Luxury brands post-pandemic: Go local, reinvent, reset distribution

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Written by Mary Yu

June 2020

Fifth Avenue and Madison Avenue, the once most glamorous and hectic streets of New York City, has shuddered to a standstill. The cobbled streets with a number of elegant luxury boutiques, including Fendi, Celine, and Chanel, were now boarded up with vast sheets of plywood. Indeed, it was the previous night when the SoHo area of Manhattan had looters broken into a significant number of stores. In anticipation of further riots and civil disobedience, high-end stores throughout New York City boarded up their windows, surrounded by echo with whining power. The condition was even more upset as the government declared a state of emergency, bringing thousands of temporary store closures across the country. Many retailers are now facing difficult decisions about staff and consumer safety, in addition, to their long-term financial survival.

What Defines Luxury Brands

Luxury is hard to define – it is expensive, but not overpriced. In fact, the definition can be very arbitrary as there is no widely accepted definition. A luxury brand provides value, whether functional or emotional, via its high-quality products, design aesthetic, brand image, or rarity. Now, you would ask, if the definition is this vague, what are luxury consumers interested in when buying their products?

Let us recall Maslow’s hierarchy of needs, a motivational theory in psychology comprising a five-tier model of human needs – from the bottom of the hierarchy upwards, the needs are: physiological (food and clothing), safety (job security), love and belonging needs (friendship), esteem, and self-actualization. The lower down deficiency needs must be satisfied before individuals can move up to pursue growth needs. The latter do not stem from a lack of something, but rather from a desire to grow as a person.

In the same mindset, luxury does not intend to meet a need or solve a problem. Rather, it takes a premium marketing angle, targeting consumers who are not simply interested in more features giving better for money. Luxury brands are the ultimate exercise in brand storytelling. A Chanel handbag is not necessarily more functional or beautiful than a Coach, yet it is seen as a better status symbol, which is simultaneously inferred from and validated by its higher pricing as well as its worldwide brand recognition. On the flip side, will such a consumer mindset ever change? As much as the brands want to deny, it certainly will, and it has happened with the catalyst of COVID-19.

The End of the Luxury’s Golden Era?

According to Bain & Company, “The luxury goods industry has been heavily impacted by the COVID-19 crisis in 2020. The core personal luxury goods market contracted for the first time since 2009, falling by 23 percent at current exchange rates to hit EUR217 billion. The drop is the largest recorded since we have been tracking the industry. The overall luxury market – encompassing both luxury goods and experiences – shrunk at a similar pace and now is estimated at approximately EUR1 trillion.”

The turmoil of COVID-19 has been the catalyst for change for the luxury industry and has slowed a decade of growth across luxury categories that was once buoyed by a bullish global economy.

  1. Travel Restrictions causing tourism spending to decline – Travel Restrictions causing tourism spending to decline – COVID-19 pandemic paused travel, which decreases travel-related shopping activities. Shopping has become an integral part of the travel experience for 20% to 30% of industry revenues are generated by consumers making luxury purchases outside their home countries. In 2018, Chinese consumers took more than 150 million trips abroad, and purchases outside the mainland accounted for more than half of China’s luxury spending that year. With the recent travel restrictions, an important driver of luxury spending has come to a halt, and it is anticipated that only a gradual ramp-up in international travel, even after the restrictions are lifted.
  2. The Lack of Demand – COVID-19 leads economic slowdown that decreases consumers’ purchasing power, especially on goods that are highly elastic. The demand to purchase luxury declined as people no longer believe they have to hold possessions for an entire lifetime. In Covid, people are less financially stable with increasing layoffs, unemployment, and high inflation. Indeed, the notion that “cash is king” prevails. Going back to Maslow’s hierarchy of needs, people are more concerned about necessity needs before advancing to growth needs, which luxury falls into the latter.
  3. The Surplus of Supply – according to ThredUp, the world’s largest fashion resale platform, it has seen a strong uptick in supply, with many people spending more time at home staring at their full closets and looking to earn some extra cash. ThredUp’s 2020 Resale Report found that 50% of people are cleaning out their closets in exchange for cash more than they were pre-Covid.

“Navigating the now” or focusing on the “long-term positioning”

Many luxury executives have certainly shown concerns over both short-term and long-term crises resulting from the unprecedented pandemic breakout. While the infection cases and mortality continue to climb, the executives have demonstrated caring leadership as they priories the safety of employees and customers, set up safety protocols, and plan crisis-response activities. Meanwhile, the executives are also busy planning and communicating with stakeholders about the long-term strategy to maintain their business operations under the bad weather.

The Paradoxical Concept: As much as luxury brands seek a balance between short-term humanitarianism and long-term profitability, it has often turned into a trade-off. The store closures have protected the public-health needs, but they also hurt the business operations, causing unprecedented levels of unsold 2020 inventory, which jeopardize brand equity and even the business survival. The dilemma aggravates – on one hand, the inventory swaps might be preferable to aggressive promotions and discounting, turning unsold goods into salutary cash flows. On the other hand, aggressive commercial and discount policies will hurt the luxury positioning of brands that do not have a concession model.

Wholesale Darwinism: Even before the pandemic, independent luxury-goods wholesalers constantly compete against each other, including eating into each other’s market shares. Such a direct competitive model extends to brands that have not yet fully transitioned to a vertically integrated distribution model.

For luxury conglomerates like LVMH, they have the leeway to overlook the short-term financial losses as they have a relatively higher cash reserve and liquidity from their historical earnings and performances. On the opposite, wholesale channels that are in the development stage, reaching out to new customers and financing for capital, will need to prioritize short-term economic returns to first survive, then thrive.

The Future Outlook Coming Out of COVID-19

COVID-19 has sped three key trends in the luxury-goods sector.

  1. Digital Engagement & Marketing – the shift toward local purchases: with the large drop in tourism, more purchases are being made locally. To mitigate the channel loss from international travel restrictions and absent audiences for the fashion showcase, e-commerce is an alternative channel to communicate with customers and forge a sense of community around the brand. In 2020, online sales skyrocketed at a pace equivalent to five years of growth. Digital doubled its market share to 23% in 2020, up from 12% in 2019. Bain & Company expected that digital sales will consist of 1/3 of total market value by 2025.
  2. Reinvention – the evolving nature of the store: the luxury industry has proved capable of reinvention. Some brands will emerge from the crisis stronger, while others will struggle to preserve the integrity of their business. How each brand plays out will much depend on their ability to respond to the short-term urgencies related to COVID-19 while simultaneously planning and executing for the future.
    • Brands in development stage: manage for cash, do demand planning, strengthen supply chain to ensure short-term cash flow and stability.
    • Luxury conglomerates: build sustainable, competitive advantages, consolidation via M&A and digitalization.
  3. Reset Distribution – countries are recovering at different rates: China experienced the worst of the crisis ahead of most other places, but its economy has already recovered to the point where GDP growth is forecast to surpass the 2019 increase. Therefore, it would be preferable for luxury brands to target the Chinese market, which is expected to rebound and end the year above 10% of the 2019 mark. By contrast, European countries such as the UK, France, and Italy may suffer from the impact beyond 2020.

Of course, the road to recovery is still uncertain from the impact of COVID-19. However, the pandemic may be a catalyst for change for the luxury industry for both challenges and opportunities. It is an imperative time for companies to rethink every aspect of their business and to recalibrate operations to meet a changed sales picture.