What Will Happen to the Luxury Sector Post-Pandemic?

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To understand where we are now, we must remember where we came from.

In 2006, housing prices in the U.S. fell for the first time in decades. Revered as one of the most stable investment markets in the Northern hemisphere, there should have been more cause for alarm, but save for a few key players who saw the writing on the wall early (and subsequently shorted the housing market to huge financial advantage), the impending crisis was largely ignored. In 2008, the economy came crashing down. 

According to the Washington Post, “In the United States, the stock market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009. Unemployment climbed, peaking at 10 percent in October 2009. Americans lost $9.8 trillion in wealth as their home values plummeted and their retirement accounts vaporized.” 

The ripple effect was felt worldwide. Global banks and investment companies had placed a lot of faith (and money) into mortgage-backed securities. Simply put, mortgage-backed securities are shares of a home loan that are sold to investors. They were viewed as solid investments and bought, sold, and traded on stock markets every day. When one homeowner cannot make a payment on their house, it’s bad enough, but when hundreds of thousands of homeowners cannot pay their loans at the same time, it causes an international crisis. When the housing market crashed, banks – which had invested in millions of mortgage-backed securities – failed. When banks failed, economies around the world took a sharp and unforgiving hit. People lost their homes, unemployment skyrocketed, and everything was destabilized.

Twelve years after the crash, the world economy has been in recovery, and that has a lot to do with Asia – and China in particular – emerging as a thriving market. In 15 years, the Chinese market alone has become the leader in consumption of luxury goods and services. Annually, its population spends roughly $111 billion on luxury items.

Photo: Courtesy of Getty Images

When China became ground zero for COVID-19 cases, the country moved swiftly into action, initiating a lockdown in the worst affected areas, restricting international visitors, banning public gatherings, mobilizing healthcare workers, and more. But the rest of the world would still be affected by the pandemic, thrusting us all together in a unified experience.

Economists and analysts rightly have eagle eyes trained on the future. Globalization has connected world economies like never before, but nothing could have prepared us for the shocking impact that COVID-19 would have on every facet of our way of life.

With the luxury consumer as an integral part of the health of global markets, there is much that remains to be seen about the survival of the luxury industry. China’s revenge buying practices could be a roadmap for a way forward, however, there are a myriad of interconnected factors to consider – especially now that consumers are reevaluating how they spend money. In order to better understand both the consumer side and demand side of equation, we turn to Lebanese jewelry designer and former economic consultant Gaelle Khouri to help us investigate what will happen to the luxury sector post-pandemic.

Demand Side

As we begin to emerge from the worldwide lockdown and navigate its psychological ramifications, consumers will most likely reduce spending. Citizens across the world have to grapple with an ever-increasing amount of uncertainty, compounded by a reduced trust in their governments’ abilities to successfully handle economic and social crises. Furthermore, the current pandemic has instilled in people an acute sense of fear that will contribute to an adoption of responsible spending in order to cope better with an uncertain and possibly severe future. 

The anxiety of potentially losing a job, coupled with the stress of constantly ensuring a safe surrounding, will alter consumers’ purchasing behavior. More specifically, consumers will likely engage in an exercise of reprioritizing their needs to focus on what is truly essential, while abandoning luxuries of the past. As a result, the post-pandemic phase will witness an increase in conscious shopping where buyers acquire products with longer shelf lives, exhibiting a tendency to capitalize on minimalist pieces and minimalist lifestyles. They will most likely limit their social gatherings and outings, which will in turn exacerbate the downward pressure on spending and overall demand.

The post-pandemic phase will witness an increase in conscious shopping, where buyers exhibit a tendency to capitalize on minimalist pieces and minimalist lifestyles.

However, the pandemic is not the sole culprit. COVID-19 can be more appropriately described as an accelerant of an otherwise fragile soci0-economic landscape. The US is officially in a recession, the Eurozone is immersed in a financial crisis, Saudi Arabia is facing a widening budget deficit following a major oil crash, and the world is witnessing severe trade tensions driven in big part by a faltering US-China relationship. Investor and buyers’ sentiments are taking a strong hit, leading to significant stock market volatility and reflecting the macro sentiments of fear and uncertainty.

The situation may not seem all doom and gloom. China and South Korea are already on the path to recovery, and their demand seems to be rebounding, which may be a promising piece of news for luxury brands from the West. According to Bain & Company, Asian shoppers were responsible for the bulk of spending in the global luxury market, standing at about 54% in 2018. However, the potential recovery in China is not necessarily representative of Western dynamics. For one thing, China’s policy responses were strict, quick, and effective in elevating consumers’ psychology and boosting confidence. For another, China benefits from younger demographics and an increasingly wealthy middle class. These segments of the population are expected to be more quick and agile in adapting to a changing surrounding. On the other hand, the aging population of the West will likely be more impacted by the pandemic on both psychological and economic fronts.

Travel trends are also expected to be severely affected, and will most likely disturb luxury retail. Flights have come to an abrupt halt during the pandemic, and even when borders do reopen, travelers are expected to exercise significant caution, limiting overall mobility and adding to industry pressures. 

Consequently, tourism shopping will be affected and will add another challenge to luxury brands that rely mostly on Chinese tourists as their key source of growth. In 2018, Chinese consumers spent $115 billion on luxury items, amounting to a third of the global spending, and spending 70% of the total overseas. Chinese enjoy shopping abroad for mainly two reasons: to indulge in the prestige of buying luxury goods in Western fashion capitals, and to avoid the heavy import duties and taxes on luxury goods. If China’s recovery undergoes a healthy V-shaped rebound, the new mobility-constrained paradigm may limit the Chinese’s foreign spending to the benefit of domestic purchasing. To better cope with this new reality, governments ought to rethink their tax regulations, while luxury brands will have to closely monitor the changing consumer behavior and adapt their strategies accordingly.  

Citizens are becoming more critical of the status quo, questioning the role of governments and companies’ values, and standing against what they perceive to be morally and ethically wrong. As a consequence, luxury brands will have to restructure their consumer experience, taking into account more than just the aesthetics of their products.

Despite its catastrophic manifestation, the current slowdown in demand may be a blessing in disguise. The luxury industry as we know it encourages spending at all costs. It conditioned consumers to sometimes buy more than they can afford in order to feel socially accepted. One can argue that such behavior contributed to anxiety and reduced happiness at the scale of a society. The current pandemic and crisis may be the catalyst for citizens to start caring about their long-term wellbeing.

Photo: Courtesy of Getty Images

Supply Side

The global consumers’ new set of priorities and principles would in turn dictate fundamental changes to the strategy of luxury brands. The fashion industry worldwide was struggling in the pre-COVID-19 era, and luxury brands were reeling from growing at an unsustainable pace. The pandemic today calls for a fundamental reset and healthy restructuring of the fashion system. 

Luxury brands mainly rely on retail partners’ distribution channels to sell to consumers. The partnership is very often based on a consignment sales agreement, whereby the retail partner pays the brand only when the products are sold. This often pushes brands to produce at a scale outside of their means without a guarantee of sales, shifting the balance of power to the advantage of retailers. Such relationships put the brands at a fundamental disadvantage, giving retail partners direct control over the relationship with the customers. Without a line of communication with shoppers, brands are left without access to feedback on products and may miss the chance to build brand loyalty.

Retail partners are also navigating through their own set of challenges, adding another layer of complication to the retail ecosystem. The concept of discounting merchandise was introduced by department stores and retail partners following the 2008 recession as an incentive to spur sales. The strategy has been used so frequently that it eventually damaged stores’ ability to sell the product at full price. Discounts conditioned consumers to wait for better deals and in return, made them less loyal to retailers and the brands they carry.

Over the years, as customers become more “connected” and familiar with online shopping, digital distribution channels leveraged a competitive edge over brick-and-mortar retailers. They faced less overheads, which allowed them to discount their prices more aggressively, better satisfying the widespread consumer demand. The luxury industry took its time in adapting to the change, and physical stores that failed to meet a newfound sense of urgency to the digital world ended up in poor financial situations. Neiman Marcus filed for Chapter 11 bankruptcy earlier this year. Barneys, Roberto Cavalli, Sonia Rykiel, and jeweler De Grisogono have all been through a turbulent time before declaring bankruptcy too.

The fashion industry as we know it incentivizes companies to grow at all costs. It preconditions them to seize expansion opportunities, sometimes neglecting financial vulnerabilities that could put the business’ operational stability and growth at risk. In addition, financial markets can exercise enormous pressure on businesses to increase productivity growth. The failing IPO market last year reflects, in part, several premature attempts at companies trying to go public.

The stress of racing forward can cause businesses to unintentionally turn their attention away from rapidly changing consumer behaviors and miss opportunities to capitalize on them. It can also create structural problems at the managerial level of companies, particularly when core business growth is achieved and the adoption of innovation becomes a necessity. Such moves can call on necessary risk-taking that can be argued to be more acute by risk-averse investors. Luxury brands and retailers may want to examine their financial leverage and rethink the foundation of a healthy growing business.

Consumers are using this moment of transition to self-reflect, and along the way, their perception of a good life is evolving.

The end of the fashion cycle today offers brands an unprecedented opportunity to drive change at different levels of the supply chain. Having a digital platform and investing in digital capacities can help brands reach a wider customer base and drive growth more quickly and cost-effectively. Furthermore, brands must adopt direct-to-consumer channels through their own digital platforms. They can forge their own connections with customers, and better regulate their experiences. As a result, they can leverage customer data to better target consumers’ needs and marketing efforts. Going directly to consumers also ensures higher product margins and a healthier cash flow for the business.

However, having online retail partners can play a complementary role in building brand awareness and accessing markets that would otherwise be out of brands’ reach. Nevertheless, retailers have to examine their strategies and create new avenues to effectively market products in a way that aligns their narrative with each brand that they carry. Brands should be allowed to reclaim some negotiating power and gain flexibility to connect with their customers. 

Brick-and-mortar spaces have to be reshaped to provide a personalized shopping experience that cannot be replicated online. The physical space can be transformed to a three-dimensional artistic escape for people, with tactical and olfactory pleasures unique to the store. 

Moreover, the pandemic is rapidly changing the landscape of luxury marketing. Consumers are using this moment of transition to self-reflect, and along the way, their perception of a good life is evolving. Their past desire for a lavish lifestyle is likely being taken over by an aspiration for “realness” and quiet moments around family and friends. Brands might want to adopt new media planning strategies to respond to the new consumer’s longing, and align their business ideology with consumers’ new values and priorities. By leveraging on people’s fundamental desire for belonging, brands can rapidly gain consumers’ trust and loyalty. 

The core changes happening in the fashion industry during the pandemic are a sign of hope. Brands that are able to navigate vigorously through this difficult time can shift the balance of power to their advantage and, in turn, put an end to the race forward. By gaining control over the supply chain, brands can dictate the pace at which they operate, create, produce, and launch into markets. This power shift will hopefully restore the vital function of creativity and craftsmanship that had long been compromised in our industry.

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