Is luxury prepared for increased private equity capital flow?

October 10, 2024

Charisma Glassman

The luxury industry is undergoing a significant transformation, driven by changing consumer demands, business and economic environment, digital advancements, sustainability trends and the growing appeal of experiential consumerism.

Historically, luxury has been dominated by European conglomerates, but these changes are creating vast new opportunities that are drawing private equity (PE) firms into the mix.

PE investors see enormous potential in helping luxury brands expand beyond Europe, with particular focus on Asia, Latin America and the Middle East.

With strong growth on the horizon, the luxury sector is now primed for an influx of private equity capital.

Luxury’s European stronghold and global expansion
Europe remains the powerhouse of global luxury, accounting for up to 36 percent of worldwide sales across different sectors.

However, emerging markets are now driving a significant portion of growth, with China projected to account for 40 percent of global luxury spending by 2025.

The rapidly rising middle class and increasing number of high-net-worth individuals in regions such as Southeast Asia and Latin America present substantial opportunities for expansion.

Private equity firms see a chance to partner with smaller luxury brands in these emerging markets, where they can provide both capital and strategic expertise.

These firms can help local brands scale operations, capture market share and compete with the dominant European players.

With luxury demand expected to grow in double-digits annually in these regions, PE capital can play a pivotal role in building global luxury powerhouses, helping brands maintain authenticity and still deliver profitable outcomes.

Digital transformation as a growth engine
The pandemic accelerated the shift toward ecommerce, with online luxury sales growing from 12 percent in 2019 to 23 percent in 2023, and forecasts predict this figure will rise to 30 percent by 2025.

However, the digital transformation of the luxury sector extends beyond ecommerce. Brands are increasingly relying on AI, data analytics and personalized digital experiences to attract tech-savvy consumers.

Private equity firms, known for scaling businesses, are essential players in this transformation.

There is a strong need for luxury brands to invest in omnichannel strategies and AI-driven personalization to stay competitive.

Consumer goods and luxury brands must build integrated digital ecosystems that can predict and adapt to consumer needs.

PE firms can provide the necessary capital and expertise to accelerate this process, helping brands innovate and stay ahead in an increasingly digital marketplace.

Sustainability and ESG-focused investments
Sustainability has become a crucial factor for modern luxury consumers, with 60 percent of millennials and Gen Z buyers stating that they prefer eco-friendly luxury products.

Luxury brands are therefore under pressure to adopt more sustainable practices, from ethical sourcing to carbon reduction.

However, these efforts often require significant investment, which is where private equity can step in.

Private equity firms are increasingly prioritizing environmental, social and governance (ESG) criteria in their investments.

In fact, most major private equity firms plan to increase their focus on sustainability in the next five years.

Sustainability is the ultimate luxury. Brands failing to adapt to this trend risk losing market share.

By aligning with ESG-focused PE investors, luxury brands can not only enhance their sustainability efforts, but also boost their long-term profitability and appeal to a more socially conscious consumer base.

Rise of experiential consumerism
Luxury consumers currently are no longer satisfied with just owning a product –they seek immersive experiences. This shift towards experiential consumerism has driven luxury brands to expand into sectors such as hospitality, travel and lifestyle.

From branded hotels, cafes, and restaurants to private jets, yachts and even cruises, luxury brands are now offering exclusive, lifestyle-oriented experiences.

In fact, 68 percent of luxury consumers say they prefer brands that offer personalized, immersive experiences.

To capitalize on this trend, luxury brands are partnering with real estate firms to create high-end retail and experiential spaces.

These collaborations, often termed "expedition retail," require significant capital investments, not just for digital infrastructure but also for real estate and partnerships in the hospitality and travel sectors.

Flagship stores are evolving into lifestyle destinations that blend shopping with art, dining and bespoke events.

In addition to digital strategies, luxury brands must explore partnerships with real estate and hospitality companies to offer the ultimate lifestyle experience.

Private equity firms, with their financial resources and expertise in real estate, are well-positioned to help luxury brands execute these strategies, enabling them to offer more than just products – in other words, entire luxury lifestyles.

Consolidation and brand diversification
Many luxury brands remain independent and localized, making the industry highly fragmented.

Private equity firms see opportunities for consolidation, helping smaller luxury brands scale their operations, expand into new product categories and compete globally.

In 2023, 30 percent of private equity acquisitions were in the luxury retail space.

PE firms are also driving diversification within luxury brands.

By expanding into adjacent categories such as beauty, wellness and home décor, luxury brands can create new revenue streams and broaden their customer base.

Strategic partnerships, M&A efforts and brand diversification will be key drivers of growth in the evolving luxury landscape.

New era of luxury and private equity collaboration
The luxury industry is at a pivotal moment.

With tectonic changes in consumer behavior, the rise of digital transformation, sustainability pressures and the shift toward experiential consumerism, the sector is primed for an influx of private equity capital.

CEOs of luxury brands, empowered by PE backing, can use this capital to scale their operations, enhance their digital and experiential offerings and invest in sustainability initiatives.

For private equity investors, the luxury market represents a high-margin, resilient opportunity with enormous growth potential.

AS THE INDUSTRY expands into new regions and embraces digital and experiential strategies, private equity will play a critical role in shaping the future of luxury.

Luxury brands that blend innovation, sustainability and experiences will be the ones that define the future.

Charisma Glassman is global strategy and transformations executive and portfolio head for consumer products, luxury and retail at Capgemini, New York. Reach her at charisma.glassman@gmail.com.

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