury industry, scale is a key competitive advantage, helping to further widen the gap between big brands and the rest.

In the 90 years from 1932 to 2022, the competition in the luxury goods industry has been continuously escalating. From 1932, when Omega sponsored sports events, to 2022, when Gucci opened a metaverse store, brands have spared no effort in creating new ways to play.

Official report

Official report

Luca Solca also said that smaller brands need to be creative and open stores that "make an impression." Niche brands need to be down-to-earth, humble, and realistic, look for new locations that cost less, and open "affordable" stores.

According to Luca Solca, "It's better to have a small but profitable store that takes the 'sword off the edge' route, and the store's profits will also help support the development and growth of the brand. For this type of brand, having large stores without a great communication experience is a 'non-returning strategy."

The report puts forward the following six suggestions for small brands to create "Profitable" stores (below):

The number of stores is small but fine (Fewer stores or better stores); Carry out a D2C (direct-to-consumer) integration strategy (D2C Integration), both online and offline; Site selection focuses on key cities (Key Cities Focus), focusing on the top 25 cities; Flexible positioning, identifying advantages (alternative or edge locations), Create very differentiated stores (Very Different Stores); Start small and start with smaller stores (Smaller Stores/Start Small);

Official report

Fewer than half of luxury shoppers are satisfied with the integrated shopping experience.

Official report

BCG Managing Director and Senior Partner Filippo Bianchi and BCG Managing Director and Partner Guia Ricci mainly introduced the research focus of "True-Luxury Global Consumer Insight".

This year, BCG and Altagamma conducted exclusive interviews with 2,600 luxury customers and found that customers of physical luxury goods are dissatisfied with digital experiences. In fact, although satisfaction with luxury brick-and-mortar channels is twice that of the mass market, compared with mass retailers and pure e-commerce, luxury brands are less satisfied with the online shopping experience, with less than half of consumers satisfied with the comprehensive online and offline experience of luxury brands.

Official report

Brands have spent decades perfecting a "fantastic" offline shopping experience but are lagging behind when it comes to online shopping, with satisfaction levels at just 80 percent of mass retailers, the report said.

Official report

Therefore, in order to upgrade the experience, the report suggests, "Brands cannot continue to think from the perspective of channels (more than 50% of brands have launched a multi-channel strategy today), but need to decide whether to use hyper-specializing to ‘defense'. Each touchpoint plays a role to guide customers to get the best experience, or through hyper-personalizing to 'offense'. All touchpoints play their own role, adapting to each customer's needs."

Official report

The spending willingness of Chinese high-consumers is 50% higher than the global average

"True-Luxury Global Consumer Insight" report also pointed out that high-spending consumers (about 20 million people) continue to show good interest in luxury goods, and 40% of true luxury consumers expect to increase spending in the next year. The report defines high-spending consumers as customers who spend more than approximately EUR 38,000 in luxury goods per year.

Among them, after the epidemic, the spending willingness of this group of people in China is 50% higher than the average level, and that in the United States is 40% higher than the average level. However, willingness to spend in Europe is less optimistic, at 40% below average.

Official report

The Chinese luxury market is recovering and is expected to grow by 15-20% in 2023 compared to 2022. However, the Chinese market environment is changing compared to the pre-pandemic environment, such as:

Strong growth in local demand (expected to account for 82% of total spending in 2023) but unlikely to return to 2019 levels; The digital ecosystem is a big opportunity, with 46% of Chinese consumers making domestic purchases online.

Consumers are more diverse; although high-spending groups support the market (accounting for about 40% of total consumption), young people under the age of 30 and consumers in lower-tier cities will increasingly contribute to the growth of the industry's contribution.

Other opportunities: the Middle East, generative AI, experiential luxury, etc.

In addition, the Middle East market also offers promising opportunities for the luxury industry due to local developments driven by Vision 2030, increased domestic demand, and growth in high-end tourism. The Middle East personal luxury goods market was worth approximately EUR 15 billion in 2023 and is expected to reach EUR 30–35 billion in 2030.

Among them, the United Arab Emirates (UAE) and Saudi Arabia (KSA) are the two main drivers of growth in the region. In 2023, the personal luxury goods market in Saudi Arabia will be worth approximately EUR 3 billion, with a CAGR of 10–12% from 2022–2030, and the market valuation is expected to reach about 6 billion euros by 2030.

Official report

At the same time, in terms of groups, in 2022, millennials and Generation Z will bring more than 200 billion euros to the luxury industry, twice the value of 2016. By 2026, this value will double again, accounting for 75% of the market share. According to the report, brands must consider the characteristics of target audiences, design diversified engagement strategies, and provide personalized products and communication experiences.

Generative artificial intelligence (GenAI) has become a priority for many brand executives. In luxury goods, generative AI offers significant opportunities across the entire value chain, with a very large impact on marketing, personalization, and customer experience. In addition, this technology also helps to expand the "VIC" (Very Important Consumer) group.

The report also stated that after the performance of personal luxury goods has gradually returned to the level before the epidemic, the performance of experiential luxury goods is also picking up, with a faster growth rate than the former 57%.


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