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Key takeaways:
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Brands are pointing to mainland China, where they hope shoppers that would otherwise be travelling might be convinced to spend more on luxury at home.
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Given concerns about visiting stores are likely to linger, e-commerce and digital platforms are more key than ever to luxury brands.
Speaking with analysts in April after the company’s first-quarter financial results for 2020 were announced, Moncler chief executive Remo Ruffini said the first few months of 2020 “will be remembered as the watershed between the before and the after”.
Despite the current turmoil, investors are still confident about the prospect of the leading luxury names in the after. Share prices for LVMH and Kering have been on the up since mid-March, while Hermès is trading just marginally below where it was at the beginning of the year. That is in spite of notable sales declines in Q1, with the expectation those drops will accelerate during Q2.
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The big names in luxury are expected to rebound, just as they have after previous recessions. But long-term change for the industry is inevitable.
A lot is left open ended and uncertain as luxury regains its footing. What we do know now is that demand will grow in mainland China, sales will swing significantly toward e-commerce and unsold inventory will be a mounting and persistent challenge for brands. How fashion companies big and small respond to these near-term trends is likely to set the tone for a significantly changed post-Covid-19 world.
Brands point towards mainland China
Luxury giants were bullish during Q1 presentations about the prospects of recovery in mainland China. LVMH spoke of 50 per cent year-on-year increases for some of its big brands, while Kering also said the less affected parts of the country were now recovering at a quicker pace. Having been the first country to shut down, mainland China is now driving close to 100 per cent of luxury sales, says Francesca DiPasquantonio, managing director for equity research at Deutsche Bank.
The downside of this news is that domestic spending in China has to increase significantly to match sales lost abroad. Around 75 per cent of luxury spending by Chinese nationals takes place outside of the nation’s borders, per McKinsey, with the most popular destinations typically neighbouring jurisdictions like Hong Kong, Japan and South Korea where the goods on offer could be purchased at a discount on mainland prices.
A recent Bain & Company study revealed the firm’s worst-case scenario for the luxury industry, a sales decline of 30 to 35 per cent, would take place if intra-Asian travel did not pick up at all by the end of the year. But the Chinese government has been ramping up efforts to domesticate more luxury spend by cutting taxes on luxury goods; the events of this year are likely to be accelerating that trend.
“The overriding message is: the structural desire for the Chinese luxury consumer to spend is still absolutely there,” says Louise Singlehurst, managing director of European equity research at Goldman Sachs.
Some luxury brands are ready for Chinese consumer spend to shift to the mainland. Kering outlined an expansion strategy last year to open more stores in up-and-coming urban centres. The laggards, without as much of a presence in the country, may have to partner with local marketplaces to catch up and make the most of these shifts. Last week Alibaba announced it was launching a luxury outlet platform to help overstocked brands shift inventory.
“Brands will want to reconsider their perennial reluctance to go on to those websites,” says Guillaume Gauvillé, sell-side analyst – vice president at Credit Suisse.
Neglect e-commerce at your peril
Up until when stores began opening in Germany and Austria in the last couple of weeks, the only place European shoppers could make luxury purchases was via desktop or mobile. That remains true in most American states and many other countries around the world.
DiPasquantonio says that some luxury brands have been seeing triple-digit increases in online sales, albeit from a low base, adding that brands that have invested and expanded their e-commerce networks are inevitably going to be the best protected by this online shift. This includes for some brands a presence on e-tailers like Farfetch and Net-a-Porter, where consumers are going to get the experience closest to what they had when going out on shopping trips. “Multibrand proposals can substitute window shopping,” she says.
Consumers remain shaken by Covid-19. A poll conducted at the end of April by Ipsos Mori showed that nearly half of British consumers said they would not feel comfortable going to shops once the lockdown restrictions are lifted. A significant proportion of the public in most major economies worldwide remain uneasy about the economy reopening. It is far too early to tell if these effects will be long-lasting, but a survey conducted in March by Vogue Business in China showed that consumers said the channel they were most likely to use to buy luxury goods post-lockdown was brands’ flagship e-commerce portals.
Ensuring discoverability of inventory on online portals is likely to become even more critical in this new age of retail. Singlehurst says the anecdotes so far from reopening countries suggest high-conversion in stores with less traffic and very limited browsing time.
The end of seasonality?
Covid-19 has highlighted the fragility of the seasonal model. A massive amount of SS20 inventory is likely to remain unsold, leaving brands with a dilemma about how to best distribute it. Wholesale has been the main target of some of this criticism, with bigger brands keen to take further control of their distribution and smaller players considering ramping up their own direct-to-consumer operations.
One tactic that some brands look to be using to deal with their excess inventory is to extend full-price sales through August, when Autumn/Winter collections would typically be hitting stores, says Singlehurst.
Gauvillé says that the traditional calendar has been to some degree eroded in recent years through product drops, but that the crisis may trigger more significant changes, with stock going on sale when consumers actually want to buy it. “We could be moving towards a calendar that is actually following spring, summer, fall and winter,” he says.
Analysts have already said that the shift is prompting brands to consider increasing their collection of cross-seasonal products as they offer greater protection from shifts in demand as that inventory can be brought back into store once consumers want to buy again.
That will likely have to be balanced with a demand for newness, which has been of greater importance to fashion consumers than seasons for some time now, says DiPasquantonio. There have already been calls for brands to use this time off to find ways to make their supply chains more nimble. “Quick time to market from a creative phase to… having the products delivered to customers is going to continue to create winners and losers.”
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