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Leatherbiz Market Intelligence executive summary: • • • • •
Market conditions remain sluggish There is demand for specific qualities and end uses, but much of the market remains under pressure Consumers are prioritising quality and value over brand prestige Leather still needs to tell its story better The European industry faces a widening competitiveness gap with Asian producers
MARKET INTELLIGENCE
T
he leather supply chain has shown little additional momentum over the past few weeks. This can be seen in publicly available market reports as well as in daily conversations with customers and suppliers. We have an essentially unchanged market situation. When fundamentals hardly move, more space is inevitably taken up by interpretation and assumptions. That is exactly where the market currently stands. In geopolitics, there are few signs of progress. Anyone who wants to understand the nervousness of the global situation only has to follow the daily movement in crude oil prices. It is there that the sensitivity of markets to tensions is most obvious. Risks to transport routes and uncertainty about future supply are particularly visible. In the markets for raw material and leather products, what has been noticeable for months has intensified in recent weeks. In Europe, demand is almost exclusively concentrated on higher-quality leather, while in Asia the focus is mainly on leather suitable for the high-volume production of shoes, furniture or automotive interiors. Everything outside this narrowing window is not necessarily unsaleable, but it is becoming increasingly difficult to place. A strategy of simply carrying on and hoping that, at some point, somewhere and somehow, the general demand for leather will rise strongly enough to clear existing inventories is not convincing. There is no shortage of isolated positive news, but there is a lack of breadth, depth and continuity in demand. Only a small segment of iconic brands and products is still able to preserve the status of exclusivity and realise values derived from the idea of collectability, uniqueness or scarcity. Wherever one looks, identification and the idea of social advancement through luxury products is losing force. This does not mean that luxury is disappearing. It means that luxury must be justified differently. The sharp
price increases of the past have alienated many consumers. Especially in leathergoods, pressure in China has recently been particularly visible. Expectations for a recovery of the luxury segment as a whole remain cautious. At the same time, products that are convincing in their quality are still capable of gaining market share and being sold at appropriate prices. The problem is not that the desire to consume has disappeared. The wish to treat oneself to something small or large does not vanish because of inflation fears, declining real incomes or geopolitical tensions. What has changed is the willingness to accept price increases merely because of a logo. The consumer has become more selective. Quality, material, durability and value for money are being examined more closely. For leather, this represents a risk and an opportunity. What is already visible in leathergoods and bags could, in our view, also become a very real option in the footwear sector. Here, however, the influence of fashion and the ideas of shoe producers must be combined in such a way that leather once again appears as a natural, high-quality and deliberate material choice. We remain convinced that strong attention must be directed towards the properties of leather. For the consumer, shoes often look more or less the same. The challenge remains unchanged: how can we make consumers more aware of the benefits of choosing shoes made from leather? With today’s communication possibilities, this should not be an unsolvable task. However, waiting solely for initiatives from brands, manufacturers or retailers is unlikely to be particularly successful. It is not necessary to convince every consumer. It would already be enough to set new trends and make leather visible on the finished product as a recognisable, explained and deliberately chosen material. But if leather remains invisible in the end product or is only mentioned in fine print, it cannot tell its story.
And as long as it does not tell its story, it will continue to lose differentiation in competition with substitute materials. The furniture sector is traditionally very closely linked to real estate markets. Since furniture usually involves larger purchases, this sector is particularly exposed to macroeconomic pressure. High financing costs, uncertainty in property markets and more cautious consumers have a direct effect on demand. In the basic question of how much leather is used in furniture production, however, the mechanism is not completely different from footwear. There are few compelling arguments as to why a sofa or seating group necessarily has to be made of leather. In many cases a decision in favour of leather furniture is more a matter of emotion, taste and interior design preference than of strict functional necessity. The difficulty of the situation in this segment can be seen in the available results of large global brands. In the automotive sector, the rumour persists that the Chinese car industry is increasingly opting for leather interiors, even in its extremely tough competitive environment. As is well known, interior design, software and in-car entertainment play a much more important role in China than in many other markets. It is therefore possible to see brands trying to benefit from the image of leather in vehicle interiors and placing it more prominently in their product descriptions. However, when looking at the Chinese car market, which has been slow for several months, with brutal competition and an ongoing price war, it is difficult to assume that leather can be much more in the short term than an attractive phrase in a sales brochure. The most recently available data again show a significant decline in passenger car sales in China, while competition remains particularly intense in electric and plug-in hybrid vehicles. Unless leather in the finished automotive interior also reaches an appropriate price level, this trend is unlikely to bring much benefit to the leather industry. On the contrary, there is a risk that manufacturers advertise with leather, while the willingness to pay along the supply chain does not increase accordingly. Leather would then become a marketing argument at the endproduct level, but a procurement price argument at the supply level. For tanneries, this would be the most unfavourable combination: more requirements, more standardisation, more quality pressure, but no sufficient improvement in margins. What can easily be read from all this is that price pressure on leather is unlikely to ease in the