How Are High-End Brands Faring In Covid-19?

The COVID-19 pandemic has significantly impacted the luxury industry, with some changes potentially being permanent. The global luxury market, as tracked by Bain and other companies, has seen a significant shift in consumer behavior, with brands focusing on mainland China. Luxury brands are not immune to economic downturns, as they experienced a 9 percent shrink during the Great Recession. However, the pandemic has accelerated the transformation in luxury, with companies adapting to the pandemic through e-commerce expansion and neighborhood stores.

Despite the decline in demand for luxury products at the onset of the pandemic, the luxury goods market has bounced back to pre-pandemic levels. Luxury brands have reported blockbuster sales despite supply chain disruptions, inflation, and global uncertainty. Luxury brands use experiential approaches such as personal shopping, invitation-only events, and catwalks to distract from transactional inequalities. Exclusive French brands like Dior and Louis Vuitton have experienced surges in revenues after the cooling off of Covid-19 restrictions.

The luxury goods market size was valued at USD 252.71 Billion in 2022 and is projected to reach USD 378.80 Billion by 2031, expanding at a CAGR of 4.6 during the forecast period, 2023-2031. Luxury brands are grappling with how to sell watches and purses in a post-pandemic world, as shoppers slowly emerge from months at home in their sweatpants.

While the rate of growth in the sector has slowed slightly in recent months, 95% of luxury brands saw profits fatten in 2022. The luxury goods market size is projected to reach USD 378.80 Billion by 2031, expanding at a CAGR of 4.6 during the forecast period, 2023-2031.

Are luxury sales declining?

The luxury market is experiencing a significant decline, with LVMH’s slowing sales growth being a key factor. Factors contributing to this decline include economic uncertainty, China’s slowdown, and post-pandemic spending changes. The decline, particularly in key markets like China, has raised concerns about the industry’s underlying causes and potential consequences. LVMH’s largest division, the fashion and leather goods unit, saw only one increase in organic revenue last quarter.

Is the luxury sector slowing down?

Luxury sector revenues have been slowing down since the post-Covid peak in 2022, with the American consumer being the first to normalize. The Chinese consumer is the only sector support fading, putting all nationalities under pressure. European luxury firms expect a 1 revenue decline in 2024. The luxury industry faces persistent macroeconomic and geopolitical challenges, particularly in China and the UK, as noted by Hugo Boss in its July sales outlook.

How do luxury brands survive recession?

The Great Depression taught luxury brands about resilience and adaptability. By diversifying their product lines and recalibrating their marketing strategies, these brands survived the economic downturn and laid the groundwork for future growth. The period highlighted the importance of understanding and responding to consumer behavior and economic conditions. Luxury brands’ strategies during the Great Depression became a blueprint for navigating future economic crises, demonstrating their ability to remain relevant and desirable even in challenging economic climates.

How are luxury brands becoming more sustainable?

Over 100 billion packages are shipped annually, causing significant waste from single-use plastic. To combat this issue, brands are partnering with suppliers who use responsibly sourced materials, such as recycled or FSC-certified resources. A shift towards mono-material packaging made from recyclable materials is gaining momentum, reducing energy consumption during recycling and eliminating the need for material separation.

Stella McCartney, a pioneer in eco-friendly practices since 2001, has integrated sustainability into every stage of its supply chain, introducing the first luxury handbag made from plant-based material, Mirum.

What are the threats of luxury brands?

The luxury industry faces various risks, including environmental failure, talent attraction and retention, global terrorism, civil commotion, political risk, new partnerships, reputational risk, cyber risk, crime, supply chain transparency, natural catastrophe risk, supply chain vulnerabilities, and vulnerability to counterfeiters and intellectual property breaches. WTW, a global luxury brand management firm, combines years of experience and risk management expertise to help luxury brands navigate the changing risk landscape. Their globally integrated team provides expertise from all areas of client servicing, including:

1. Identifying and addressing environmental and sustainability targets.
2. Attracting and retaining key talent.
3. Managing cyber risk, including customer and sensitive data.
4. Addressing crime, including organized theft and social engineering.
5. Ensuring supply chain transparency and ethical integrity.
6. Addressing natural catastrophe risk and supply chain vulnerabilities.

What luxury brands are struggling?

In the context of economic pressures and high inflation, luxury brands are facing challenges in retaining their consumer base. This has led to a shift in consumer preferences towards mid-level brands such as Zara and Pandora, which offer a more accessible luxury experience. These retailers are experiencing success as a result of their strategic positioning and pricing. Users have the option of accessing personalized feeds of their preferred topics while on the go. They may also choose to opt out at any time by visiting the Preferences page or unsubscribing.

How is the luxury industry changing?

Luxury retail trends in 2023 include omnichannel strategies, personalization, sustainability, and the growing popularity of purchasing used luxury items. Omnichannel strategies blend online and in-store experiences for a seamless customer journey, with brands like Burberry collaborating with Chinese tech giant Tencent to offer WeChat-based window displays at their Shenzhen store. Sustainability is also a key trend, with brands like Gucci focusing on ethical practices and eco-friendly products.

The second-hand market is growing in popularity due to consumers’ environmental concerns and a desire for cheaper items. Online resale of luxury goods is growing, with millennials driving interest in buying pre-owned items. Millennial and Gen Z buyers seek pieces with history and a story behind their purchase, meeting their expectations of luxury and embracing the piece’s individuality.

Are luxury brands doing well?

In a recent report, Luca Solca, the managing director of luxury goods at Bernstein, observed that the luxury goods industry remained polarised during the first quarter of the year. This was evidenced by the contrasting performance of different brands, with high-end brands such as Hermès and Brunello Cucinelli demonstrating resilience, while brands with strong momentum, including Moncler and Miu Miu, exhibited weakness. Conversely, mega-brands like Louis Vuitton and Cartier demonstrated stability.

How is Gucci becoming more sustainable?

Companies can purchase Renewable Energy Certificates (RECs) to invest in climate initiatives, such as carbon credits. Kering, Gucci’s parent company, uses RECs to pay for the production of green electricity elsewhere in the world. The Guarantees of Origin (EECS certificate system) is a region-wide tracking system used for claiming consumption of “green electricity” in Europe, aiming to track who consumed which type of electricity. This is done through a separate market of digital certificates.

If one person buys and “cancels” a certificate, they buy the right to claim they have “used” electricity from that plant, which disappears, and no one can claim the same claim. This can lead to double-counting, which is considered fraud. Scope 3 is not a region-wide tracking system, and double-counting can be problematic when companies claim Scope 3 reductions. Scope 3 should be considered for single companies, and double-counting allows companies to reduce emissions by changing their suppliers.

What are the biggest challenges for luxury brands?

Luxury brands are facing operational disruptions due to lockdowns, including store closures, supply chain disruptions, and logistical challenges. This unpredictability affects sales, marketing strategies, and product launches. Chinese consumers’ purchasing decisions are evolving due to prolonged restrictions, with a shift towards digital channels. Consumer confidence may fluctuate due to economic uncertainty, impacting discretionary spending on high-end fashion items. The Business of Fashion offers insights on how brands can navigate these tumultuous waters.

What are the challenges faced by LVMH?

LVMH’s Wine and Spirits segment faced challenges in the first half of 2024 due to market normalization, inventory management, and exchange rate impacts. Despite these challenges, strategic initiatives and a strong brand portfolio have allowed the group to navigate effectively. As the division continues to expand globally and maintain brand desirability, it is expected to contribute positively to LVMH’s growth trajectory.