It has been more than two years since the start of the global COVID-19 pandemic, which brought the world to a standstill and reshaped our reality into one where remote-working, social distancing and mask-wearing became the new normal. And yet, in spite of these changes, the luxury market has managed to flourish against all odds, demonstrating a masterclass in how to attract and engage consumers at a time when selling luxury during times of crisis was thought to be a challenge.
In the financial results released early in the year from the luxury companies, the outlook for the industry looked positive. LVMH reported a 44 percent rise in full-year revenue of 64.2 billion euros compared to 2020, confirming that it had seen a return to strong growth following the severe disruption to the first half of 2020. Richemont said its third-quarter sales ended December rose by 32 percent to 5.66 billion euros helped by strong demand for its jewellery and watches, and companies like Kering, Prada, Capri Holdings, and Ralph Lauren are all painting a similar picture.
The latest results from the first quarter show the trend continuing. LVMH said it saw a "good start to the year despite the challenging environment marked by the situation in Ukraine and the ongoing effects of the health crisis," recording a 23 percent rise in organic growth compared to the same period a year earlier. Hermès posted a 27.1 percent in revenues to 2.76 billion euros, beating analyst expectations.
In short, luxury’s bounce back from recovery to resurrection has been phenomenal. But will the growth that we have currently seen from 2021 last?
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The answer isn’t simple. As the FT pointed out, many economists were expected 2022 to be a period of strong economic rebound. But with the double-shock of COVID-19 and the Russian invasion of Ukraine, inflation rates in many countries have shot up to the highest levels seen in decades, pressure on supply chains has soared, and the result is many central banks are still adapting their monetary policies and fiscal stimulus packages to support global economic growth.
And while companies' results so far are positive, the reality is that the results for the first three months of the year do not fully reflect the impact of the challenges that we are seeing arise now and the longer-term impact they may have on growth.
Russia’s war with Ukraine has seen luxury companies like LVMH, Chanel, Prada, Hermès, and Richemont temporarily closed their stores and paused their operations in Russia. Luxury carmakers like Porsche have stopped production and are no longer shipping vehicles to Russia. And the European Union also announced a ban on exports to Russia of EU luxury goods, delivering a blow to its wealthy elite who have been spending on items like watches and jewellery in the midst of the turmoil.
Likewise, the hard line taken by China to control its biggest COVID-19 outbreak has cast further uncertainty over luxury companies’ ability to maintain the growth they experienced since the initial shock of the pandemic. In April, Kering said in a call with analysts that Chinese store closures in March and April slowed its main brand Gucci’s ability to draw in new and younger customers, affecting its lower price points. Its shares fell by 7 percent on the day.
Analysts at Nomura estimated in mid-April that 45 cities in China, which represents around 40 percent of its GDP, were under full or partial lockdowns, putting China’s economy of growing risk of a recession.
Taking into account these two major factors, luxury’s rebound is unlikely to continue at the same pace that we have seen over the past year, however the long-term fundamentals of the industry were and still are very attractive and despite the challenge of a crisis, consumers are more engaged and interested in the luxury market than ever before, particularly as brands now have more tools than ever in which to engage them.
The findings from our study into luxury demand found that interest in iconic products is at an all-time high, and the trend looks set to continue in the coming year. Consumer demand (measured through Google searches) for products like Cartier’s Love Bracelet and Louis Vuitton’s Neverfull are up 27 percent and 20 percent respectively.
Likewise, our community survey found that more than 85 percent of 112 respondents answered that they felt optimistic about the long-term prospects of the luxury market, demonstrating the positive sentiment felt from those within the industry that the rebound in growth seen over the past two years will continue to trend upwards.
But many of challenges and the questions that arise from them remain unanswered.
What will be the long term effects of the war between Russia and Ukraine on the global markets? When will China ease its lockdown restrictions? Will travel resume to levels seen before the pandemic? Will luxury consumers want to return to buying in stores after embracing the digital experience? And how will brands manage the balance between meeting the needs of their local customer and the return of the luxury traveller?
“2021 was already an incredible year,” said Alain Zimmermann, Managing Partner at DLG. “It was absolutely unexpected. But with the ongoing uncertainty caused by the conflict between Russia and Ukraine as well China’s lockdowns, to see another increase on a year that was already much better than many expected, is something that many companies are cautious about."
The picture that emerges for the future of luxury isn’t clear cut. Trends that began well before the pandemic are still ongoing or have accelerated. Multiple solutions may be needed to meet the demands of the consumer. And knowing exactly which consumer is attracted to your brand is what companies will need to focus on in order to deliver the exact service that customers expect.
To return to our earlier points at the beginning of this report, we believe in order for brands to succeed in this environment, they must consider the best practices demonstrated by luxury’s leading brands when faced with challenges ahead: preparation, investment, creativity, agility, locality, data and mindset. As those who are able to successfully navigate the challenges that may lie ahead, will be the winners.
The first challenge that many companies are trying to prepare for is the return of the luxury traveller. When will a sense of normalcy resume and when can travel resume to the levels seen pre-pandemic so that brands can anticipate what to provide when demand resumes?
In 2021, international tourism was estimated to have risen by 4 percent, according to the United Nations World Tourism Organization, recording 15 million tourist arrivals compared to 2020. However, this was far below the levels seen in 2019, before the start of the global COVID-19 pandemic, where almost 1 billion more tourists travelled in 2019, representing a 72 percent drop.
Pre-pandemic, the economic contribution of tourism (measured in tourism direct gross domestic product) in 2019 was valued at $3.5 trillion, and while 2021 is estimated to be $1.9 trillion, it still trails behind 2019 levels.
There are early signs that 2022 may see an uptick in travel. Luxury travel companies like Abercrombie & Kent are reporting a “new sense of urgency” to travel due to clients feeling like they have lost out on the past two years and according to a survey of 12,000 travellers in 12 countries conducted by Expedia, 65 percent of respondents are planning to “go big” by planning exciting or extravagant trips for the coming year.
What this may mean is that travel in some form or another will resume, and with that, the desire to spend and spend big – be that on experiences, or dining out, purchasing goods or planning trips to destinations further afield, is high, which as a result may shift where luxury demand is attributed to.
However, it may not return in as big a way as hoped given that both Russian and Chinese consumers are being impacted by the ongoing uncertainties in both their countries. UNWTO estimates that Russia and Ukraine represent a combined 3 percent of global spending on international tourism as of 2020 and that a prolonged conflict could represent a loss of $14 billion in tourism receipts globally in 2022.
In China, where the country is currently experiencing numerous weeks of lockdown, international tourism is a significantly higher portion of the pie.
However, according to recent surveys conducted by McKinsey to understand Chinese travellers’ sentiments, desire for travel has spiked and dipped as COVID-19 outbreaks continue. The report found that “Chinese travellers express a desire to travel, both domestically and abroad, but while the majority of respondents still perceived international travel as unsafe and are not planning international travel in the near term, they also show strong interest in international destinations.”
“We expected to see a massive rise in revenge spending across several categories beyond travel,” said David Sadigh, Founder and CEO of DLG. “Lots of people have been frustrated and are eager to spend money and enjoy life again. But this is now intimately tied to the evolution of the geopolitical and macro-economic situation.”
“As a result, business agility has become mandatory. Forget the usual long-term brand planning with advertising campaigns that are designed several months in advance. Brands must now be able to design and implement new initiatives within a matter of days or weeks.”
The second challenge is how brands manage the balance between meeting the needs of their local customer - as they have done since restrictions were lifted - and who have been the driving force of the recovery seen in China and the United States and the immediate needs of the luxury traveller, whose pent-up desires to spend on luxury goods whilst travelling might outweigh the outcome of the local customer.
Will local customers, who have benefitted from luxury brands lavishing attention on them by flocking to open stores nearer to them or adapted services like private showroom appointments, video shopping consultations, and communicating through messaging apps, want to go back to being less important in the eyes of a salesperson who will have to balance the personalised service that they now offer to customers against a travelling customer who is in the mood to spend big and may take less time to convince on a purchase?
“The personal aspect of shopping and service is extremely important today,” said Robert Burke, CEO and Chairman of Robert Burke Associates, noting the success of The Webster, a multi-brand boutique with seven stores in the U.S. and an e-commerce site.
“During the height of the pandemic, they had their sales people in contact with their customers on Instagram and on WhatsApp. And they were going into the stores even when they were closed and pulling merchandise specifically for those customers and sending that over to them. Offering the level of service and personal shopping that previously had only been available to the very, very big spenders.”
“It was an extremely good lesson, it has stayed with people and it's paid off for the brands,” he added. “I think that's kind of what people expect now, is that personalised service. That's changed enormously from pre-pandemic,” he added.
“It will be interesting to see how luxury brands deal with the local clientele they often overlooked before the pandemic and then suddenly had to seduce in a way they never did before,” noted Zimmermann. “Because it’s not the same business. Sometimes, it’s not even the same merchandising. The customer journey is completely different.”
"The mistake would be just to go back to how it was in 2019,” said Zimmermann. “Brands need to consider how they address their local clientele because we now know how quickly things can change, and how important this group is to growth as well.”
The third challenge is the balance between the in-store experience and digital. Will luxury customers want to return to buying in stores after embracing the digital experience during the pandemic?
As we have seen over the past two years, the pace of digital acceleration within the luxury space has changed the way in which online services are used forever. Companies pushed forward their plans and reported that online sales were booming. Since the start of the pandemic, Hermès reported that it attracted new shoppers online, and even when its stores reopened and customers returned to purchase in physical locations, its online sales also kept growing.
As noted earlier in our interview with Rachid Ait Addi, Vice President of Client Partnerships at Teads, the world’s leading video advertising marketplace, conversations about a new innovation or digital campaign that previously would have taken a year to sign off (pre-pandemic) were suddenly being activated and launched within a few months of discussion.
Interest from some of the world’s leading brands to work with Teads’ Creative Services team to develop new digital media concepts soared, and for Ait Addi, it represented a change in mindset from his clients that luxury was finally ready to embrace what digital media advertising could offer.
“It's really adapting their DNA for this new digital age,” he said. One key example for Ait Addi was with a client, who previously would take up to a year to consider new creative ideas and concepts pitched to them by his creative team, but following the pandemic really embraced the opportunity to explore what digital advertising could offer.
“Digital is really the first point of media for those brands now. We really see a change in the mindset,” Ait Addi, said of the shift. “The creative team used to talk about ‘luxury time’, meaning that luxury brands really take their time to embrace innovation and even a new creative idea. Usually, we pitch an idea, and then a year later, they activate it during the space of six months. So, I was really surprised that in the first half of this year, we saw more creative innovation from them than in the last two years.”
“The boundaries between digital and offline are not as obvious as before and the boom of the Web3 and hopes related to the Metaverse are further accelerating this trend,” added Sadigh. “We expect brands to create more physical products that also offer a unique digital experience and vice versa. The NFT revolution is real and just at its infancy.”
An ongoing issue from the past two years is supply and production. While some companies have benefited during the pandemic, others have suffered due to issues like supply chain. In the automotive sector for instance, many carmakers are reducing the number of cars they plan to make because of a shortage of chips and are prioritising putting those chips into more expensive models, pushing demand and new vehicles prices up.
It’s something that was confirmed in our interview by Beat Imwinkelried, the owner and chief executive of B.I. Collection, a luxury car dealership based in Zurich. Clients were demanding luxury cars immediately and they were willing to buy pre-owned. With supply chain issues occurring in virtually every industry globally, how do companies and brands plan for the future?
The price of raw materials, shipping and production are just some of the costs that are expected to rise in the coming months within all global industries, and companies are under pressure to produce goods, even at a time when it may cost them infinitely more, resulting in the cost being passed onto their customers. Luxury brands like Louis Vuitton and Chanel have increased their product prices since the start of the pandemic and the trend looks set to continue.
“It can take weeks or months to adapt,” noted Zimmermann. It’s one of the most challenging parts as a business. Do you plan for demand at the level of 2020, or 2021? Do you create scarcity and drive demand up, or ramp up your plans to meet what you anticipate demand may be? Where do you put the cursor?”
Where to put the cursor brings us to one of the biggest trends over the past few years. Sustainability. Demand for second-hand or pre-owned luxury is at an all-time high. A recent study by consulting firm McKinsey and Co. expects the resale luxury market, which was estimated at $25-30 billion in 2020, to grow at an annual rate of 10-15 percent over the next decade, thanks in part to online resale trading platforms like Vestiaire Collective and The Real Real.
Many brands are responding to these changes. In 2022, we have already seen announcements like Moncler declaring that it will phase out the use of fur in its collections by 2023, Burberry signing its sustainability-linked loan and Richemont appointing its first chief sustainability officer.
But are these changes enough to address the concerns that consumers have about issues like provenance, circularity and the reduction of waste from an industry built on selling people the dream of something they probably don’t actually need?
“Change is about entire systems, not siloed policies,” noted Positive Luxury Chief Executive Diana Verde Nieto. “While luxury brands are taking steps to address Environmental, Social, and Governance, they should adopt a more systems positive approach to their businesses and look to embed it within their culture,” she wrote in a column for Luxury Society.
“This means business transformation at a global scale, with a genuine change of culture, from the way business is conducted, to the way business is operated,” she added. “Recruitment, retention, and evaluation of performance, the way products are produced, the procurement process of raw materials, the choices of suppliers, the supply chain management, and the re-education of boards and shareholders on how to rethink success as not just double-digit growth year-on-year but also share value.”
And lastly, one of the parting thoughts to consider about the future of luxury is whether people will consume it in the same way, and whether consumers will have different criteria when it comes to the brands they pick.
Major brands as we know well are investing a lot in engaging consumers in all different areas, from sustainability to the metaverse and beyond. And it is clear that those who can win the attention of multiple niche groups will be winners as discussed earlier in this report. But what is also clear is that brands with a niche approach, those focused on a particular product or service, offering a limited selection of a la carte or bespoke experiences will also attract a new clientele looking for something different that perhaps the bigger brands are unable to provide.
“Data is obviously critical, but the ability to translate the data into actions at scale and globally is where the biggest challenge lies,” said Sadigh. “How can I, as a brand, build automated experiences that will help to elevate my brand perception? That will further foster desirability for my products? That will motivate my customers to come back to my stores?”
The question remains on how to engage that specific person who is attracted to your brand, when it comes to content, or tone of voice, products and messaging. Data remains key to knowing your audience so that companies can learn about their audience and apply their knowledge in the most direct and appealing way to their consumers.
All of these metrics that brands use to measure and assess who their audiences are, are digital tools that brands use to understand their customers, their expectations, their desires and how to craft an experience in the modern age for them, and those who fail to do so, may be left behind in this decade of change.
We want to take the time to thank you, our loyal readers, for your thoughts, insights and participation in The Deep Dive. It has been a pleasure to explore this topic over the past few months and share our findings with you. We look forward to delving into another topic with you soon.
The Luxury Society Team.