Luxury May Not Be the Success Story You Think

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By now you’ve heard the news that leading luxury brands are bringing in cash hand over fist. LVMH, with its Louis Vuitton, Christian Dior, Fendi and newly acquired Tiffany brands, reported “record first half performance” with revenues up 56 percent over same period in 2020 and organic growth up 11 percent compared to 2019. Its Fashion and Leather Goods segment did even better, up 38 percent over 2019.

The news led to hyperbolic headlines including in the Wall Street Journal, “Luxury Shares Soar as Louis Vuitton Shrugs Off Pandemic,” as it reported shares for leading competitors, Richemont and Kering, also rose with LVMH’s news.

Winners and Losers

Without a doubt, the big are getting gigantic in the post-pandemic luxury market. Cartier and Van Cleef & Arpels’ owner Richemont ended first quarter in June with revenues up 22 percent at constant rates. And Kering, with such prestigious brands as Gucci, Yves Saint Laurent and Bottega Veneta, advanced 8.4 percent from 2019.

[callout]Repatriation of luxury consumer spending places additional stresses on brands’ existing supply chains, which were strained almost to breaking point last year. With luxury consumers staying on their home turf, not just in China but everywhere else, luxury companies are challenged to get their goods from here to there in response to immediate demand.[/callout]

But that’s the top of the luxury food chain. Next level down, there are many less well-capitalized brands still struggling to overcome disruptions from the pandemic. Tapestry remains four percent underwater through third-quarter fiscal 2021, even while its flagship Coach brand reached parity with 2019 in the most recent quarter. Capri, owner of Versace, Jimmy Choo and Michael Kors, remains down seven percent in its first reporting quarter this year compared to 2019. And in Ralph Lauren’s most recent quarter, it is down four percent from same period 2019.

Altagamma, the association of Italian luxury companies, released a mid-year 2021 report in association with Bain and credited luxury companies’ resourcefulness with the rapid turnaround so far this year. \”Thanks to their responsive, resourceful approach, in 2020 luxury companies worked not only on damage limitation but also to lay the foundations for recovery, leading to the first positive signals of this year,” said Matteo Lunelli, Altagamma’s president. He also notes, “Investments in digital and the rationalization of business models and processes are producing results with China and the U.S. recovering.”

Based upon results from the first calendar quarter, the study found overall the luxury market is level or even advanced about one percent over 2019. If consumers continue to spend at their current levels, it will mean full recovery by year’s end, reaching ~€280 billion ($328 billion) from €217 billion ($254 billion) in 2020. But that’s a big if.

The Luxury Traveler

For full recovery to occur, which Bain assigns at a 30 percent probability, Chinese and American luxury consumers must continue to make up for shortfalls in Europe, Japan and the rest of Asia.

A recovery may also be boosted by consumers continuing to shift money normally devoted to travel into luxury goods, which many analysts believe helped lift luxury goods spending during the global shutdown. This shift was an aberration in historic spending trends because luxury travel and goods spending go hand in hand. Consumers typically purchase more in anticipation of a trip and even more while they are traveling. Shopping, after all, is an important part of the travel experience and luxury souvenir purchases are a hallmark of affluent shoppers.

“The luxury goods market has always been based on tourist flow, primarily because when wealthy people travel, they have more time to spend their money,” said Federica Levato, co-author of the Bain study. “Pre-Covid, by our estimate, at least 50 percent of sales in the market were done while traveling. That’s a huge number.”

Noting travel-related luxury spending dropped to between 15-to-20 percent last year, she expects that level to rise only between 20 to 30 percent this year because people will be traveling more domestically than internationally.

It is leading to a trend toward “repatriation” in the luxury goods market. “We foresee a repatriation of the luxury industry and market in general, as we don’t think there will be a full rebound of luxury tourists,” Levato continued.

Chinese Wildcard

Repatriation of spending means even more when it comes to China. Boston Consulting Group, in association with Altagamma, finds nearly 69 percent of Chinese consumers expect to spend more than half up to all their luxury budgets at home. Prior to Covid, more than half of Chinese consumer spending (56 percent) was conducted abroad.

As a result, China – the place – will take precedence in the recovery instead of the traveling Chinese consumer.  But Susanna Nicoletti, author of Luxury Unlocked, warns China can be a “honey trap” for luxury brands. “China is a place where brands risk to get lost in their quest for easy success,” she shares. “Brands have to make a huge effort to understand the Chinese culture and market. It takes enormous energy and investments. Once you are totally focused on one market, the result is you neglect other key markets that have a different approach to luxury, like the United States and Europe.”

Luxury brands have made monumental cultural missteps in China, like Dolce & Gabanna’s “pizza with chopsticks” ad. The collectivist structure of the Chinese culture, combined with its social media\’s power, puts import luxury brands at risk.

“Marketing budgets are invested to develop and nurture emotional relationships. The downside, however, is that brand love can too easily transform to brand hate,” cautions Professor Glyn Atwal at the Burgundy School of Business and co-author of Luxury Brands in China and India.

“The reason consumers hate (imported) luxury brands can vary from poor customer service to ethical and moral transgressions. The concept of hate is a powerful emotion that can manifest into varying degrees of negativity from brand rejection to brand revenge,” he continues.

Besides the cultural minefields, there are ever-present dangers from diplomatic and political conflicts between the West and the East, such as the recent U.S.-China trade war, the Uyghurs controversy and new reports that the Covid pandemic may have originated from a Wuhan laboratory leak.

The explosive growth of luxury in China over the last decade creates the potential for even greater volatility to come. “If the Chinese sneeze, the luxury sector gets pneumonia,” says Luca Solca, senior research analyst for luxury goods at Bernstein, in describing luxury brands’ over-dependence on China.

Supply Chain’s Long Tail

Repatriation of luxury consumer spending places additional stresses on brands’ existing supply chains, which were strained almost to breaking point last year. With luxury consumers staying on their home turf, not just in China but everywhere else, luxury companies are challenged to get their goods from here to there in response to immediate demand.

Frank Kenney, formerly with Gartner and now director of strategy at Cleo, warns of the potential for even greater disruptions ahead. “Supply chains are relatively complex and have a long tail of impact,” he shares. “Disruptions usually occur without warning, although sometimes they can be predicted due to a particular action, such as tariff adjustments and disputes. At this point, we’ve had so much turmoil within different parts of the supply chain that additional disruption is just extending the volatility throughout the global chain.”

Noting that brands needed to plan at least six months out to catch up to supply chain disruptions from last year, Kenney warns new challenges such as floods in Europe and China and new Covid outbreaks in port cities have pushed recovery even further out. “One can start adding months on top of months necessary to get to the point of predictable service,” he says.

So, while luxury brands have been focused on meeting current strong demand, the long tail impacts on consumer behavior due to the pandemic may not yet be realized. “Keep in mind that the pandemic forced societies worldwide to examine things like work-life balance, the importance of human socialization, and the role of government in our lives,” Kenney states. “This means that everyone should pay attention to these disruptions and how they have impacted the supply chain. The inherent inequity luxury goods represent between the haves and the have-nots could present “disruptive ideals that lead to actions that can cause a dramatic shift in how supply chains evolve,” he says.

Eye of the Hurricane

Anyone who has ever experienced a hurricane knows it comes on strong with pounding winds and storm surges. But following that initial hit, calm — even sunshine — breaks through for a time as the eye passes over. Then the winds resume, though usually not as strong as the first wave. After it’s all over, even more flooding can occur as the hurricane’s movement slows down over land. And then after it’s all over, the really hard cleanup work begins

Reflecting on what the luxury market has come through in 2020 and can expect in the near future, it seems like last year was merely the initial blow from the Covid hurricane. Since last quarter 2020 through the first half of 2021, we’ve enjoyed the relative calm of the Covid hurricane’s eye. But we’d better be prepared for the final assault of the hurricane to hit.

We can already feel it growing, with new variants of the Coronavirus emerging, anxiety about the effectiveness of the vaccines against the new strains, resistance to vaccination and uneven vaccine policies and distribution here and around the world.

On a positive note, Bain remains cautiously optimistic that the luxury market is in recovery mode, assessing a 70 percent probability that the luxury market will at the minimum reach 2018 levels between €250 to €265 billion ($294-$311 billion) this year. In this scenario, full recovery to 2019 levels must wait till 2022.  But optimism should be balanced with caution since conditions on the ground are changing so fast;  it’s hard to predict what the rest of this year holds in store for us.

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