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Q2 Was Luxury’s Worst-Ever Quarter, Bain Says

While one would be hard-pressed to find a retail category that hasn’t been impacted by the emergence of Covid-19, luxury goods have taken a particularly hard hit this year.

The core personal luxury goods market contracted this year for the first time since 2009, falling 23 percent at current exchange rates to 217 billion euros ($257 billion), according to a Bain & Company report in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers’ industry foundation,

The overall luxury market saw similar shrinkage, now worth about 1 trillion euros ($1.18 trillion).

The second quarter of 2020 was “the worst the sector has ever experienced,” Bain said, though there were signs of recovery in Q3. “The most likely outcome is a minus 10 percent year-over-year drop in the fourth quarter,” it added, noting that results will be “heavily dependent on the future evolution of Covid-19 and the additional restrictions that national governments could put in place.”

This year’s revenue decline has disproportionately impacted the luxury sector’s profitability, with Bain data projecting a 60 percent decline in operating profit from the year prior, bringing margins down from 21 percent to 12 percent.

Tourism ground to a halt in the early spring months, and locales across the globe have reopened to outsiders with trepidation—and now, varying degrees of rollback measures upon the virus’ second wave. That lack of travel greatly impacted luxury sales, as moneyed jet-setters greatly contribute to the market.

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According to Bain, the sector is on track for a recovery by 2022-2023, if luxury brands and retailers continue to spend and even accelerate investment in marketing and online channels to drive sales. Though scenarios for 2021 are varied, the study indicates that the market could recover 50 percent of its profit losses from 2020 throughout next year, though it will still emerge below 2019 levels.

Growth, Bain said, could range from 10-12 percent to 17-19 percent depending on macroeconomic conditions, along with Covid containment and a resurgence of global travel.

“We have all experienced a difficult year of rapid, unexpected changes and luxury has not emerged unscathed,” Claudia D’Arpizio, a Bain partner and lead author of the study, said in a statement. “While the industry has suffered from a pause in global travel and ongoing lockdowns, we believe it has the necessary resilience to manage through the crisis.”

D’Arpizio said luxury players will continue to transform their operations to meet new shopper expectations and retain relevance for younger generations. With shoppers now spending much of their time at home, online shopping for luxury goods has skyrocketed, growing from just 12 percent of the category’s market share in 2019 to 23 percent currently.

Luxury sales across the globe have contracted during the Covid era, though e-commerce is growing.

Omnichannel experiences will play a large part in ensuring that the sector gets back on track, and e-commerce has shown particularly promising growth. Online sales made up 49 billion euros ($58 billion) in 2020, up from 33 billion euros ($39 billion) the year prior. Bain believes that the web is set to become the primary destination for luxury purchases by 2025.

Brick-and-mortar, conversely, will continue to flounder, Bain projected, expecting no growth in store numbers operated by brands this year and a possible decline throughout 2021.

“Brands will need to adjust their footprints to the new map of luxury buying,” Bain said, and “evolve the store role and its ergonomics, and maximize the customer experience.”

Though shoppers across the globe have reined in spending, Mainland China’s economy will be the only region to close out the year on an upswing, growing by 45 percent to 44 billion euros ($52 billion), with local consumption for all categories, channels, generations and price points only growing stronger.

Conversely, the total collapse of tourism has hobbled Europe’s luxury market. While locals are still buying, regional consumption fell 36 percent year over year to 57 billion euros ($67 billion). The U.S. saw somewhat less of a contraction, with the sector seeing a 27 percent drop, likely due to retail shutdowns and the uncertain future of department stores.

Japan saw a 24 percent reduction in luxury spend to 18 billion euros ($21.3 billion), and Hong Kong and Macau were among the worst global performers, with a 35 percent contraction in luxury spend to 27 billion euros ($32 billion), Bain found.

Overall, the rest of the globe, including the Middle East and Australia, contracted by 21 percent to 9 billion euros ($10.6 billion). Because of the dearth of tourism, the share of locally made purchases grew to 80-85 percent this year, and Bain expects the number to remain high, at around 65-70 percent, during the retail recovery.

While all luxury goods have seen reduced demand throughout 2020, shoes saw a modest fall of just 12 percent because of the popularity of premium sneakers. Predictably, formal wear saw a “sharp decline,” and apparel across the board saw increased competition from digitally native DTCs capitalizing on a newfound need for loungewear. According to Bain, luxury brands will need to learn quickly from these newcomers in order to claw back market share.

“Luxury brands have faced a year of tremendous shifts but we believe that the industry will come out of the crisis with more purpose and more dynamism than ever before,” Federica Levato, a Bain partner and study co-author, said. “By 2030, this industry will be drastically transformed.”