Is The Luxury Market Immune To COVID-19?

Luxury houses are facing a big dilemma. Should they discount goods to improve their top lines or defend their brand's hefty price tags for the sake of long-term sustainability? Luxury companies have seen dramatic drops in revenue as international travel was brought to a halt and the pandemic placed half of the world in quarantine. Even the Parisian conglomerate LVMH Moët Hennessy Louis Vuitton LVMUY who reported its earnings recently saw its net profit plummet by 84 percent to $613 million, despite increasing online sales and the resilience of its major brands. Chanel, who is just behind this world's biggest player, expects COVID's negative impact to persevere over the next 18 to 24 months.

Falling From Grace

Michael Kors-founded Capri Holdings CPRI seemed invincible after its 2017 acquisition of shoemaker Jimmy Choo. Yet its revenues tumbled 66.5 percent in the first fiscal quarter of 2021.

Even the luxury car icon Ferrari N.V. RACE, who can woo car lovers with big pockets and lure them away from fuel efficiency or even self-driving technology, had a rough first half of the year.  Shipments were particularly low in the second quarter as they dropped 50%. Moreover, early adopters couldn't get the electrified supercar from Maranello that was supposed to be delivered in the first half of this year due to supply chain disruptions. But Ferrari remains optimistic that it will get back on track by the end of the year as well as unveil two new models.

PVH Corp. PVH, the parent of upscale apparel designers including Tommy Hilfiger and Calvin Klein, as well as the holder licensing agreements with many powerhouses like DKNY, revealed in June its first-quarter revenue dropped as much as 43%, with even worse expectations for the second quarter and overall year.

While it's too early to quantify COVID-19's total financial toll as we are far from leaving this chapter behind us, the pandemic has shaken the core aspects of the industry. Moreover, some of these changes could be in for the long-haul.

Factory And Store Closures

Even before the pandemic struck, many luxury-goods wholesalers were already struggling due to the growth of e-commerce. Then store and plant closures happened only to make matters worse. Moreover, the companies that produce and sell their high-end products ‘in-house' have a hard time cutting costs.

International Travel Halted

Possibly the worst threat upon the sector is that travel will not resume to pre-pandemic levels anytime soon. Considering that about 30 percent of industry revenues are generated by consumers making luxury purchases outside their home countries, this is a major problem. Chinese consumers represent the sector's biggest growth potential. In general, luxury shopping is an integral part of the travel experience for Asian consumers as it adds authenticity and excitement to their experience.

Therefore, brands need a new approach to attract these shoppers which entails they need to engage with them on a deeper level by using digital channels. For example, Italian eyewear giant and global leader Luxottica Group, who has some of the most powerful and most expensive brands such as Ray-Ban and Oakley as well as designs under a license for Armani, Burberry, and Chanel, has partnered with China Duty-Free Group to reveal an exclusive eyewear range from Prada to deepen its engagement with Chinese consumers. As of October, its models will be available both in their stores and e-commerce platforms.

The (Fashion) Show Must Go On

Fashion weeks are essential for brands to maintain their relationship with both their customers and trade partners. With restrictions on travel and large gatherings, brands are exploring alternative ways such as streaming as they attempt to deliver the same kind of magic that these events offer.

Consumers- A Significant Shift

Experiential luxury that includes high-end resorts, cruises, and restaurants has been one of the most dynamic and fast-growing components of the luxury sector. But Millennials are not fans of such perks, diamonds included. Just look at Tiffany & Co TIF which has been trying very hard over the last years to redefine its brand in an attempt to appeal to new generations that prefer Instagram experiences. If you add the fact that baby boomers could have already accumulated their luxurious possessions, the trend for luxurious items is in for a slowdown even without the pandemic. But the good side of such experiences is that the emotion they produce cannot be created in any other way besides getting people together. Therefore, the positive momentum of experiential luxury cannot entirely vanish.

A New Definition Of Luxury

Perhaps the biggest threat to the industry is the simplicity that became the new ‘bling' during the lockdown. Even the legendary ‘lipstick index' met its match as masks became our new daily wear. For example, the beauty industry is shifting to a natural, cleaner, and ‘antiseptic' self-care. Moreover, skincare is one of the rare segments that made a breakthrough during the pandemic.

Outlook

The sector as a whole has shown over the years that it is more than capable of reinvention. But its brands will be classified based on three fundamentals. First, the health of their balance sheets prior to the crisis. Second, the resilience of their business model which includes their digital capacity, the agility of their supply chain, and their dependence on wholesale channels. And last but definitely not least, their response to COVID-19 that only emphasized the fragility of their seasonal model.

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