Why does luxury grow?

Despite the economic downturn we're living, it seems that
rich people don't feel the pain. / www.myhouseidea.com

It’s not a secret that the luxury sector has grown in the past years, and therefore in the middle of a global economic downturn. In 2010, the world’s GDP went up by 4.4%, according to the World Bank data. In the same period, the luxury market grew by 13%, as states the 2012 Luxury Goods Worldwide Market Study made by Bain & Company, a famous management consulting firm. In 2011, the tendency lowered a bit, but not in a parallel way: as the world’s GDP rose by 2.7%, the luxury sector did it by 11%. And last year, this study esteems that the world’s luxury market went up by 10%, establishing a new income record: 212.000 million euros. Although Europe represents a third of these gains, it tends to grow much less than other areas in the world: it is expected to grow by between 0% and 2%.

Despite being in recession for five years, Spain is important in the European luxury market. In fact, it has the fifth biggest turnover in the EU, only after France, Italy, the UK and Germany. In 2011 the Spanish market went up by 25% and in 2012 by 15% according to Cristina Martín, president of Luxury Spain, an association formed by Spanish luxury companies. This spectacular growth contrasts with a generalized downfall in consumption due to the economic crisis.

Surprisingly, Madrid (the capital city of Spain) is not leading the country’s luxury market. Barcelona is the Spanish city with the biggest turnover, almost a third part of the total, followed by Madrid (27%), Marbella (18%), Ibiza and Mallorca. All five add up to 90% of the Spanish market. But it can’t be overlooked that in Spain four out of ten luxury customers are foreign, and more than a half (55%) come here to buy international brands just because they are cheaper than in their own countries.

And where do purchasers come from? According to the World Tourism Organization (UNWTO), in absolute terms, the spending of Chinese tourists has overcome French’s’, English’s, Germans’ and Americans’, the ones who used to be on top of the list. Even the Russians have made it to the top 5. One out of four luxury buyers is now Chinese. They, Russians and Chinese, are the new parvenus, the ones that have come to stay amongst the colonizers of capitalism. The importance of these people for the luxury market is a phenomenon that seems to be even more pronounced in Barcelona.

Russians and Chinese are the top consumers of luxury articles in Barcelona, according to Professor Emerita of Applied Economics at UAB Miren Etxezarreta. For European super rich it’s maybe more chic to buy in Paris boutiques or in Portofino, Italy, while Russian tourists (and the ones that come here to stay) are attracted by this low-cost luxury that Barcelona offers in comparison.

Inequality map of the European Union. It shows the GINI
coefficient, according to Eurostats data.

The Luxury Dreams Group is a company that runs the internet portal Luxury News, has a real-estate business and promotes other luxury partners. Its manager, Miguel Ángel Solá, corroborates the importance of the Russian client, at least in the housing sector: approximately 80% of their clients are foreign and, of them, seven out of ten are Russian.



There is still an important issue: why does the luxury sector grow in Barcelona, Spain and practically the entire world while many other sectors are bearing huge declines? For Applied Economics professors Etxezarreta and Robert Tomàs, one of the critical factors is a great increase in inequality. Most of the countries in the Organization for Economic Co-operation and Development (OECD), which are themselves 34 of the richest nations in the world, have seen their inequality rise to levels comparable to the situation in the early twentieth century. The riches are even wealthier and they can therefore increase their luxury consumption.

For Etxezarreta, “capitalism, as conceived nowadays, is just feeding from the poor”. Miguel Ángel Solá states that luxury will always be a good business, even in the middle of a deep economic crisis: “Its consumers aren’t affected. There will always be someone with a full wallet and eccentric enough to look for exclusiveness”.