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How Does COVID-19 Impact Luxury?

How Does COVID-19 Impact Luxury?

May 27, 2020

As the global coronavirus pandemic continues, entire industries are forced to reevaluate their business practices to ensure longevity once the crisis has subsided. Luxury retailers are among the verticals impacted, although the industry may fare better than originally thought. Despite store closures and the impending recession, investors remain optimistic. Big-name brands like LVMH and Kering are expected to recover.

Luxury’s Reliance on China

The luxury industry relies greatly on China for its consumer base as well as production. Chinese consumers accounted for 35% of global luxury goods sales last year, and they generated 90% of industry growth. Fortunately, when mainland China reopened, the demand for luxury goods was sustained, driving nearly 100 percent of all sales for the industry. However, this resurgence alone cannot make up for a loss of revenue in sales abroad.

As a result of increasing labor costs and high tariffs, many luxury retailers had already been moving away from their deep-seated reliance on China. Still, almost every retailer has a great deal of exposure there, whether it be product quality, lead time or established infrastructure. Therefore, supply chains will suffer to some extent. Luxury retailers that diversified supply chain sources prior to the onset of COVID-19 will undoubtedly fare better than those who do not have a diverse digital supply chain.

Finding the Path to a Luxurious Recovery

The recovery process for luxury brands will be determined by product offerings, digital competency and willingness to adapt. For example, lifestyle and athleisure brands will out-perform event-based product lines such as dresses and bridal. 

Additionally, many luxury consumers are expected to continue to spend through the course of this year. As a result, luxury brands will recover faster than brands that sell to the mass market.

At the same time, retailers that supply luxury goods are rarely deemed ‘essential.’ As a result, luxury brands suffered more from store closures than mass market counterparts that sell through essential businesses like Wal-Mart or Target. Once luxury retailers are allowed to reopen, they will need to adapt new strategies to ensure an increase in sales while keeping customers safe.

Why Digital Competency Is Critical

Stay-at-home orders and store closures are accelerating the pace at which all brands need to embrace a fully functional digital presence, and luxury is no exception. eCommerce sales are increasing in many categories, but only if the company is a digital native, (i.e. did not start as a brick-and-mortar or wholesale business who subsequently added a DTC presence). eCommerce revenue will not offset the revenue loss in the other distribution channels. 

According to a Francesca DiPasquantonio, managing director for equity research at Deutsche Bank, in Vogue Business, “some luxury brands have been seeing triple-digit increases in online sales, albeit from a low base, adding that brands that have invested and expanded their e-commerce networks are inevitably going to be the best protected by this online shift.” Adapting to online platforms has been critical thus far and it will remain relevant as consumers re-engage with society with hesitation.

Ensuring Safety for Everyone

Cities around the world are slowly reopening nonessential businesses. The process has been gradual: smaller stores can open first, and hours will not be as extensive as usual. Despite concerns, luxury consumers have returned to the recently opened shops in Paris. New precautions have brought comfort to the weary customers including mask requirements, social distancing guidelines, limited fitting rooms and a visible increase in sanitation tactics. Customers will be eager to come out and support businesses soon, but only if they can trust that retailers will help keep them safe.

Scheduling is one way to ensure safety. Companies like FareHarbor, which provides the reservation backend for Booking.com, Google Reservations, Expedia and TripAdvisor, help shoppers schedule times to visit stores. Tools like this ensure entry/exit scanning and real-time visibility into store volume, shopping experience and other associated metrics. 

What the Future Holds for Luxury

While it’s safe to say the well-known luxury brands will outlast the COVID-19 pandemic, no brands are exempt from the structural shifts our society will face. The implications of COVID-19 are far from over, so the brands that are willing to monitor the crisis, support customers and adapt to the new reality will come out on top.

A digital supply chain solution can ensure the speed and responsiveness required in today’s new environment. Our digital supply chain solutions allow retailers to coordinate all aspects of the business with one simple platform, ensuring the business is more adaptable for whatever comes next. Contact us today if you think our digital supply chain solutions could be right for you.