Current conditions are testing the mettle of retailers and others in the luxury goods sector, demanding rapid changes to traditional strategies.
Sales of luxury goods have gradually revived, first in Asia, then in Europe and America. But the past few months have been punishing: According to the Boston Consulting Group, year-on-year sales plummeted by about 75% between March and May. With fashion weeks cancelled, luxury shops just reopening and unsure how to unload last season’s styles, online influencers with nothing new to display, and European tourism minimized, the world of luxury goods faces an uncertain outlook.
The luxury sector depends on consumer confidence more than most; thus the spectre of a global recession poses an immediate existential threat. In the longer view, there are changes afoot concerning how products are made, to whom they are sold, and where. Trends that might have unfolded over the course of a decade, set in motion prior to the pandemic, have accelerated.
Asians still account for the lion’s share of spending in luxury. Of the €281 billion ($315 billion) in luxury goods sold last year, more than half was purchased by Asians. Chinese consumers have gone from 1% of purchases in 2000 to 35% last year, according to Bain. Some 70% was purchased overseas, mostly on trips to Europe. Hence when international tourism takes a hit, the luxury sector feels the impact.
European firms have other ways of reaching Chinese luxury consumers, such as closing retail stores in high-rent locations like Paris and Milan and making more products available in China, where they often sell for much higher prices. This could also give margins a boost, but it would likely be short-lived. Armed with apps for comparing prices, Chinese consumers are becoming less willing to pay inflated prices at home. Meanwhile local brands are gaining appeal as Chinese authorities toughen restrictions on bringing luxury items home from abroad.
Other consumer trends have been accelerated by the pandemic as well. Online sales of luxury goods are around half those of mass-market fashion retailers, at 7-8% of total sales. But with shops closed, luxury brands have had to be more open to selling online, and online purchases are on the rise. Unfortunately so are production costs. Many suppliers are small family firms, which are now struggling. Some luxury groups are providing financial support to help keep them afloat.
The Economist reports that despite the challenges and the gloomy sales forecasts, “Most of the big players have healthy balance-sheets and are expected to find ways to return to profitability. Many smaller marques are controlled by founders or their families, who are loth to sell in a downturn.” Consolidation seems unlikely. The planned takeover of Tiffany by LVMH is in a holding pattern.
Some parts of the industry are in a better position than others. More established luxury brands are more apt to retain buyers in a crisis, while those looking to make a comeback could be victims of circumstance. There are also differences between segments: Fragrances and cosmetics have prevailed, while fashion houses are vexed with finding their place in a world of lockdowns.
Overall, wealthy consumers’ appetite for luxury goods remains healthy, but surviving in the COVID-19 world and beyond will demand change in an industry steeped in tradition.