Luxury: Setting a new course in three phases
The latest Boston Consulting Group (BCG) study "A new era and a new look for luxury" anticipates a three-phase recovery in the luxury industry. But the industry does need to address a number of factors if it wants to come out stronger. An exclusive analysis.
By Cristina D’Agostino26 juin 2020
The Covid-19 pandemic has brought sales to a sudden stop in the first half of 2020. BCG tells us that we should expect sales to fall between 25 and 45% this year, and even that is the best-case scenario – if the economy bounces back fast and only if a vaccine is found quickly. But even this optimistic outlook will mean a slow-moving, gradual recovery, and the return to pre-crisis levels should not expected before 2023. That’s all due to several factors at work here, says BCG.
The crisis we’ve all lived through now has had a major impact on our desire to consume and the way we do it. The health emergency brought out a social crisis predicated on inequalities, and new sensitivities about inequity have changed the way luxury brands want to position themselves in the public sphere. An ostentatious luxury with casual disregard for diversity and inclusiveness is no longer acceptable. The shifting attitude on this in the luxury sector is what BCG calls the “flattening” phase. Of course, it’s easy to point to luxury brands that actively took a hand in the fight against the coronavirus: shifting production to much-needed products like medical gowns and sanitizing gels, for example, or ponying up the cash to preserve the jobs of their workers and craftsmen. But this social commitment must now lead to a sweeping reimagination of the value chain, one that is built on greater integration of environmental and ethical factors. Because the pandemic has made consumers aware of the most precious commodity of all: their health and that of the planet.
Recovery: some better positioned than others
According to BCG, not all luxury brands are being affected in the same way, and this will in part determine how they recover. Brands with products perceived as timeless will not be affected as severely as those that are directly dependent on trends and fads. Filippo Bianchi, co-author of the report, Managing Director & Partner BCG: ”In China, however, we had begun witnessing a shift in values even before Covid-19, with a recent wave of extravagance, which have been confirmed by our survey: preference for luxury extro values increased by ~14% for Chinese, while it has lost ~9% for Westerns. Westerns are anticipating the “Sober Era”, while for Chinese this new era is still a bit far. In any case, iconic brands such as Hermes, Chanel, Cartier, Rolex, are winning the race on both directions. Post-crisis, there is always a “flight to quality”, and consumers want to buy product with undisputable value, almost like an investment. Those brands will benefit from this consumption pattern, resulting in market share gains.”
Post-crisis, there is always a “flight to quality”, and consumers want to buy product with undisputable value, almost like an investment
Filippo Bianchi, co-author of the report, Managing Director & Partner BCG
Moreover, BCG writes, “skin care, makeup, footwear, and leather goods are in the best position to rebound. Sales in these categories are less tied to seasons, holidays, or other key moments than are others, and online sales are already relatively strong. We expect that sales in these categories will decline in 2020 but recover faster than others, potentially reaching precrisis levels in 2021 or 2022.”. Other sectors, though, like watches and jewelry, will be more affected, as they rely strongly on physical points of sale and international travel. Sales of ready-to-wear clothing will fall by 35% to 50% this year and will not return to 2019 levels until 2023.
As for the global outlook, and which region will be the most resilient, China looks the most promising. According to Filippo Bianchi, China “is expected to rebound and end the year as much as 10% above the 2019 mark, as more Chinese who normally shop for luxury goods when they travel stay home and spend in the country. By contrast, we expect a drop from -50% to -60% for the Italian market and France, from -35% to -45% for the UK, from -30% to -40% for the US and from -40% to -50% for Japan”
Phase 2: in-depth digitisation
After this initial flattening phase, which has prompted companies to protect not only their employees but also their assets, “the industry faces a protracted Fight phase, where regions gradually restart their economies but business outlooks remain uncertain because of the potential for the virus to reemerge… Companies that respond by streamlining operations, redefining luxury to be less conspicuous and more inclusive, and investing in new ways of doing business are more likely to not just power through these uncertain, changing times but emerge stronger for the future.”
This second phase is primarily about accelerating the implementation of digital channels. The habit of consuming online, a necessity while on lockdown, is not something the consumer intends to abandon anytime soon. But for brands, this means a number of things: not only implementation of an e-commerce site specific to the brand and the activation of multi-brand platforms (such as Net-à-Porter and Farfetch), but also a stronger presence on social media as the brand’s primary source of desirability. According to BCG, “In addition to selling merchandise, digital channels have become essential inspiration points in the prepurchase phase of the consumer journey. Generation Z shoppers—those aged 5 to 25—in particular devote half of the time they spend making a purchase either seeking inspiration or inspiring others. More than 70% of the age group globally and 82% in the US decide what to buy during the inspiration stage of the purchase journey.”
Phase 3: Investing in artificial intelligence to predict demand
These substantial investments will not be possible without a profit and loss adjustment. Rents, payrolls, and marketing costs will be the first to be affected, but a relocation of production and greater agility in the face of demand will also allow the brand to make better strategic choices. This is the third phase of the recovery: investing in artificial intelligence and embracing what BCG calls “clienteling 2.0”. Technology will be used to simulate, in order to better anticipate customer behavior, schedule a product launch and reduce costs. This is what the authors of the study refer to as "the bionic operating model", a model combining human and technological capabilities.
“Adoption of artificial intelligence (AI), advanced analytics, and other components of an enterprise-wide technology backbone will become a key differentiator in the industry,” they write. “If the Fight phase of crisis recovery continues for some time, it may be difficult to predict product trends, at least in the near term. Brands can use AI to steer the way, doing pulse checks on buying patterns, for example, to improve demand tracking and analysis and gain insights that competitors might not have.”
There is no doubt about the resilience of the luxury industry. But there is a price to pay: brands will need to address major challenges to change production models and values and to build a new and more socially responsible presence online.
Read the full study: cliquer ici
Share the post
The latest figures announcing significant growth in the luxury industry at LVMH and Kering coincide with a disappointing result of China’s GDP. What are the consequences on the sector? Our analysis.
After leather goods, hospitality or winemaking, art book publishing seems to be ever more sought after by luxury groups. The latest buyback of the publishing house Citadelles & Mazenod by LVMH highlights this trend.
Be notified of the latest publications and analysesRegister