Luxury after the 2020 pandemic
Updated: Sep 29, 2020
Questions by Patrick O'Keefe for The Marshall Society Dismal Scientist Magazine.
What makes the luxury goods and services market important in a modern economy?
Luxury goods can and will continue to be a stable market and a stable investment. Despite fluctuations in the global economy and ever-changing global style trends, luxury is here to stay. For example, whilst European fashion houses still dominate the design process for haute couture, Asian markets have been growing substantially and leading the way for fashion innovation - think Shanghai’s Virtual Fashion Week earlier this year. Fashion revenue in Asia is projected to reach US$321,012m in 2020, with a compound annual growth rate of over 10%, according to Statista research. The growth of fashion and contribution to the global economy is undeniable, as is the growth of Asian markets - particularly China and their growing millennial middle class.
Why do we buy luxury goods and services?
Traditionally, luxury goods sold a dream. Now, although they continue to retain this status (à la Swiss watches and Birkin handbags), access to current trends and the advent of social media has undoubtedly contributed to the ‘democratisation’ of luxury items and demystifying of trends. Next, a refocusing of consumer priorities to sustainability and accountability have made the consumer more aware of the processes and manufacturing standards which were kept under wraps for decades. Because of this, luxury brands with quality processes and materials are even more appealing to the buyer. From this perspective, it’s clear that both younger and older consumers are buying luxury goods for the same reason: quality. Furthermore, there is the concept of Veblen goods where the quantity demanded increases as price increases, as evidenced with Chanel classic handbags and Hermès Birkin handbags. These handbags have increased their prices every year (percentages vary) and in the past prices have increased two or three times within a year. Demand remains high for these handbags because of their desirability but costs have risen for the producers hence price regular rises due to factors such as fluctuating exchange rates, production costs and raw material prices over profitability.
What were the industry’s biggest challenges before coronavirus?
It’s hard to ignore the advent of sustainable manufacturing processes and the inevitable trade-off between quality, quantity, and profit. In addition, big fashion powerhouses such as Zara have come under fire for supposedly ‘stealing’ designs from indie designers and artists without credit. McKinsey suggests that it will become more and more difficult for smaller brands to compete with the economies of scale and market reach of larger luxury goods businesses, especially those which have a wider target market. For couture and high-end businesses, pre-coronavirus concerns again centred manufacturing and sustainable sourcing, such as the extraction of raw materials from mines to produce cosmetics or for jewellers. Now with the pandemic, the industry has faced disruption with supply and demand of their products.
Bain & Co. predict the market will contract between 22% and 25% in 2020, will we see luxury firms struggling to survive or will they be able to absorb the costs and bounce back?
Again, we return to the democratisation of luxury and luxury goods trends. On one hand, luxury firms will struggle if they do not appeal now to a wider consumer base. This doesn’t actually threaten their exclusivity and appeal, as there are still barriers to entry pricewise, but it does open them up to a broader range of younger customers eager to embrace new trends - we’ve seen this in the rise of streetwear brands (e.g. Supreme) over the last 4 to 5 years, and this is certainly a space for ‘traditional’ luxury couture providers to enter into. On the other hand, coronavirus has shone a rather uncomfortable light on the sourcing and manufacturing processes for many fashion and couture houses. For instance, Kylie Jenner and Kendall Jenner’s fashion line, which falls under The Global Brand Group, has recently come under fire for delaying payments to Bangladeshi factories which make their luxury clothing. Short-term, luxury conglomerates and smaller luxury groups may not suffer as great a hit from coronavirus as expected, but there is a greater cost in doing nothing given the number of younger consumers who are increasingly more aware - and angrier about - inequalities and injustices across all stages of the luxury production and consumption cycle. Furthermore, due to supply issues, luxury brands such as Chanel have risen their prices during the pandemic to reflect rising costs because of the disruption the pandemic has caused to their supply chain so they may need these margins to soften the impact with an opportunity to reinvent their supply chain.
China accounted for 90% of global luxury market growth in 2019, so will it be China that leads to the recovery of the industry?
‘Recovery’ is a broad term. As mentioned, Shanghai recently led virtual Fashion Weeks which were cancelled due to coronavirus, and so the impetus for change in a seasoned industry may certainly come from China. In addition, China’s urban middle class enjoyed an increase in disposable income of almost 600% from 2008 to 2018, and McKinsey has found that millennial customers account for 56% of luxury goods sales in China. Clearly, affluent Chinese customers will be well-poised to lead some recovery given their immense purchasing power. However, money in the bank will not heal the luxury goods industry if global supply chains are affected - and they are - worldwide. Additionally, coronavirus has hit spending among China’s affluent millennials, and so long-term recovery will not necessarily depend on them alone. Recovery relies on all corners of the world to collaborate and invest in restarting manufacturing (sustainably!) and engaging with global consumers with less disposable income compared to pre-pandemic times. Chinese consumers have an appetite for luxury, but they may not be fed just yet. Furthermore, according to Bain’s 2019 Luxury Goods Worldwide Market Study, it is Generation Z that will reshape and increase the market growth of the luxury industry by 2035 alongside Generation Y through disruptive consumer trends in addition to increasing Chinese demand since they appear to be recovering from the pandemic. When news broke that Chanel planned to increase their prices again in May 2020, many shoppers in Asia queued in Seoul, Beijing and Shanghai to purchase Chanel products before the increases were introduced which shows that consumers were still interested in buying and demanding luxury goods during a pandemic.
China’s prominence will continue to rise post-pandemic. Will luxury businesses struggle with rising political tensions?
It depends on how you look at it. If we consider Chinese-owned brands and fashion houses, then yes, there will certainly be doubts cast on them by Western consumers. This can be found in the increased scepticism consumers have towards the reliance on China for manufacturing and production. Moreover, the escalating US-China trade war has obvious implications for manufacturing due to increased protectionism. In the short-term, the winners may be smaller, independent, and more local luxury businesses such as independent jewellers and boutiques. In the long-term, however, this question is one to keep an eye on.
If habits stick, we should see more digital shopping post-pandemic. With luxury goods placing more emphasis on the shopping experience, will online sales be as effective for luxury firms?
Chanel has stated, frankly, that it does not intend to sell its goods online - CFO Phillipe Blondiaux made this very clear in a recent interview with the Financial Times. However, rivals Louis Vuitton and Gucci were identified by the Financial Times as increasing their e-commerce presence - no small feat, considering the footprint of fast-fashion giants ASOS, BooHoo, and Pretty Little Thing dominating online retail and enticing the masses towards cheap clothing. In addition, second-hand e-commerce sales of luxury goods already account for 7% of online luxury sales revenue, with higher-end providers such as the Vestiaire Collective and Chrono24, the online luxury watch retailer, already established as sustainable providers of luxe. It’s hard to ignore the lure of e-commerce, especially nowadays, but as slow adopters of current technology and digitalisation in retail it will remain challenging for luxury brands to carve out space in the online arena. Bain & Company has previously conducted a survey that reviewed shopper demographics and channels they were more likely to purchase through. They found that customers are increasingly shopping online for luxury products since it is convenient and easier to browse, leading to many of the fashion houses now catering to online orders. Online sales account for 12% of the market with 75% influenced by online channels in Bain’s 2019 Luxury Goods Worldwide Market Study. However, consumers enjoy the experience of luxury retail shopping so online shopping will not be able to replace the feelings associated with in-store purchases.
General public opinion is shifting away from a glamorisation of extensive wealth due to persistent and worsening inequality, and the media exposure of crises such as those in Yemen. Will this hurt demand for luxury goods and services?
Whilst there has certainly been a newfound focus on global current events in mainstream media, the recurring themes of quality and responsible sourcing and sustainability will continue to benefit the luxury goods industry. For example, Hong Kong upcycling and sustainable fashion line, The R Collective, is committed to responsible fashion by repurposing and rebuilding textiles to create exceptional clothing. The demand will stay, but with a cost: consumers are now interested in the how and the why of their purchases. Moreover, luxury brands are now conscious that some wealthier customers do not wish to display their wealth in brand logos and labels so there is increasing movement towards quality high fashion without recognisable logos making it discreet for the wearer as they choose not to show off their wealth but wish to continue purchasing high-quality fashion. Due to this trend, the luxury market is changing as they take into account perceptions, attitudes and culture. In addition, more consumers are increasingly moving away from luxury good purchases towards luxury experiences such as travel to lavish destinations and creating memories to share with others as another way to display their wealth.
How will we see luxury firms change their approach to satisfy this shift in preferences?
Transparency. Rather than vague attestations of sustainability and ethical practices, consumers want to know who made their products. We see this even for non-luxury brands such as Lush, who label their products with the name of the individual who made a certain bottle of shampoo or hand cream. From this end, luxury firms must avoid the trap of ‘greenwashing’ and empty promises and demand tangible information on how products are made. Furthermore, in recent years, some brands are no longer using exotic materials such as animal skins and fur. Chanel announced in December 2018 that it will ban the use of exotic skins because it was getting difficult to source high-quality materials ethically as they move towards luxury cruelty-free fashion; this move also made Chanel the first luxury fashion house in the world to introduce such a ban. Other brands that followed are Vivienne Westwood and Diane von Furstenberg as they shift towards alternatives such as man-made textiles to create ethical and sustainable fashion given that consumers are now more conscious about their purchases and the rise of veganism.
Yasmin Begum & Georgia Clayton President & Sponsorship Director
Cambridge University Fashion & Luxury Business Society