MILAN — Spending on personal luxury goods is expected to contract between 20 to 35 percent for the full-year 2020 — this after falling by an estimated 25 percent in the first quarter, impacted by the coronavirus pandemic and the ensuing lockdowns and halted tourism.
A recovery to 2019 levels will not occur until 2022 or 2023 and the personal luxury goods market is expected to reach sales of between 320 and 330 billions in 2025, boosted by consumers in China, the online channel and younger generations (Gen Y and Gen Z).
These findings are reported in the latest Bain & Co. Luxury Study 2020 Spring Update released on Thursday in collaboration with luxury goods association Fondazione Altagamma. The 2 to 3 percent increase from 2019 compares with expectations by Bain and Altagamma reported in November of 3 to 5 percent annual growth at constant exchange through to 2025 for personal luxury goods, with sales reaching between 335 billion euros and 375 billion euros.
While the study still sees growth in the long term, Bain & Co. partner and coauthor of the study Federica Levato said in a phone interview that “this is a much bigger crisis than the previous one in 2008, when the sector saw a decrease of 8 percent,” and a fast turnaround the following year, with a 12 percent growth and brands redirecting their investments into China. “This is an unprecedented and the most serious economic and health crisis with a strong impact that could put clusters at risk.”
China continues to be a key factor now, too. “The coronavirus crisis has accelerated the core engines of the luxury goods industry. These are the online channel, which is seen growing up to 30 percent by 2025 and has been the only positive growth recorded, accessories, and China,” according to Levato.
Bags and shoes are the most resilient categories. “It is the category with the highest online penetration, a strong product identity and customers choose single items as icons. They are durable, they don’t change every season, they are luxury yet their price point is not as high as jewelry, for example. Some brands have probably opened up a bit the doors to the temple of luxury to customers,” foregoing some product scarcity, Levato explained. In contrast, watches have been declining the most due to a lack of online sales platforms to offset the shutdown of physical channels.
Levato noted that China “is a champion for recovery. Customers are willing to buy, they go back to stores, it’s promising in the mid- to long term globally.” China has begun to lead the way toward a recovery and Chinese consumers are set to cement their status as crucial drivers of the industry, accounting for nearly 50 percent of the market by 2025. As a region, mainland China will account for 28 percent of the luxury market, up from 11 percent in 2019.
Levato said that “luxury brands’ ability to anticipate and meet the customers with proactive strategies” will be fundamental for a recovery.
According to the consultant, brands have been responding “very fast, planning scenarios, rethinking the future, questioning past actions, how to evolve their pillars, which worked and which didn’t, what role to give stores, the number of stores, all to be near their customers.”
From the customers’ perspective, the crisis has accelerated and solidified certain trends, such as their quest for value. “Brands have to present a credible offer at different price points,” said Levato.
The crisis will lead to a new wave of M&As, she added, “a consolidation of not only brands but of the supply chain as well, as it is at risk, with small labs and manufacturers that don’t have the muscle to sustain and react to the situation.”
“There will be a recovery for the luxury market, but the industry will be profoundly transformed,” said Claudia D’Arpizio, Bain & Co. partner and lead author of the study. “The coronavirus crisis will force the industry to think more creatively and innovate even faster to meet a host of new consumer demands and channel constraints.”
“As consumers slowly emerge from lockdowns, the way they see the world will have changed and luxury brands will need to adapt,” Levato agreed. “Safety in-store will be mandatory, paired with the magic of the luxury experience: creative ways to attract customers to the store, or to get the product to the customer, will make the difference.”
That said, it will be key for brands to remain consistent with their DNA to succeed, concluded Levato.
For the second half of the year, the study expects a contraction between zero and 10 percent and between 20 to 25 percent depending on two different scenarios. One is based on the local rebound, restarted intra-country tourism and intra-regional tourism, and an extra-regional tourism that has not recovered, but showing the first positive signals by the fourth quarter and the holiday season. In this case, the drop in the first half would be flat to down 10 percent and for the full year 2020 down between 20 and 25 percent.
In the second scenario, the study sees a slower local rebound, mainly with sluggish Europe and Americas, stabilized intra-country tourism but still limited intra-regional tourism and extra-regional tourism not recovered. In this case, the decrease in the second half would be between 20 and 25 percent and for the full year between 30 and 35 percent.
D’Arpizio identified several market trends that are here to stay, including: More China; accelerated shift to online but with a phygital mind-set; heightened environmental and social consciousness; strengthened local pride and demand for intimacy, entertainment and emotions.
During a webinar conference on Thursday morning, Altagamma president Matteo Lunelli and general director Stefania Lazzaroni presented the Altagamma Consensus 2020 Update, which estimates this year an average 20 percent drop in luxury consumer spending in all markets. In particular it forecasts a 29 percent decrease in Europe, a 22 percent in North America and a 21 percent drop in Latin America, all impacted by a protracted crisis and the absence of international tourists, especially Chinese. Japan is seen down 13 percent, Asia down 5 percent, and the Middle East down 16 percent.
By cluster, the Chinese consumers are seen to decrease 9 percent as they are the first to exit the emergency, followed by the Japanese, down 14 percent and the rest of Asia, down 16.5 percent.
By product, the Consensus expects sales of jewels to decrease 22 percent; watches to drop 25 percent and ready-to-wear, down 21 percent, while leather goods is seen down 16 percent and cosmetics down 11 percent.
Lunelli was positive about the long-term prospects for Italy’s “creative industry, which will be able to leverage unique manufacturing, creative and entrepreneurial resources.” The priorities in the short term are to protect the pipelines that are struggling; in the medium term to complete the digital transformation and the relaunch of tourism while increasing its attention to the social and environmental sustainability.”
Lazzaroni said the Consensus sees profitability of the companies in the luxury sector down 30 percent in 2020, compared with a Consensus for year released last November that forecast a 4.5 percent growth. She concurred with Lunelli, saying that the digital transformation of companies will be surely implemented and that the crisis will bring new lifestyles, more sustainable and moderate.