The safety and health of all employees and customers is the top priority of any company in the face of the coronavirus pandemic. Luxury companies have moved to address immediate public-health needs. The factories that used to produce scarves or perfumes now make hand sanitizer and face masks. And many luxury groups have made financial donations to hospitals and other non-profit organizations. With millions of people dependent on the luxury goods industry for their livelihood, including factory workers and employees at retail stores as well as small-town artisans and craftsmen, industry leaders are making plans and grappling with long-term strategic questions to ensure the continued survival of their businesses.
This article will discuss the impact of crisis on the luxury-goods and retail sector. We recommend two sets for industry executives: shortterm actions to “navigating now” and long-term considerations that will shape the future.
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While it is premature to estimate the full financial toll of COVID-19, the crisis has definitely shaken the foundations of the luxury sector. And some of these changes could last forever.
Wholesale Darwinism. Wholesale Darwinism. Some might be forced out of business by the pandemic. Brands that are not yet ready to move to a vertically integrated distribution model could be the ones to suffer. However, this could also impact upstart brands that require wholesale channels in order to reach new customers or finance the development and expansion of their full collections. Wholesalers are likely be aggressive in their commercial and discount policies, which could impact the luxury positioning brands that don’t have concession models.
From global traveler, to local shopper. Luxury is appealing to a global consumer. 20-30% of industry revenues can be generated by luxury purchase outside of their home countries. Chinese consumers traveled more than 150,000,000 miles abroad in 2018, accounting for over half of China’s luxury spend. Asian tourists buy luxury goods overseas to enjoy cheaper prices in Europe. However, they also shop because it’s part of the travel experience. Shopping in the country where the brand originated gives you a sense authenticity and excitement. A key driver of luxury spending is now halted by recent restrictions to travel. However, we still expect a steady increase in international travel once the restrictions are lifted. However, the biggest growth opportunity for luxury is still in China. The challenge for luxury brands is to attract new customers. Brands should create customized local experiences to appeal to Asian luxury consumers. They can also strengthen their digital, omnichannel and mobile offerings and connect more deeply with those in tier-2 and -3 cities. Given the limitations of both customer-service and retail infrastructure in these cities, it will be difficult to do so.
There are no live audiences for fashion shows. Trade shows and fashion week have been key ways brands have kept strong relationships with their customers and business partners. We anticipate some return to normalcy in this area, but we also believe that luxury industry members should collaborate closely with fashion-week organizers as well as trade associations to explore other ways to offer the same magic these events provide when there is a restriction on international travel and large gatherings. Industry players may also be interested in a coordinated redesign of the fashion calendar. This would see brands simplifying their presentation schedules.
From ownership to experiencing, and back again. “Experiential Luxor”–think luxury resorts, hotels, and restaurants–has been the fastest-growing sector of the luxury market. Millennials (those born between 1980-1995) prefer to experience and “Instagrammable moments”, rather than luxury products. Baby boomers, who were born between 1946 and 1964, also moved in this direction. They have already built up luxury products over time. The positive momentum of experiential luxury should continue. However, this trend will eventually slow down as people temporarily choose to buy goods rather than experiences.
Hyperpolarization in performance. The sector’s growth rates and profit margins are so spread out that it makes no sense to discuss them in terms of averages even before the crisis. Even within the same category and price point, luxury brands experienced a range of growth rates from 40 percent to negative and earnings between 50 percent and single-digit percent. Three fundamental factors are important to us: the brand’s health before the crisis, the strength of its operating model (including the digital capacity and agility of its supply chain and dependence on wholesale outlets), and the response to COVID-19.
Another chance to grab ‘rare gems.’ Over the past ten years, European luxury conglomerates, public-equity firms, as well US fashion companies and investors from the Middle East, have all sought after 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. Even acquisitions that were once too expensive may become financially viable after the crisis. These developments could lead further industry consolidations or even the formation new luxury conglomerates.
The luxury industry is capable of reinventing itself repeatedly. We believe in the sector’s long-term potential. While some brands will come out of the crisis stronger than others, others will struggle to maintain their business integrity. How they can respond to short-term COVID-19 urgencies while also planning and executing for future events will determine a lot.
‘Navigating now’: Immediate priorities
Several luxury executives demonstrated caring leadership in this crisis. They put safety first and communicate regularly with all stakeholders to inform them about their new health- and safety protocols, emergency response plans, and the steps taken to keep operations running. But they also need to take swift action to ensure their businesses survive the crisis. Here are some short-term measures that company leaders might consider.
Reexamine 2020 inventory to rethink 2021 collections. The spring season sales this year are 70% lower than last. This is due to the fact that shoppers had limited access to the spring and Summer collections in stores. Decline how to phase into the 2020 fall/winter collections, and create a plan to deal with untapped 2020 inventory without resorting to high-priced discounts that could jeopardize brand equity. Stay informed about the plans of wholesalers and online retailers to sell additional inventory. In some cases inventory swaps can be better than aggressive discounts and promotions. It is possible to reward loyal customers with gift cards or other types of giveaways in return for extra inventory. This will delight them and also encourage them to shop across categories and collections.
Enhance digital engagement. E-commerce can help you increase your digital engagement. Accelerate your digital investments. Move media spending to the internet channels with a focus more on customer activation than brand building. Partnering with reputable e-retailers is a good option, in addition to enhancing your website. Digital marketing may be a great way to increase online sales, but also to entice shoppers into visiting stores when they reopen.
More than 40 percent global luxury-goods production takes place in Italy. All Italian factories including the small, family-based faconniers have temporarily been shut down.
Manage cash. With representation from the sales and procurement departments, create a cash-control unit to monitor spending and find ways to reduce cash outflow. All operating expenses including marketing, events and leases should be reviewed. As a bonus, be prepared to support wholesalers as well as department stores by increasing accounts-receivable terms. Also, arrange inventory swaps. For cash-strapped countries, it is important to work closely and individually with the authorities.
You should take a ‘cleansheet view’ of demand planning. Assess COVID-19’s effects on each region and business division by reviewing your budget and inventory plans. Adjust revenue and profit estimates and provide incentives for business unit heads to establish new targets. Do not allow sales to be pushed at the expense of margins. An aggressive sales approach can result in incorrect demand projections that will lead to unsold inventory and high levels of unsold inventory.
Evaluate the strength and stability of your supply chain. Italy produces more than 40 percent global luxury-goods production. All Italian factories have temporarily closed down, including small, family-based faconniers (a French term loosely translating to “contract producers”) Luxury companies should examine each category and every product to determine where the greatest impact will be felt. You can take short-term measures such as moving inventory to other regions or channels, favoring markets that are less affected and making sure you fulfill online orders. In the medium-term, luxury companies should assist production partners by prompt payments and restoring as much production as possible. Italy’s faconniers may not be able to continue working, and a hallmark element of the luxurious ecosystem–the craftsmanship that is the product of generations of excellence and skill and the source of “Made in Italy”, could disappear forever.
Make adjustments to merchandising strategies. We are seeing changes in purchasing behavior as consumers adapt to physical-distancing restrictions or lockdowns. According to luxury players, the high-end and lower-end luxury products are showing greater resilience than the middle range. This could be because of a combination of “revenge buying” (a term that refers both to the increased demand for luxury items after or during crises) and a desire that functional items provide more value. They also report that handbags are selling better than readymade apparel during this crisis. Children’s clothing seems to be doing particularly well. The millennials haven’t cut back on their spending as much the other segments of adults have. These are only the views of a few luxury brands, but there is no one-size fits all merchandising program. Brands should analyze sales data carefully and integrate consumer insights into their merchandiser plans.
Make the next Normal: Longer-term Considerations
Stabilizing the company during crisis is vital, but the management should not lose sight on the longer term. These are the strategic actions you should consider during recovery.
Put digital at your center of your business model. This crisis has served as a catalyst to many companies in developing and executing an omnichannel strategy and online strategy. China’s ecommerce has attracted new market segments and customers (exhibit); we can expect similar results in other locations. Consider allocating a higher share of your investment to the online channel. You can partner with established online retailers in many new ways. You can increase your personalization efforts with digital marketing. Luxury consumers expect high-quality service at stores. Therefore, the focus should be on creating an individual digital experience with the same quality.
Learn skills that enable you to adapt and transform. Because of its creativity, innovation, and longevity, the luxury industry has generated value for over 30 years. The core competencies of luxury businesses include design, marketing and merchandising. However, they also need to have the managerial talent to support the CEO with resilience and transformation. One option is to create the position of chief transformation officer in the C-suite to highlight the importance and importance of these capabilities. 2
Boldly reform the ecosystem, including through M&A. Crises are a way to open new doors for growth. The most important question for companies is “Are we able to partner with other companies, both to help them stay in business and expand our reach into new markets? Are there new opportunities in the value chain, such as vertical integration? What partnerships or acquisitions–perhaps in the technology arena–could we pursue now that were less viable before? What brands might we buy to expand our portfolio? Or to start our journey toward becoming more luxury.
Anticipate changes in consumer behaviour and sentiment. The ultimate shareholders of luxury sector are consumers. If conditions allow, we anticipate that consumers will want to go back to their normal lives. But the next normal may look very different. Luxury businesses must be prepared to respond to any new normal. 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. It has been proven that consumers may prefer “silent luxe” to pay less attention to conspicuousness and “bling” after large-scale crises.
Digitize all aspects of the supply chain. Luxurious companies can benefit from technology–from remote-working platforms, to virtual showrooms –to maintain productivity during crisis. Additionally, commercial elements such as digital prototyping and sample and virtual showrooms will be useful in maintaining strong relationships to buyers, even during travel restrictions. The investment in innovative and cutting-edge technologies will be necessary to digitize the supply chain.
We are optimistic that those with a luxury lifestyle during pandemic will be able to weather the COVID-19 crisis and emerge stronger than ever. These tips can help you and your fellow leaders navigate today’s challenges, while simultaneously building and strengthening your business in the long-term.
