Economic uncertainty runs high these days as the COVID-19 pandemic wreaks havoc on lives, livelihoods and businesses. However, for some industries it offers considerable scope for innovation, acceleration and competitive gain.
On April 2, four luxury professionals from McKinsey, Digital Luxury Group and Lamborghini joined a special IMD webinar that focused on the significance of the COVID-19 crisis for the luxury industries. The 55 executive participants felt that uncertainty but also optimism best characterized the industry mood. An instant poll revealed that 10 percent felt the crisis would be negative for their business, 24 percent were uncertain about its impact, and two thirds believed it would bring positive changes.
Uncertainty around the projected length of the crisis was a major concern. And while luxury has always done well in crises – the 1930s and 1940s being a case in point, it bears noting that the industry was considerably smaller during those depression years than it is now.
According to Bain and Company, the overall luxury market – encompassing both luxury goods and experiences – grew by 4 per cent to an estimated €1.3 trillion globally last year.
As a result of the sheer scale of the sector, the current crisis poses one big question. That is, will there be enough space for everyone? The longer the crisis goes on, impacting both economic and social stability, the more negative the answer seems to be.
Things may well vary by sector too. In automobile, the pandemic landed during an already traumatic transition to electric vehicles that has ravaged the profit margins of many long-established players. And in watches, the crisis represents another blow, following last year’s slowdown caused by Hong-Kong’s political upheaval.
The covid-19 crisis will function both as an accelerator of change and a rupture point depending on how economic, social and technological forces play out. So where do the opportunities lie? Here are five trends that COVID-19 will accelerate.
The Crisis Will Accelerate Industry Consolidation
According to Achim Berg, global leader of the Apparel, Fashion & Luxury group at McKinsey, before covid-19, there was already a difference between the industry’s winners and losers. Whether they operate in the fashion or watches market, the winners will come out of the crisis stronger. They already have strong brands, they earn their cost of capital, and they rely less on wholesalers – indeed, many wholesalers may not survive a long crisis. Finally, winners have cash chests that will help them gobble up distressed players on the cheap.
Luxury Firms With Balanced International Sales Will Fare Better
Asia might bounce back better than Europe and the US for a while, so being present in all key markets will continue to be beneficial.
However, Pablo Mauron, Managing Director China and Partner at Digital Luxury Group made the point that the Chinese demand for luxury may grow less fast. Despite the virus no longer being considered a major risk for public health in China, safety constraints remain. Early signs are that they have significantly changed consumer behaviour and footfall in stores and shopping malls is struggling to recover.
While the Chinese continued to rely heavily on ecommerce, during the crisis, it was not to buy luxury. Despite the record-sales by Hermès in its Guangzhou store at the reopening, hopes of strong “revenge buying” have not materialized yet, with the middle classes having come out poorer from the stock-market downturn, and travel remaining off the agenda. Other factors call for cautious optimism: if the West decides to reshore many supply chains, the export engine that has traditionally fuelled the Chinese demand for luxury will slow down.
Luxury Firms Should Continue Building a Greater Commitment to Responsible Business Leadership
As the gap between rich and poor grows, consumers will increasingly scrutinize large and wealthy companies for their social values. A recent case in point was the uproar Adidas triggered in Germany when it announced it would stop paying the rent on its closed stores during the covid-19 lockdown. Facing a public backlash, it was forced to backtrack. However, as well as the circumstantial, there are also systemic issues to face. Since emergency rescue packages are likely to leave many states financially crippled, luxury groups would be ill advised to continue exploiting tax loopholes. This will be lethal for their brand reputation.
The 2020 Edelman Trust Barometer showed that people have more trust in companies than in either the state or the media to help them through the covid-19 crisis. To retain and increase that trust, luxury firms will need to continue engaging in public-private partnerships to show positive contributions to society beyond the realm of products. They will want to be seen as responsible local employers. Practices that exploit the most vulnerable workers, even in luxury, will have to stop.
Finally, the crisis also brings home the idea that the more we continue interfering with wild animal ecosystems, the more likely it is that new, deadly viruses will emerge. If anything, this crisis is making consumers even more sensitive to the necessity of nature-friendly and climate-friendly investments, including in luxury.
COVID-19 Will Accelerate The Rebalancing Between Digital and Physical Retail
Both Achim Berg and Pablo Mauron argued that e-commerce is likely to be the clear winner of the covid-19 crisis. New sanitary rules will mean that luxury stores will have to implement the same hygiene practices as grocery stores. Entry by appointment might become the norm. This will certainly lower the experience in physical retail. In China, it will mean that many brands might accelerate the downscaling of their stores network. In IMD’s instant poll, 72 per cent of participants maintained that luxury brands that do not sell online should now reconsider this choice, even in automobiles.
However, there are three caveats to keep in mind. One, the crisis has hit social ties hard. As soon as safety concerns subside, consumers may well flock back to physical stores, as these ties will be even more precious to them. Two, the crisis is evidencing the rise of mass-surveillance, even in democracies. If unduly continued after the health emergency, this disturbing practice might dampen consumer enthusiasm for digital. Three, some key luxury e-retailers like Net-a-Porter have suspended most of their e-commerce operations to keep their employees safe. Thus, the availability of luxury products online is not necessarily guaranteed.
Experiential Luxury Is Where The Action Will Be
The rise of experiential luxury was already a trend. With COVID-19, what emerges more clearly is that the digital shopping experience will improve considerably. Augmented Reality (AR) and Virtual Reality (VR) combined with holographic experiences, such as the ones that Imverse can offer, will transform the online shopping experience by placing consumers in quasi physical-store conditions. For Achim Berg and Pablo Mauron, as travel continues to be hit hard, luxury will have to embark on mobile, digital-first experiences. Brands will also have to secure high quality and meaningful experiences with such channels.
To overcome the looming economic downturn, luxury firms will also need to seize the opportunities that today’s rupture points present.