In the unmitigated disaster that is the coronavirus outbreak, there is hope for the beaten-down world of luxury — the shutdown and eventual reboot could ultimately lead to companies that are “stronger, more innovative and more purposeful,” according to Bain & Co.
Call it comfort for the here and now as the sector struggles with a crisis that could result in up to a 35 percent drop in sales this year.
“Leadership teams can mitigate today’s threat and accelerate into an eventual recovery if they govern through a new leadership framework; maximize short-term financial, operational and brand resilience, and transform the value proposition and business model for the future,” Bain said in a new report, “Luxury After COVID-19: Change for (the) Good?” The study was written by Claudia D’Arpizio, Federica Levato, Stefano Fenili, Fabio Colacchio and Filippo Prete.
The luxury market will contract by 25 to 30 percent in the first quarter, predicted Bain, which also modeled three scenarios for the whole of 2020 — ranging essentially from bad to really bad to horrible. The bad sees a drop of 15 to 18 percent in revenues.
The really bad, or as Bain described it “intermediate scenario,” sees a sales decline of 22 to 25 percent, or 60 billion euros to 70 billion euros, in revenues. That would be the equivalent of shutting down LVMH Moët Hennessy Louis Vuitton (with its annual revenues of 54 billion euros) and Kering (16 billion euros) for a full year.
And it’s worse on the bottom line.
“Profitability will be disproportionately hit,” Bain said. “Yet there is an emerging bright spot: The Chinese market already appears to be on its way to recovery.”
Luxury got an early look at the threat of COVID-19 when it shut down stores across large parts of China, a vital market for the sector. And it’s a threat that’s not going away. Not only is the pandemic bearing down on both North America and Europe now, it’s hurting the global economy and will continue to depress travel.
“We expect that the pandemic will continue to reverberate through the industry in 2021,” Bain said. “Some countries will likely experience a rapid rebound while others will see more of a ‘dip and stabilization.’ China and the broader Asian market could experience the strongest recovery; Japan, Europe and the Americas could feel a more prolonged impact, depending on how the real economy fares.”
To help weather the storm, Bain said company leaders need “clear, robust and regularly updated information” on the COVID-19 crisis and well-defined and regularly updated contingency planning that prioritizes actions, lays out timetables and assesses implications. A narrow committee of empowered crisis should be put in place to enable rapid decisions.
Looking further out, over the medium term, the report said demand for luxury goods will be supported by the Chinese middle class, Millennials, Gen Z and e-commerce.
Bain pointed to six consumer trends that will emerge or solidify due to the crisis:
• More emphasis on China with the country standing as the first to restart luxury spending.
• An accelerated shift to digital shopping.
• Heightened environmental and social consciousness.
• Rise of a post-aspirational mind-set where ethics become more important.
• Strengthened local pride.
• An expanding need for inclusion.
“Some companies will emerge from the crisis able to make much faster decisions, especially if they jettison inefficient legacy processes and embrace advanced analytics,” Bain said. “The coronavirus is accelerating ad-hoc adoption of video conferencing, cloud-based collaboration and telecommuting. Companies that systematically embrace these digital tools and flexible working practices will become more agile, save money, reduce their carbon footprint and attract talented young employees.”
And the production model could also get a reset.
“The COVID-19 response can become the catalyst for a supply chain reinvention in the luxury industry,” Bain said. “The goal here is to preserve the elements of today’s short-term scrambling that can underpin a more reactive and flexible operation in the future — one that is increasingly decoupled from the rhythm of seasonal collections.”
At a time when more than three million people jumped on the U.S. unemployment rolls in a week and the $2 trillion stimulus package coming out of Washington is seen by some as a first step to hold the economy over, a look at a better future has to be a good thing.
Now it’s a matter getting from here to there.