Why it's only a matter of time before luxury brands turn to the secondhand market
The standard practice in many industries is to grow by expanding into new markets. This usually means creating new products or moving into new territories where demand is high. A good example is the personal luxury market in the 2000s - as sales started to plateau, brands responded by creating products and accessories that were much less expensive. This democratization of luxury made it possible for a much broader array of consumers to experience the “dream”. During this period brands also expanded aggressively into new territories. The nouveaux riches continue to be appealing targets (China, India, Brazil to name a few). However, new product lines and territories are a finite source of growth. What happens when those resources are tapped out?
Automotive is a classic example of an industry whose primary market has reached capacity. The market for new cars enjoyed strong growth in Europe, North America, and Japan for most of the 20th century. Decades of consistent growth occurred in part because manufacturers developed new models at various price points (like luxury brands in the 2000s). However, the market stagnated at the turn of the 21st century. According to data from McKinsey, the market for new cars has been growing at less than 1% since 2004. When the market started tapering off in the 90s, auto makers turned their attention to used cars in search of new growth. Today the used car market is growing 7% YoY and sells more units than the primary market – in 2016 there were 60 million used cars sold compared to 18 million new cars.
Heavy equipment is built to last a quarter century and survive the most rugged conditions imaginable. Function is the primary driver of sales in this market, which means Caterpillar can’t increase revenue by designing a sexier bulldozer. A secondhand market for this kind of product is inevitable. Manufacturers have responded by adapting their business models to include used equipment, which offsets volatility in the primary market and provides new growth opportunities. They leverage their position as subject matter experts to certify used equipment and thereby differentiate themselves from third party resellers. According to the Wall Street Journal, the number of used construction equipment being sold at auction grew 35% last year. A major source of equipment sold at auctions are rental businesses, which is a trend fashion should also be paying very close attention to.
The smartphone market is the probably the most similar to luxury because the product is about form and function – your smartphone, like your clothes, is an expression of who you are. Apple is essentially a luxury brand. It sells products that are high quality, expensive, desirable, and meticulously designed. This statement reigns even more true after the release of the iPhone X. It’s therefore a bit shocking that Apple has been discretely selling used iPhones in the United States since 2016. The secondhand market started with a small collection of online resellers back in 2010. According to Deloitte, the market for used smartphones is now worth $17 billion and growing 50% YoY. Outside the product itself, smartphone makers and luxury brands share many other things in common. They both have fast design cycles, a strong focus on brand equity, high price points, and reliance on tech savvy or digital consumers. The used smartphone market provides an interesting view into what the secondhand luxury market could look like in 5 years.
Brands must look beyond traditional sources of growth as the personal luxury market continues to slow down. This doesn't mean they need to sell secondhand. But it does mean they need to think about ways to extract value from the resale of their products, and providing authentication services is a great place to start. Is it perhaps time for luxury to take a page out of Apple’s book and think differently?
- McKinsey & Company, 2014. http://www.mckinsey.com/industries/automotive-and-assembly/our-insights/a-road-map-to-the-future-for-the-auto-industry
- PricewaterhouseCoopers, 2016. https://www.strategyand.pwc.com/trends/2016-auto-industry-trends
- Business Wire, 2017. http://www.businesswire.com/news/home/20170517006119/en/Global-Car-Market---Size-Projections-Drivers
- Wall Street Journal, 2016. https://www.wsj.com/articles/heavy-equipment-glut-weighs-on-machine-makers-1474191001
- Recode, 2016. https://www.recode.net/2016/11/16/13631116/apple-used-iphones-refurbished-resale-newest-product
- Deloitte, 2016. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Technology-Media-Telecommunications/gx-tmt-prediction-used-smartphones.pdf