Retail contractions have been felt throughout the sector and across the globe, but the luxury market stands to face disproportionate challenges in 2020.
A recently released report from Bain and Company conjectures that luxury brands could see sales fall by more than one-third this year.
The first quarter alone has been marked by unprecedented and wholly unforeseen challenges, and experts predict global luxury sales will suffer a year-over-year decline of 25 percent to 30 percent.
For the rest of 2020, though, the luxury sector’s potential performance remains to be seen. Bain analysts have modeled three potential scenarios for the most likely outcomes, which could show contractions of 15 percent to 18 percent, 22 percent to 25 percent, or 30 percent to 35 percent, based on how long the market remains depressed.
The variability depends mostly on how the virus continues to impact important luxury hubs, both for purchases and production.
While China was the epicenter of the crisis mere weeks ago, the country is already showing signs of economic recovery since the coronavirus’ spread began to stall and then recede.
Chinese citizens accounted for a staggering 90 percent of global luxury growth in 2019, and Chinese consumers currently account for 35 percent of the global personal luxury goods market. The country’s recovery could spell good fortune for flagging labels, Bain analysts said.
However, there are still massive roadblocks facing luxury brands and suppliers. In Italy, a mecca for luxury fashion headquarters and manufacturing, the local population has been devastated by the spread of COVID-19. Some of the world’s most coveted labels have halted operations altogether amid a national lockdown.
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“Gross domestic product, employment (and therefore spending power) and financial markets are under severe strain, with a consequent plunge in consumer confidence and willingness to spend,” Bain analysts said of the luxury consumer market at large. “In addition, purchases of luxury goods and services by tourists will continue to be disrupted by travel restrictions and a lingering fear of possible contagion on planes and cruise ships.”
Despite the pileup of largely disadvantageous circumstances, experts said turnarounds in influential factors like the “duration, geographic depth and intensity of the outbreak,” as well as other variables like “expectations for GDP, consumer confidence and other macroeconomic indicators” could yield less catastrophic results than the worst-case scenario of a 35 percent total loss in sales.
As labels prepare to weather the uncertainty of the next three quarters, Bain experts recommended a three-pronged approach to mitigate damage and accelerate recovery. Brand leaders should govern through a new leadership framework, act to maximize short-term resilience in operations, and transform their brands’ value propositions and business models for the future.
Executives must step up to the plate to lead in a new and augmented capacity, Bain said, demonstrating empathy toward their employees and broader populations being affected by the virus. Companies should remain apprised of the best practices for health and safety, and go beyond the legal minimum in their operations. They should also work to support the fight against COVID-19 through financial and in-kind donations, and should continuously work to craft contingency plans that prioritize actions, lay out likely timetables, and assess implications.
To maximize resilience, brands must use this time to ensure that they’re staying relevant with customers, experts said. This can be done by reassuring them that all measures are being taken to protect people, and by fostering a sense of community online through social channels and creative new engagement tools, like virtual shopping sessions. They should quickly pivot to invest more in online and mobile marketing and functionality, while postponing fashion shows and other “nonconverting” initiatives.
Lastly, analysts said, brands that hope to emerge from this situation in a position of strength will reframe their value propositions and the ways in which they do business. Before this outbreak, retail was already undergoing a shift toward more customer-centric, digitally optimized and sustainable operations. Companies should not lose sight of these long-term goals in the wake of the crisis, and should instead use this time to double down on the issues of greatest importance to their consumers.
“The COVID-19 response can become the catalyst for a supply chain reinvention in the luxury industry,” analysts said.
“The goal here is to preserve the elements of today’s short-term scrambling that can underpin a more reactive and flexible operation in the future,” the added.
Today’s heightened pressures will highlight the work of vendors and suppliers that can react quickly while maintaining quality, and luxury brands should use this time to permanently redesign internal processes for efficient production.
“Lessons in resilience learned in the dark days of 2020 can power a sustainable recovery in 2021 and beyond,” analysts said. “This crisis may be transforming the luxury industry for good, but it could also be a transformation for the good.”