COVID-19 and the lost immunity of the luxury goods industry
The market for luxury goods has enjoyed phenomenal growth over the past few decades. In 2019, the global value of the sector was estimated to be around a staggering US$1.47 trillion. A carefully crafted illusion of hedonism, robust manufacturing processes and seamlessly integrated supply chains have allowed the industry to create and satiate people’s perpetual appetite for high-end products and experiences with great aplomb. Even during periods of grave economic uncertainty, flagship luxury brands have emerged virtually unscathed. For instance, in the aftermath of the catastrophic Global Financial Crisis of 2008-09, the sector contracted by a mere 9 per cent, before loyal consumers promptly elevated the retail giants back to their original dominant positions by the following year. The events of 2020, however, have managed to expose a chink in the industry’s armour.
The COVID-19 pandemic and the resultant economic downturn have dealt a major blow to the generally indomitable luxury segment. According to analysts at Bain & Co., the global sales of personal luxury goods declined by 23 per cent in 2020, and are not expected to return to 2019 figures until late 2022 or 2023. Such projections do not bode well for Southeast Asia’s luxury market, which had started to show signs of slowing down even before the current outbreak, thanks to the spill-over effects of the US-China trade war.
Since the beginning of the millennium, the luxury goods market has relied, almost exclusively, on two consumer clusters for generating overall growth. While middle class Asian tourists remain the primary revenue source, young local adults or ‘Millennials’ form the much smaller backup target. However, with COVID-induced travel restrictions affecting the former group and rising youth unemployment impacting the latter, demand has flatlined and the industry has been caught completely off guard. Annual sales of LVMH, the parent company of prestigious companies such as Louis Vuitton, Dior, TAG Heuer and Bulgari, plummeted 17 per cent year-on-year, while net profits were down by 34 per cent. Likewise, rival conglomerate Kering SA, owner of Gucci and Yves Saint Laurent, witnessed a 17.5 per cent decline in revenue, and a 34.4 drop in recurring operating income. Although pricing strategies – including setting price mark-ups sometimes as high as 20 times the cost of production for a host of products – have allowed most industry stalwarts to remain afloat during the pandemic, a handful of high-end boutique brands are starting to shutter down. Among the American casualties of the crisis are retail giants Brook Brothers, Neiman Marcus and Lord & Taylor – all three companies filed for bankruptcy last year. Closer to home, Singapore’s Robinsons & Co., too, was unable to bear the brunt of the coronavirus fallout, announcing its closure after 160 years in the city-state. Other players that have come to terms with the peculiar nature of the ongoing crisis – the ease with which the virus spreads, the psyche of cautious consumers and the complexity of vaccinating billions of people – and that anticipate a long recovery process have finally started to abandon their change-averse mode of operations.
Economic homeostasis has been a signature trait of most luxury fashion houses. A self-sustaining ecosystem developed by nurturing a steady stream of loyal patrons has helped them attain unparalleled growth in the past. In order to do so, established brands have unreservedly backed textbook notions of fuelling ‘conspicuous consumption’ and generating ‘snob value’ to help their consumers distinguish themselves from the crowd. So entrenched is the prestige preservation philosophy that large-scale commoditisation has never even been considered a viable option. However, the lasting impact of the current pandemic is making them take the first steps towards setting aside the allure of exclusivity and embracing coping mechanisms rooted in mainstream economic principles. First, a number of companies are offering existing and new customers a greater range of products and prices that would – at least somewhat – justify heavy spending in this challenging period. Second, centre stage brands are actively trying to develop a sense of congruity between consumer perception and their own values. And third, the ever-so-neglected digital engagement channels are finally being put to good use.
Most luxury fashion houses have been wary of diversification due to fears of ‘brand dilution’. But keeping such concerns at bay and unapologetically extending product and price ranges is now imperative for such firms. Given that recessions invariably heighten consumers’ price sensitivity, catering to financially fettered shoppers should be seen by the industry not as a deviation from its ethos of maintaining inaccessibility but as an opportunity to inculcate loyalty into a new group of consumers. This should be supplemented with detailed analyses of market trends. Preliminary studies have shown that, in Southeast Asia, younger consumers have been affected less severely by the COVID-19 crisis than their middle-aged counterparts. Not allocating adequate resources to serve their needs just because they have traditionally accounted for a smaller proportion of the revenue stream would therefore be a misstep. Instead, by offering a greater variety of goods tailored to their preferences by utilising the underlying notion of ‘aspirational utility’, the industry stands a good chance of creating a new, permanent consumer base in the future. Developing practical and durable goods – as exemplified by some brands that have forayed into production of reusable face masks (Burberry), exercise equipment (Louis Vuitton) and electronic gadgets (Mont Blanc) – is a brilliant move towards diversification.
The literature on behavioural economics is replete with studies that highlight the idea of possessions being an expression of their owner’s extended self. With the ‘new normal’ forcing most individuals to stay indoors and unintentionally making them reflect on ‘what really matters’, materialism is bound to take a hit. It is therefore important for the luxury sector to depart from its typical ‘wants over needs’ narrative and, instead, communicate to the buyers what it stands for. A host of new studies have shown that, in addition to the combination of willingness and ability to pay, luxury consumers now assign a lot of weightage to their preferred brands’ manufacturing processes, treatment of employees, commitment to saving the environment, charitable endeavours, inter alia. As shoppers begin to trickle out of their homes after months of isolation to satiate their ‘pent up demand’ for luxury escapism, the industry must make greater effort to convince them of, say, the craftsmanship of the artists it employs, its resolve to create a truly inclusive work environment and the genuineness of its pro-social behaviour. In the early days of the COVID crisis, many big-name fashion companies had turned their production lines, usually meant for handbags and apparel, to manufacture personal protective equipment and hand sanitisers – a gesture that will undoubtedly add to their scintillating brand value.
‘Experiential satisfaction’ has been the essence of the luxury sector. Consequently, enhancing the operations of brick and mortar stores has been the principal focus of most high-end brands. For years, digital marketing and sales channels were implicitly labelled as weak instruments – to the extent that most brands did not even list the prices of their offerings on the official websites; in order to obtain this key piece of information, consumers were expected to call the nearest outlet. Things are much different now. The pandemic has forced the industry to elevate e-commerce sales to the same stature as outlet purchases. Luxury firms are finally adopting digital engagement to not just showcase goods and services and relay their desirability, but also receive immediate customer feedback. A growing number of firms in the region have been livestreaming fashion events, offering virtual consultations and adopting digital prototyping to unveil novel products. As social distancing measures are here to stay for at least the next several months, further digital amplification can certainly help cushion the impact of the crisis.
While these measures alone cannot restore the luxury industry’s immunity overnight, they can help mitigate some of the challenges brought upon by the current crisis and prepare a new, sustainable modus operandi for a post-COVID scenario.
Pritish Bhattacharya is Research Officer in the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute.