Why Tourist Demand Could Be Huge For Ralph Lauren’s European Sales

by Trefis Team
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Quick Take -

  • Ralph Lauren derives around 20% of its sales from the European region.
  • According to Bain & Company, Europe’s luxury market is estimated to grow at 5% in 2012, to reach €75 billion ($96.1 billion). This contrasts to a growth rate of approximately 10% witnessed in the prior year.
  • The growth in the European luxury market is being driven by higher luxury demand from tourists. Chinese tourists account for 30% of the industry-wide luxury sales in Europe.
  • Ralph Lauren’s European sales declined by 9% in the first six months of fiscal 2013. However, it showed constant currency growth of 8% in Q3 2013.
  • Chinese tourists represent less than 2% of Ralph Lauren’s European sales, and we believe increasing this proportion will be the key for Ralph Lauren to grow its revenues in the region.

Ralph Lauren (NYSE:RL) derives around 20% of its sales from the European region. In contrast to the economic downturn in Europe, the luxury market in the region has recorded steady growth over the past few years driven largely by luxury demand from tourists. Chinese tourists have emerged as the key shoppers in the region with 30% share in the overall European luxury sales. Increasing tourist travel from regions such as Russia, Middle East, Brazil and other Asian countries has further helped the luxury market in the region. While the demand from tourists has grown, domestic consumers in Europe have become more value conscious than before and are increasingly looking for bargain shopping.

The European luxury market is showing varied trends across different parts of the region. Luxury sales in Southern Europe (including Italy and Spain) have been most affected due to the economic challenges in the region. In contrast, the luxury market is showing high growth in Germany, Eastern Europe and Russia.

Ralph Lauren’s European sales declined by 9% in the first six months of fiscal 2013. However, in Q3 2013, its European sales showed constant currency growth of 8% led by higher retail sales. Ralph Lauren’s wholesale business in Southern Europe remains challenging and we expect this trend to continue in the short term. The company derives less than 2% of its European sales from Chinese tourists, and we believe increasing this proportion is the key for Ralph Lauren to grow its revenues in Europe. We expect this proportion to rise in the future, helped by the company’s efforts to elevate its brand image in China.

In this article, we evaluate the current dynamics of the luxury market in Europe. Further, we analyze the implications for Ralph Lauren to grow its revenues in the region.

See our complete analysis for Ralph Lauren

What are the current dynamics of the overall luxury market in Europe?

Notwithstanding the current economic downturn in Europe, the luxury market in the region has grown over the past few years driven by luxury demand from tourists. According to Bain & Company, the personal luxury goods market in Europe is expected to grow by 5% in 2012, to reach €75 billion ($96.1 billion). This compares to the growth rate of around 10% witnessed in the prior year. Europe remains the biggest luxury market in the world, however, its share in the worldwide luxury goods market was estimated to decline from 37% in 2011 to 35% in 2012. [1]

Tourism has been the key driver for Europe’s luxury market as the demand from local consumers has waned. Chinese customers have become increasingly important in the European market as they comprise for around 30% of the industry-wide luxury sales in the region. [2] According to analysis by TUI Think Tank and Z_punkt (a strategy and foresight consultancy), an estimated 3.8 million Chinese people traveled to Europe in 2010 and this figure is expected to grow by four times by 2020. [3] Hence, it becomes especially important for Ralph Lauren to tap the growing demand from Chinese shoppers in the region. Moreover, the increasing tourist travel from regions such as Russia, Japan, Middle East, Brazil, and other Asian countries has further bolstered the European luxury market.

In contrast to the trend being witnessed for tourists, the demand for luxury products from domestic consumers in Europe has subsided as they have become more price sensitive than before. According to a study by McKinsey and Company, more than 50% European consumers reported that they bought fewer luxury products in 2011 as compared to the prior year. [4] Moreover, they are increasingly looking for bargain shopping as compared to full price shopping.

How is the luxury market performing region-wise in Europe?

The luxury market is showing varied trends across the different regions of Europe. Luxury demand within Southern Europe (including Italy and Spain) has been the worst affected owing to debt crisis in the region.

In contrast to Southern Europe, the German luxury market has grown at a strong rate over the recent past, helped by rising interest of Germans in luxury products, especially among younger shoppers. In 2011, the German luxury market posted growth of 16%, which was above the European industry average growth rate. [5]

The luxury market in Eastern Europe (especially Poland) and Russia is witnessing high growth due to growing economic prosperity in the region.

What are the implications for Ralph Lauren in the region?

Ralph Lauren has a large presence in Europe and it derives around 20% of its sales from the region. Its products are sold through 4,377 wholesale doors in Europe. In addition, the company also has 26 retail stores and 35 factory stores in the region (as of March 31, 2012).

For the first six months of fiscal 2013, Ralph Lauren’s European sales dropped by 9% annually primarily on account of weakness in its European wholesale business due to the economic challenges in the region. However, Ralph Lauren’s European sales picked up in Q3 2013, with constant currency growth of 8% led by higher retail sales. Its wholesale business remains challenging in the region, particularly in Southern Europe (especially Italy and Spain).

We think the return to sales growth in Europe is an encouraging trend for the company. However, we would have to wait for a few more quarters to see whether this actually indicates long term recovery in its European sales. We believe Southern Europe will continue to be a challenging market for Ralph Lauren in the near-term as the region faces significant macro headwinds. Demand from Chinese tourists account for less than 2% of Ralph Lauren’s European sales and we think if Ralph Lauren is able to improve its brand image among Chinese consumers, its sales throughout Europe will receive a boost. [6]

Ralph Lauren is actively taking efforts to enhance its brand image in China. It has restructured its business in China and closed down a significant portion of its distribution network in the region to replace them with more high end stores. The company plans to open premium stores in the region in the future, along with other leading luxury brands. We believe this move could help Ralph Lauren in elevating its brand image in China, which will also positively impact its European sales.

We think the company may also have to make other efforts in Europe to attract more Chinese tourists. According to a research by McKinsey and Company, Chinese shoppers have different shopping patterns as compared to their European counterparts. While Chinese customers like to buy more apparel, watches and handbags, Europeans like fragrances, cosmetics and apparel. [4] This may require Ralph Lauren to realign its product portfolio in its European stores to stock more products suited to Chinese tastes and preferences.

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Notes:
  1. Bain projects global luxury goods market will grow overall by 10% in 2012, though major structural shifts in market emerge, Bain & Company, October 15, 2012 []
  2. Ralph Lauren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2013 []
  3. New Chinese tourists in Europe from 2017, Z-punkt []
  4. Domestic consumers: The “Sleeping Beauty” of European luxury, McKinsey & Company, February 2012 [] []
  5. Roland berger study on the luxury goods market: Germany has the biggest potential in Europe, Roland Berger, April 16, 2012 []
  6. Ralph Lauren Management Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, May 22, 2012 []
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