Every company is committed to protecting the safety and health of its employees, customers, and business partners during the coronavirus pandemic. Luxury companies have shifted to address public-health issues. For example, factories that once produced perfume and scarves now make face masks and hand soap. Many luxury groups have also donated money to hospitals and non-profit organizations. The luxury-goods sector is sustaining millions of people, from factory workers to small-town craftsmen to retail-store employees. Industry leaders are addressing long-term strategic issues to ensure their businesses’ survival.
This article discusses the effects of luxury lifestyle during pandemic on luxury-goods industry. Then, we recommend two priorities for industry executives: short term actions to “navigating the now” as well as longer-term considerations for shaping and shaping the future.
Are you looking for a quick blip or a hard reset?
Although it is too early to determine the financial impact of COVID-19 on the sector’s entire financial health, the pandemic certainly has shaken certain foundational elements of the luxury industry. Some of these changes may be permanent.
Wholesale Darwinism. Independent luxury-goods wholesalers in Europe, many of which are family-owned boutiques, were already struggling before the pandemic. This was partly due to luxury brands shifting to vertical integration over 20 years, and more recently the rise of e-commerce. Some of these stores may be forced to close down due to the pandemic. Brands that haven’t yet transitioned to vertically integrated distribution models could suffer. Upstart brands will also be affected by the need for wholesale channels to reach new customers, and finance their full collections. Wholesalers will likely adopt aggressive discount and commercial policies to survive. This could, at the very least, affect the luxury positioning of brands without a concession model.
From local shopper to global traveler Luxury sector appeals to global consumers: Between 20 and 30 percent of industry revenues come from luxury purchases made outside of their own countries. Chinese tourists made more than 150 million international trips in 2018. We estimate that luxury purchases from outside China accounted for more that half of China’s luxury spending in 2018. Asian consumers buy luxury goods from abroad not only because they can enjoy lower prices in Europe but also because it is part of their travel experience. Buying luxury goods in the country of origin gives them a sense authenticity and excitement. Due to recent restrictions on travel, luxury spending has slowed down. We expect a gradual increase in international travel even after these restrictions have been lifted. However, China remains the largest growth market for luxury. It is clear that luxury shoppers will require a new approach by brands. Brands can create tailored experiences in local markets, strengthen their digital and multichannel offerings, and engage more closely with customers in tier-two or -three cities to reactivate Asian luxury shoppers. This will prove difficult due to the limited retail infrastructure and customer service capabilities of these cities.
Live audiences are not required for shows. Trade shows and fashion weeks have been vital ways for brands to maintain strong relationships with consumers. We expect some normalcy to return, but we believe the luxury industry should work closely with trade associations and fashion-week organizers to find other ways to provide the same magic as these events when there are restrictions on international travel or large gatherings. A coordinated overhaul of the fashion calendar might be a possibility for industry players, which would allow brands to simplify and streamline their presentation calendars.
From ownership to experience and back again. The fastest-growing segment of the luxury sector has been “Experiential Luxury” which can be described as high-end resorts, hotels, restaurants, and resorts. The 1980-95 generation, also known as millennials, opted for experiences and “Instagrammable moment” over luxury products. The Baby Boomers, who were born 1946-1964, are also moving in this direction. They already have luxury items and have accumulated them over the years. We expect that the positive momentum in experiential luxury will continue, but it will slow down as consumers temporarily switch to purchasing goods to experience the benefits.
Hyperpolarization in performance. Because of the wide spread of growth rates and profit margins, it was difficult to speak about the sector as a whole before the crisis. Luxury brands saw their growth vary from 40% to negative percentages within the same price segment, while earnings varied from 50% to single-digit percentages. The three main factors that we expect to see more polarization are the brand’s financial health before the crisis, its resilience and operating model (including its digital capability, agility and dependence on wholesale channels, and its response to COVID-19.
Another opportunity for “rare gems.” Over the past decade European luxury conglomerates, privately-owned firms and, more recently in America, Middle Eastern investors, as well as US fashion groups, have eagerly sought out attractive acquisition targets. As a result of the current crisis, some of these acquirers–particularly those that aren’t luxury companies themselves–could find that they have neither the core competencies nor the patience to nurture these high-potential brands, and thus might be willing to put them back on the market. In the aftermath of the crisis, acquisitions that were once prohibitively expensive might become feasible. These developments could lead to further industry consolidation, or the creation of new luxury conglomerates.
The luxury industry has proven its ability to reinvent itself time and again. We are optimistic about the sector’s future potential. Some brands will be stronger than others, and some will have to work harder to keep their business intact. Their ability to manage the immediate urgencies of COVID-19 and plan for the future will be crucial.
“Navigating the Now”: Priorities for immediate action
During this crisis, many luxury executives showed caring leadership. They prioritize safety for employees and customers, and communicate with all parties about their new safety and health protocols, crisis-response actions, and the steps they are taking to keep operations going. They must also take immediate action to protect their businesses from the worst. These are some short-term steps that business leaders should take.
Rethink your 2021 collection and review 2020 inventory. The spring season sales are up to 70% lower than last year. This is not surprising considering consumers didn’t have much opportunity to see the spring and summer collections in person. Plan how to phase in 2020’s fall and winter collections. Also, plan how to deal with the unprecedented amount of inventory that has yet to be sold 2020. Keep up-to-date with wholesalers and ecommerce companies’ plans for clearing excess inventory. Sometimes inventory swaps are better than aggressive promotions or discounting. You could reward loyal customers with gifts and other giveaways, in order to get more inventory. This will surprise and delight them while also encouraging them to shop across different categories or collections.
Enhance digital engagement. E-commerce can be a vital channel to keep sales up, communicate with customers and build a community around a brand. Accelerate your digital investments. Shift media spending to online channels. With a focus on customer activation and not brand building, You should also look into partnering with reputable online retailers to enhance your websites. Digital marketing can help increase online sales and entice customers to shop at reopened stores.
Over 40% of luxury goods production worldwide is done in Italy. All Italian factories, even small family-owned ones, have been temporarily closed.
Cash management. Establish a cash-control group with representatives from the sales and procurement teams to review spending and determine responsible reductions in cash flow. Examine all lease agreements and operating expenses, including marketing and events. Prepare to support department stores and wholesalers by extending accounts-receivable terms or arranging inventory swaps. To alleviate cash pressures through public measures, work closely with the government authorities in each country.
A ‘cleansheet” view of demand planning is recommended. Examine your inventory and budget plans for 2020 and assess COVID-19’s effect on each business unit and region. Make adjustments to revenue and profit projections, and give incentives to business unit heads to set new goals. Avoid the temptation to increase sales at the expense margins. A sales-focused approach is likely to produce inaccurate demand projections and large quantities of unsold inventory.
Your supply chain strength should be assessed. Over 40% of luxury goods production worldwide is in Italy. All Italian factories, even small family-owned faconniers, which loosely translated to “contract manufacturers”) have been temporarily closed. Luxury companies need to assess the likely impact on their products and categories. Short-term options include moving inventory between regions and channels, priiling less affected markets, and making sure that online orders are fulfilled. Luxury companies must help producers recover by paying promptly and restoring production as soon as possible. Italy’s faconniers could die if they fail to survive. This would mean that a key element of the luxury ecosystem, the craftsmanship that results from excellence and skill, which is the source of the “Made in Italy”, aura, will be lost forever.
Plan merchandising changes. We are beginning to see changes in consumer buying habits as lockdowns and physical disconnection restrictions become more common. Luxury players have reported that high-end items and lower-end items are more resilient than items in the middle price range. This could be due to “revenge spending,” which refers to the pent-up demand during and after crises, and the desire to maximize the value of money by buying functional items. Handbags and small leather goods are also selling better than ready to wear apparel in times of crisis. Children’s wear is doing especially well. Millennials have not reduced their spending as much than other segments of the adult market. These are just a few examples of luxury players. However, there is no single merchandising strategy that works for all. Brands need to carefully analyze sales data in order to incorporate consumer insights into their marketing plans.
The next normal: Long-term considerations
It is important to stabilize the business during a crisis, but management must also keep an eye on the long-term. These are some strategic steps to be taken during recovery.
Digital should be at the heart of your business model. This crisis was a catalyst for many companies to develop and execute an online and multichannel strategy. E-commerce in China has attracted new customers and markets (exhibit); similar patterns can be expected to develop in other countries. You can start by allocating more investment to the online channel. Find new ways to partner with established e-retailers. Boost your personalization efforts in digital advertising. Luxury customers are used to receiving exceptional service in stores. The emphasis should be placed on creating a personal digital experience that matches this standard.
Develop resilience and transformation skills. The luxury sector has been a source of innovation and creativity for the last 30 years. Luxury businesses need to develop the management talent necessary to support their CEO in resilience, transformation, and marketing. To emphasize the importance these skills, one option is to create a chief transformation officer position in the C-suite. 2
Boldly transform the ecosystem through M&A. Crises can open up new opportunities for growth. Ask your company to ask these questions: “Are they companies that we could partner with to both keep them in business as well as to allow you to expand into new markets or product categories?” Is there a value chain move (such as vertical integration), that is more appealing? What partnerships or acquisitions–perhaps in the technology arena–could we pursue now that were less viable before? What brands can we acquire to enhance our portfolio, or to begin our journey towards becoming a larger luxury company?”
You should anticipate changes in consumer behavior and sentiment. The ultimate shareholders in the luxury sector are the consumers. When conditions permit, we expect consumers to want to return to their normal lives. Luxury companies need to be able to anticipate what the next normal will look like and how they can respond. For example, in our recent conversations with CEOs, one trend that is likely to intensify postcrisis is the trend toward sustainability and the desire for more-responsible consumption–reinforcing the need for companies to provide clear, detailed information about their processes and products. Consumer preferences may shift to “silent luxury” after a crisis of large scale and emotional impact. This means that consumers will pay more attention to the classic elements such as craftsmanship and heritage and less to conspicuousness or “bling”.
Digitize your entire supply chain. The use of technology, from remote-working platforms and virtual showrooms, can help luxury companies remain productive during crises. It may even be possible to improve productivity. The commercial aspects (such as digital prototypes, sampling, and virtual showrooms) can be very valuable in maintaining strong relationships and buying trust, even when travel restrictions are in effect. Digitalizing the supply chain will require investments in cutting-edge technologies.
Although the COVID-19 pandemic made 2020/2021 a difficult year, we believe that the luxury-goods industry can weather the crisis with good planning and savvy execution. These actions can be used to help you and your team navigate today’s challenges while also building and strengthening your company for the long-term.
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