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Luxury sector poised to invest in metaverse opportunities

Even luxury goods may not be immune to macroeconomic woes in 2023, but the prospects for longer-term investment and innovation remain bright, says Piral Dadhania, Director, RBC Capital Markets.

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By Piral Dadhania
Published January 17, 2023 | 2 min watch
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Key Points

  • The luxury goods sector in North America remains robust, but continuing slowdown may hit margins and restrict price increase potential for 2023.
  • Further ahead, however, the industry is poised to invest heavily in new forms of product personalization, such as NFTs.
  • The broader demographic base for sporting goods makes this sector more vulnerable to a decline in consumer spend.
  • Aspirational customers will be more deeply affected by near-term economic pressures, but expansion of the resale market in luxury goods will encourage their participation.

Robust 2022, uncertain 2023

Short-term slowdown is affecting asset prices and investment decisions in the luxury market, as in other sectors. However, fundamental opportunities are likely to present in the medium to longer term.

Revenue momentum has remained healthy despite the economic headwinds, with little deceleration in North America. China’s position has been affected by lockdowns under the Zero Covid policy, though with the prospect of loosening as 2022 closes.

Looking to 2023, a potential concern for the luxury sector is the timing and magnitude of the inevitable deceleration in revenue growth, which is arguably now reflected in valuation levels. It remains to be seen how far margins and annualized price increases can be sustained in this context.

Real and virtual engagement

Further ahead, though, the industry is primed for continued capital investment, with billions of dollars earmarked towards accelerating change. Companies and consumers are resetting their priorities – creating opportunities and challenges across the real and virtual world.

Investments in the metaverse, for example, will reset the rules of how, when and where companies can interact with their customers. Consumers are also buying into more personalization, purpose and transparency than ever before.

Many luxury brands offer buyers the option of customization across a range of options, but for now these are consumer-initiated. A more proactive and anticipatory element will typify the shopping experience in future. For example, an online customer interface could reflect historical buying patterns, adapted to seasonal shifts in the customer’s region, and augmented by a virtual styling assistant for high-value customers.

Non-fungible tokens (NFTs) also offer huge potential. In the future, consumers will use NFTs for status and self-expression in virtual ecosystems – for instance, buying one-of-a-kind, personalized luxury sneakers and owning the digital twin online. The NFT would provide proof of ownership and authenticity, enable transactions, and become the pillar of closer relationships between brands and customers.

Slowdown hits sports goods

Sporting goods sales have benefited from improving product supply and World Cup sales. However, the sector will need a clean-up of China inventory, resumption of more normalized marketing strategies and rebuild of credibility of western sporting goods brands.

To some extent, we also believe the market is adjusting expectations towards a lower growth outlook for China, and a lower level of sustainable margin compared to the pre-Covid 19 peak.

Given the wide demographic appeal of the sector, the broad slowdown in consumer spending will hit sentiment for sporting goods. Price elasticity is also a potential concern against a backdrop of declining disposable income.

Resale: luxury’s next frontier?

Aspirational customers, who make up a high proportion of luxury demand, are more likely to be affected by the current cost of living squeeze, and could be the segment of luxury demand that slows first.

Looking ahead, we expect the next frontier for luxury brands to be the resale market. From the demand side, this will be partly driven by aspirational consumers who want to participate in luxury brands, and consumers’ changing perception of luxury goods as an investment.

The growing desire of consumers to recycle and reduce waste is another key factor. A secondary market would offer brand owners the opportunity to bring product circularity into their business models, and further embed sustainability as an end goal.

While the jury is still out on whether resale is a net positive or negative for brand owners, we believe it could make up at least 20% of luxury demand within ten years – with knock-on implications for future revenue growth, new customer recruitment and product control.

This trend, and others with huge potential to disrupt and transform industry and society, are explored in detail in RBC Imagine’s Preparing for Hyperdrive: Themes that will define our new future.

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