In the midst of the coronavirus epidemic, the first priority of every company is to ensure the safety and health well-being of their employees, customers and business partners. Luxurious companies have taken steps to address the urgent public-health concerns. Factory workers who used to make scarves and perfumes now produce face masks, hand sanitizers, and luxury groups have donated money to hospitals. In the meantime, millions of people depend on the luxury-goods market to make a living. From factory workers and small-town artisans to craftsmen and women, industry leaders are looking ahead and pondering long-term strategic questions in order to protect their businesses.
We discuss the effect of the crisis in the luxury-goods market. Next, we suggest two types of priorities to industry executives: short-term “navigating” the present and long-term planning for shaping the future.
Is it a temporary blip, or a hard reset
It’s too early for COVID-19 to be able to assess the total financial impact on the sector. However, some foundational aspects have been shaken by the pandemic and some of these changes could become permanent.
Wholesale Darwinism. Wholesale Darwinism. They might have to shut down some of their stores due to this pandemic. Brands that have not yet made the transition to a vertically integrated distribution system could be hit hard. This could also affect upstart brands who need wholesale channels to reach new clients and finance full collections. Wholesalers will adopt aggressive commercial and discount strategies to survive. This could affect luxury positioning for brands that do not have concession models.
From the global traveler to the local shopper. Luxury appeals to a global customer: 20% to 30% of industry revenues are generated from consumers who make luxury purchases in countries other than their home country. Chinese consumers made over 150 million trips to the rest of the world in 2018, and we believe that more than half of China’s luxury spending was outside China. Asian buyers buy luxury goods abroad to take advantage of lower European prices. But, shopping is now an integral part the travel experience. The authenticity and excitement that comes with buying in the country of origin of luxury goods gives them an authentic feeling. The recent travel restrictions have slowed luxury spending. However, we expect an increase in international travel to continue even after restrictions are lifted. The biggest growth opportunity in the luxury sector is still China’s consumers. To attract luxury shoppers, brands will need to find a new way of approaching them. In order to attract Asian luxury consumers back into their countries, brands should focus on tailoring local experiences, improving their digital and omnichannel offerings, as well as engaging with people in tier two and three cities. Given the city’s limitations in retail infrastructure and customer-service capabilities, this will make it difficult to achieve the latter.
Without live audiences, shows are ineffective. Brands have built strong relationships with customers and trade partners through trade shows and fashion weeks. We hope for a return to normalcy, but the luxury sector should also work closely with trade associations as well as fashion-week organizers. These events are not permitted to be held internationally and can offer the same magic. The industry could also push for a coordinated overhaul of fashion calendars, where brands streamline and streamline their presentations.
From ownership to experiences, and back. “Experiential luxury” – high-end hotels and resorts, as well as restaurants – has been a fast-growing component of the luxury industry. Millennials, those born between 1980 and 1995, prefer experiences to luxury goods. This trend was also evident among the baby boomers, born 1946-1964. They had already acquired luxury products over the years. Although we expect the positive momentum for experiential luxury to continue, it will be slowed down temporarily as consumers revert to purchasing experiences over goods.
Hyperpolarization in performance. It was impossible to talk about the sector using averages before the crisis because the growth rates and profit margins were so dispersed. Luxury brands’ growth rates and earnings ranged from negative to positive percentages in the same price bracket and segment. Based on three key factors, we expect more polarization: brand health prior to crisis, resilience of operating model (including digital capacity, agility of its supply chains, dependence on wholesale channel, and response to COVID-19), and brand health.
Another opportunity to acquire ‘rare gems’. Over the past decade European luxury conglomerates and private-equity companies, as well, Middle Eastern investors and US fashion groups, eagerly took up 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 postcrisis period, even acquisitions that were once so prohibitively expensive may be possible. This could lead to industry consolidation and even new luxury conglomerates.
It has been proven time and again that the luxury sector is capable of innovation. We are confident in the sector’s long-term prospects and those of a luxury lifestyle during pandemic. However, some brands will emerge stronger from the crisis while others will struggle with their businesses’ integrity. It will all depend on how they respond to the COVID-19 short-term issues while also planning for the future.
Navigation the Now: Priorities immediately
During the crisis, many executives from luxury companies have shown caring leadership. They have prioritized safety of customers and employees, and are proactive communicating with all stakeholders about the new safety protocols, crisis response activities, and the steps that they are taking to maintain operations. However, they must act quickly to help their businesses weather any crisis. Here are some quick-term actions company leaders can take.
Take a look at 2020 inventory and think about 2021. The spring season’s sales were 70% less than last year. It is no surprise, given that the consumer had very limited opportunity to view the spring and winter collections in store. Plan for how to phase-in the 2020 fall/winter collections. Stay up to date about the plans of wholesalers or e-retailers to clear additional inventory. In some cases, inventory swaps may be more effective than aggressive promotions and discounting. To make use of extra inventory, you could reward loyal customers by giving them gifts or other types to delight and surprise them.
Enhance digital engagement. E-commerce is an important channel to increase digital engagement. Accelerate digital investments. You can shift media spending online to support customer activation, not brand building. Apart from improving your websites, you should also consider forming partnerships with reputable electronic retailers. Digital marketing could not only increase sales online but also encourage customers to return to stores after they reopen.
More than 40% of the global production of luxury goods is made in Italy. The factories have been temporarily closed down, even those that are small and family-run.
Control cash. To reduce cash outflow, establish a cash control team with representation from sales and procurement. Reexamine lease contracts, all operating expenses, and marketing spend. You can also plan to provide support for wholesalers and department store by extending accounts receivable terms and organizing inventory swaps. You should work closely with your government officials country-by-country to identify ways to relieve cash shortages using public measures.
Do a “cleansheet” analysis of your demand planning. Reexamine your 2020 budget and inventory plans and evaluate COVID-19’s impact on each area and business unit. Adjust revenue and profit forecasts. Give incentives to business-unit leaders to set new targets. Refrain from pushing sales at the expense or margins. This will result in inaccurate demand projections which can lead to large amounts of inventory that is not sold.
You should assess the strength of your supply chains. Italy accounts for more than 40% of the global production of luxury goods. This means that all Italian factories, small and family-based, as well as “contract manufacturers” in French, have temporarily been shut down. Luxury companies should evaluate, product by product, the areas where the most severe impacts are likely to be felt. Moving inventory across channels and regions, prioritizing less affected geographic markets and making sure online orders are filled are all possible short-term actions. Luxury companies need to help production partners recover. This means making prompt payments and restoring production as fast as possible. Italy’s Faconniers will die. If they do not survive, it could mean the end of a unique element of the luxury eco-system, the craftsmanship that has been handed down through generations and which is the source for the “Made in Italy” aura.
Modify merchandising plans. We’re starting to notice changes in consumers’ buying behaviour as they adapt to lockdowns, physical-distancing restrictions and social routines. Some luxury players claim that luxury items at higher price points are more resilient than luxury items at the middle. This may be due to a combination “revenge shopping” (a term that describes the excess demand for luxury goods during and after crises) as well as a desire for functional items to provide the best value for money. They are also seeing handbags, small leather goods and other accessories selling better during crisis than ready-to wear apparel. Particularly children’s wear appears to be doing well. Millennials aren’t spending as much as the other adult segments. These are observations from a few luxury players. But, clearly, there isn’t one-size-fits all merchandising plan. Brands must carefully analyze their sales data and incorporate consumer insights into merchandising plans.
Form the next normal with longer-term considerations
While it is critical to stabilize the business in a crisis, management must remember the longer-term. Here are some strategies to take during the recovery.
Make digital a central part of your operational model. Many companies have found that this crisis has helped them develop and implement an omnichannel and online strategy. China’s e-commerce has attracted new markets and customer segments (exhibit); the same pattern can be seen in other regions. Begin by allocating a larger share of investment to online channels. Partner with established ecommerce retailers in new ways. Digital marketing should be more personal. Luxury consumers have grown accustomed to high standards of service in retail stores. It is important that digital marketing efforts are focused on personalizing the experience.
You will develop resilience and transformation competencies. Through its creativity and innovation, the luxury sector has contributed to the creation of value over the past 30 year. Luxurious businesses must now develop the managerial skills to support the CEO’s resilience and transformation. To highlight the importance of these competencies, it is possible to create a new position in the C-suite, the chief transformation officers. 2
Boldly change the ecosystem, even through M&A. Crises can lead to new growth opportunities. It is important for companies to ask themselves these questions: “Are there any companies we could possibly partner with, both in order to keep them in the business and to allow us expand into other markets or product types?” Are there value-chain moves (e.g. vertical integration) that are more attractive now? What partnerships or acquisitions–perhaps in the technology arena–could we pursue now that were less viable before? What brands could be acquired to add to our portfolio or start our journey to becoming a larger luxury brand?
Be prepared for changes in consumer behavior. Luxury sector shareholders are ultimately consumers. As long as the conditions are favorable, we anticipate that consumers will return to their regular lives. The next normal could be very different. Luxury companies should try to anticipate the new normal and prepare for it. 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. The experience has shown that consumer preferences can shift toward silent luxury after a major crisis, which is paying more attention the traditional elements of craftsmanship and heritage.
Digitize the entire supply chain. Luxury companies can use technology to help them maintain their productivity in times of crisis. Virtual showrooms, digital prototyping, and sampling will help to maintain strong relationships with buyers even in times of travel restrictions. Investment in innovative, cutting-edge technologies is required to digitize the entire supply chain.
The COVID-19 epidemic has created a challenging 2020/2021. However, we are confident that with careful planning, and skilled execution, the luxury-goods market can survive the crisis and emerge stronger. These steps can help you, your colleagues and other leaders navigate the current challenges and build and strengthen your business over the long term.
