Watches and jewelry are not spared by the crisis in the luxury sector. Erwan Rambourg, responsible for the sector for HSBC in Asia, gives us some perspectives on the future.

What is causing the luxury market downturn?

For twelve months, it’s mainly due to psychological causes, what the Anglo-Saxons call the “feel good” factor. In China, the collapse of 40% of the equity market in the space of a few weeks, developed doubts about the economic outlook. The political and geopolitical environments are also weighed down by the elections in Taiwan and Korea. In Europe, the Brexit and the elections in Austria, along with the strikes in France are all negative factors. The US election campaign is accompanied as always by a slow-down, but it’s more pronounced this time than usual. And in general, tourist flows are affected by the idea that the world has become a more dangerous place.

So, the luxury industry is entering a new era?

For years, the demand exceeded supply. Remember, the Swiss watch industry could not keep up in terms of production! There were therefore no questions to ask. Today the slogan has changed, it’s: retail excellence. In other words, the horizontal expansion strategy in terms of outlets gave way to a vertical strategy to better understand the expectations of customers who accumulate fewer products and seek out experiences. Brands segment their offer with multiple services and exclusive products for Very Very Important Customers. They seek to recruit the best sellers knowing that 10% of them generate 40% of the business. They also target communication. Some brands believe the customers and particularly the Chinese are not loyal, but in reality, some brands are too slow. They must adapt and reclaim the customer relationship.

What will be the role of e-commerce and social media?

Luxury is a late adopter, but it cannot avoid this turning point because there is a growing gap between them and the 20-30 year olds, especially Asians, who spend their lives on the mobile phone referring to chats, blogs and other forums. They can order a pair of Nike with their initials on them and in their favorite color, or receive a book from Amazon in 24 hours, but not a bag! Ultimately, the investment effort will be more about e-commerce. For example, Hermès announced that next year we should find virtually all of its products online. However, it will be much more complicated with partners such as Net-a-Porter, as there is a risk of losing control of the direct relationship with the customer and a dilution of the margin.

Where will the recovery come from?

The recovery will not come from Europe or Japan. It’s considered that in the next five to ten years, the American nationalities less complexed about luxury, and the Chinese should represent a strong growth potential. If we focus on China, we can say that it will get better and better for different reasons. The potential is huge because if Chinese customers account for 40% of the luxury industry, only 10% of business is done in their country. As the effects of anti-corruption laws fade, Chinese customers are buying more and more at home. At first they feared traveling to Europe and the big price differences between China and other countries, which have reduced: Richemont and Chanel initiated this standardization. The reduction of certain taxes, especially of import tax, by the government is reflected in the development of domestic duty-free areas like on the island of Hainan. And in addition, we expect the first purchases by the new middle class.

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