There’s no doubt that the global luxury goods market has been hit hard by the coronavirus pandemic – but how are manufacturers planning to bounce back when it’s all over, and what changes will they have to make?
A recent Euromonitor report estimated that the global luxury goods market would decline by about 18 percent during the coronavirus crisis – the question is, can it ever regain its previous heights, and if so how long will it take?
With product launches in fields from watches to fashion delayed, exhibitions cancelled and others rescheduled, it was always clear that the coronavirus pandemic was going to have a serious effect on luxury goods sales.
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French fashion-to-perfume house Chanel has warned that the coronavirus crisis will will weigh on the luxury goods sector for the next two years, but confirmed a commitment to its strategy of avoiding discounting and online selling.
The coronavirus shutdown seems to have been the final nail in the coffin of the ailing Baselworld watch show, which will probably not take place again in its present form, and other events planned for even later in the year have been forced to postpone – the organisers of the luxury car show Concorso d’Eleganza Villa d’Este have decided to postpone the event planned for October 2020 until 28th–30th May 2021.
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Luxury in decline?
The Euromonitor report estimated that at the end of 2019, worldwide sales of luxury goods exceeded €910bn. At that time the total global luxury goods market was estimated to grow by three percent in 2020, but in the light of the coronavirus crisis, that figure has now been revised to an anticipated decline of 18 percent.
Ten countries would contribute most significantly to the downgrade in luxury goods says the report, with the largest decline globally in Switzerland, expected to be 25 percent. Germany, Italy and France were also high on the list, followed by the USA and Canada.
Germany was expected to see its luxury goods market contract in value by 23 percent, with France and Italy declining by 20 percent.
The report says: “Whilst some luxury goods categories and retail channels may be less negatively affected than others, the pandemic represents an absolutely unprecedented shock to all areas, and no luxury goods category is likely to “benefit” from the COVID-19 crisis, with all categories affected in the short term.
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Consumer confidence
“Consumers fear contagion in the luxury retail space, whilst others see little point in buying personal luxury goods, such as leather goods, apparel and footwear, timepieces or jewellery. Owing to the conspicuous nature of some products many feel there is little opportunity to wear or use them in the foreseeable future. In addition, consumer confidence has been hit and spending on “non-essentials” has been put on hold.
“The ongoing COVID-19 outbreak is hitting the luxury travel market hard. Luxury hotels, travel, high-end travel retailers and hospitality services have all already suffered significant losses due to falling global demand with the long-term outlook looking uncertain as consumer spending on all such services is pulling back dramatically.
The report suggests that there is some hope for service-based luxury business which have been able to some extent to adapt to the times. “Whilst luxury foodservice has been severely impacted by the challenges of COVID-19, with all of the world’s luxury foodservice operators facing mandated shutdowns, many luxury hotels are now focused on home delivery services and providing online tutorials on how to replicate luxury hotel services at home, with lessons on services such as bed-dressing, creating the perfect “turn-down service”, flower arranging and fine-dining” says the report.
Many chefs and restaurants have adapted to the period of closure by providing services to frontline workers and the vulnerable: Tom Kerridge’s team from his three Marlow food sites have served 75,000 meals to frontline workers and the vulnerable, for example, while Tommy Banks delivered upscale meal kits from his two-Michelin-starred Yorkshire restaurant The Black Swan to 500 customers a week. However this is hardly a model for long-term recovery.
Cheaper options
In January, the British luxury sector was worth £48 billion to the UK economy, but as the coronavirus pandemic struck, the value of the FTSE 100 dropped by £44bn as luxury retail groups saw their share values fall. Harrods, Burberry and other luxury goods specialists have announced job cuts as market researcher GlobalWebIndex found that just 15 percent of 2580 consumers surveyed said they would buy the luxury items they originally wanted at full price, while 40 percent said they would wait for promotions, and 23 per cent would look for cheaper options from other brands.
Harrods chief executive Michael Ward said the job cuts would come “in parts of the business that have been most affected by the challenges of lockdown”. But the luxury department store, which is reliant on its flagship Knightsbridge outlet, found a new way to sell surplus stock by opening its first outlet pop-up store in one of London’s Westfield centres to sell last-season and surplus stock built up over the lockdown at discount prices.
This is likely to be one of many ways that luxury goods retailers try to make up their losses post-lockdown. Testing the waters with virtual showrooms and digital runways, luxury fashion retailers will speed the transition to an online-first retail model, with investment in consumer research and data analytics. Some brands like Swiss watchmaker Patek Philippe have started selling online for the first time, and Dior’s collaboration with leisurewear specialist Nike suggests that the post-lockdown market may concentrate on comfort and wellbeing rather than overt luxury.
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“It has become clear, especially for luxury merchants who have relied heavily on bricks and mortar retail, that a strong ecommerce strategy is therefore crucial for any brand looking to recover from the pandemic,” said Neil Kuschel, chief executive at technology specialist Global-e. “For luxury retail to recover, retailers may need to experiment with ways in which they can turn the whole exercise of going into a store as an experience” he added.
Bricks-and-mortar
Some brands may find it hard to give up the bricks-and-mortar approach, feeling that this is still the best way to portray a brand image; “You do need a physical presence because you want the final client to show up and understand [the brand]” said Edgardo Osorio, founder of Italian shoe brand Aquazzura.
With international travel restricted, in the short to medium term one major change in the luxury goods market may be that it relies more on local business than on tourism; the Financial Times reported that luxury goods department store Le Bon Marché of Paris, owned by luxury group LVMH, would normally have 12 counters open for tourists to reclaim taxes, but in May had just one counter open to handle a handful of refunds. Business analyst McKinsey said: “With the recent travel restrictions, an important driver of luxury spending has come to a halt, and we anticipate only a gradual ramp-up in international travel, even after the restrictions are lifted.”
But as the Euromonitor report suggests, there are also some good prospects for the luxury goods market, where “Despite the extremely difficult times that luxury businesses are facing, many brands have been able to shift their focus and support local communities. These shifts include the reworking of supply chains to make the products consumers and the health industry currently needs as well as providing special discounts, food and shelter to healthcare workers.”
There’s also some hope for premium beauty and personal care products, led by premium fragrances, representing €44.1bn of the luxury goods market. The Euromonitor report estimated a value decline in this sector of just two percent for 2020, with a quicker bounce back to normality compared to other categories like luxury cars and hotels.
China bounceback
In China, a major luxury goods market among the first to be hit by the pandemic, there are already signs of a bounceback, with several luxury goods companies reported an uptick as people emerged from weeks of lockdowns, prompting what some analysts have called “revenge spending” – the release of pent-up demand once people aren’t forced to stay home.
With the luxury goods market in China estimated to rise to 50 percent of the global total by 2025, the market is clearly an essential one. Tiffany reported that jewellery sales in China had surged by around 30 percent in April and 90 percent in May compared to the same months last year – all this despite a drop of about 40 percent in Tiffany’s global net sales in May. “Our business performance in mainland China, which was the first market impacted by the virus, is indicative that a robust recovery is underway,” CEO Alessandro Bogliolo said during a company earnings presentation. Clothing manufacturer Burberry and jeweller Richemont have also reported strong demand in China since stores reopened.
In some other markets, such as automotive, a bounceback of big-ticket sales is not likely to be so swift.
In a recent webinar, Euromonitor suggested that the wellbeing and mental health markets may be two key areas in the potential recovery of the luxury goods market. Forty percent of high-income consumers are already taking measures to manage stress, anxiety and mental health during the current pandemic according to the report.
Luxury positioning
In the final analysis, the two trends likely to emerge in the luxury market are a move back to item purchases rather than experiences, and a possibly self-destructive period of discounting. McKinsey says: “Even before the pandemic struck, independent luxury-goods wholesalers in Europe and some of the large North American luxury department stores were already struggling… This pandemic might force some of them out of business. To survive, wholesalers are likely to adopt aggressive commercial and discount policies—which, at least in the medium term, could hurt the luxury positioning of brands.”
The advance of ‘experiential luxury’ such as high-end hotels, resorts, cruises, and restaurants, which was one of the most dynamic and fast-growing components of the luxury sector might lose momentum in the short term, as “consumers temporarily revert to buying goods over experiences.”
But McKinsey concludes on a partially optimistic note: “Time and again, the luxury industry has proved capable of reinvention. We are confident about the sector’s long-term potential. But some brands will emerge from the crisis stronger, while others will struggle to preserve the integrity of their business. Much will depend on their ability to respond to the short-term urgencies related to COVID-19 while simultaneously planning and executing for the future.”
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