The future of the luxury industry was very much in question during the recession, especially with the strategy of U.S. retailers who slashed luxury brand prices to move inventory.  However, sales for the first quarter of 2011 are just in and the luxury industry has officially surpassed pre-recession sales levels.  Consulting firm Bain & Co. raised their prediction for 2011 luxury sales growth to 8 percent: $262 billion in sales this year compared to $244 billion in 2010.  Bain referred to the recovery as a “return to normal luxury goods consumption” but this recovery does not reflect the same consumption patterns as pre-recession and is creating a potentially destructive pattern for the luxury industry overall.

Luxury firms would like us to believe that consumers are returning to high-quality luxury products after getting burned with bargain shopping during the recession.  The 2010 annual report for LVMH, the largest player in the luxury market, suggests as much, repeatedly referencing product quality and the strength of their brands as the reasons for its spectacular recovery. But the geographic revenue growth for LVMH shows that sales from China are the primary driver of the exceptional sales numbers (see graph below).  Bain confirmed this pattern across the luxury industry – Chinese consumers have become the largest luxury consumer with luxe sales in China outpacing the rest of the world.

It’s not necessarily a bad thing that most revenue is coming from China but it doesn’t support the theory that luxury companies are rebounding because of their great products. The Chinese market is a perfect storm of newly wealthy consumers who love luxury brands. Some of these consumers were created by owning or managing manufacturing facilities, but even lower-income Chinese spend whatever discretionary income they have on luxury goods.  Ironically, the Chinese market is also heavily employed making some of the same products they are buying. If this revenue stream is dependent on current outsourcing levels creating a mass of consumers with money to spend, label-driven companies could be in trouble when production moves to a less expensive country, leaving the Chinese without jobs.

That’s not to say sales in the U.S. are stagnant — consumers in the Americas are buying even more luxury goods than they were before the recession hit. But where is this money coming from? Possibly Brazil, touted as the new center for luxury consumption because of the high concentration of wealth. Some of it comes from ultra-wealthy Americans unaffected by the recession because their wealth is built on stable, recession-proof sources, who are unashamed to conspicuously consume now that the recession is over. But large chunks of luxury sales pre-recession were from the aspirational consumer — those who could not actually afford luxury items and were buying on credit. Those consumers have not come back after losing their jobs and homes and going bankrupt. So what or who is compensating for them? Perhaps the weak U.S. dollar is triggering enough tourism, and tourist spending, to compensate for the loss of aspirational consumers in the U.S.  The same thing happened in Europe last year.

In some ways, luxury consumption is the same as it was before the recession.  Although sales are coming from different countries, the consumer type is the similar – someone buying beyond their means.  As we have seen in the U.S. market, this consumer is temporary at best.  Courting this consumer means constantly circling the globe for new wealth, often tied to areas of the globe with the cheapest labor pools.

It is this strategy that could destroy the luxury market altogether.  At a recent fashion trends seminar held at the Academy of Art University, a representative from forecasting firm TrendUnion reiterated the concept that what the truly wealthy desire most is discretion and privacy.  It is the truly wealthy who are the stable consumer base for the luxury market and, to keep this consumer, luxury firms must ensure that their products reflect those values.  The more that luxury firms splash logos all over their products and make them readily accessible to the new money consumer, the more the truly wealthy will turn away from them.

Maybe “destroy” is too strong a term.  Perhaps this strategy will simply separate true luxury firms – those focused on a high quality product – from faux luxury firms – those focused on marketing products.

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