Aiming to show “what’s happening behind the scenes,” Antonio Achille, global leader of McKinsey’s luxury practice, on Wednesday unveiled the results of research called “Emerging with strength in luxury’s ‘next normal.’” The study was prepared by the consulting firm in collaboration with Italy’s Camera della Moda and trade show organizer Pitti Immagine.
Based on interviews with hundreds of chief executive officers of both established and up-and-coming brands, international department stores, manufacturers, a luxury consumer survey, as well as MGI and McKinsey proprietary data, the research was aimed at understanding the impact of COVID-19 on the sector and how global leaders are responding.
According to data provided by McKinsey, in 2019 the personal and experiential luxury business was valued at 390 billion euros. Due to the negative impact of the crisis, in 2020, in the personal luxury business, the watch and jewelry segment is expected to be the most affected, with reductions ranging from 25 to 45 percent compared to the previous year, while the leather and accessories goods sector will be the most resilient with reductions ranging between 15 and 35 percent. The companies operating in the apparel and fashion segment lost an average 40 percent of market capitalization since Jan. 1. The retailers’ segment was hit most significantly, registering a financial loss equal to 50 percent of its market capitalization.
According to the research, 80 percent of chief executive officers said the coronavirus crisis caused a decline of up to 40 percent in their top line. Their biggest concerns are a drastic drop in consumption, excessive inventories, as well as aggressive discounting strategies of wholesalers and marketplaces.
As for what is likely to happen in the next few months, 31 percent of the 2,100 executives interviewed by McKinsey chose a darker scenario as the most likely, which, taking into account a resurgence of the virus, expects global sales of luxury goods to drop by between 130 billion and 140 billion euros in 2020 and by between 40 billion and 50 billion euros in 2021, compared to 2019.
A more optimistic scenario, preferred by 16 percent of the fashion executives, forecasts a smaller decrease compared to 2019, ranging from 100 to 110 billion euros, and a faster recovery in 2021, with the business returning to 2019 levels.
While less than 3 percent of ceo’s expect that the business will return to normal, 43 percent of the them think luxury will inaugurate a new era, where fundamental rules will be redefined.
First of all, the coronavirus crisis caused a resetting of consumer priorities. For 50 percent of luxury shoppers, luxury now means spending time with loved ones and being safe, rather than purchasing desirable goods. In addition, the research also forecast that shoppers will be more willing to buy sustainable goods from brands that they trust and at local and nearby shops. “Preferences will be directed to those brands offering ‘silent luxury,’ consumers are showing an increased appetite for quality and values, rather than for bling bling products,” Achille said.
Online commerce is certainly gaining ground. During the lockdown, 24 percent of luxury sales were made by first-time online luxury shoppers and 76 percent of them were satisfied with the experience. In particular, across all countries considered in the survey, shoppers valued safety and delivery guarantee as of primary importance for a positive online shopping experience. In addition, according to consumers’ responses, promotions were the most important factor convincing them to buy online, followed by the brand’s commitments in fighting COVID-19.
According to the research, in the U.S., Italy, France and Germany, jewelry, watches and eyewear will be the categories most exposed to delays in purchasing as a result of the crisis. Three quarters of consumers expect to resume their pre-COVID-19 luxury spending habits after the emergency, but 80 percent of them said when stores reopen they will opt for those that adopt special measures to prevent infections. Baby Boomers seem the most worried about safety, while the youngest generations are the most willing to return to buy in stores.
Interviewing 59 luxury brand store managers in China, McKinsey found that 90 of the local stores registered improvements between the second half of February and mid-March. However, 50 percent of those stores registered sales that were down 50 percent compared to the same period last year. In particular, sales were boosted by the younger generations, who focused on accessories rather than ready-to-wear, mainly because of fewer social occasions.
“China remains a key market for the world of luxury. The rebound is happening, but slowly. It will take time,” said Achille, highlighting the importance for brands to sell to Chinese shoppers in their own country.
In fact, the research put the focus on the fact that 40 percent of Chinese luxury shoppers won’t return to travel until fall 2020 and in the short term the biggest percentage of their trips will be within China.
“In this perspective, Macau might increase its relevance as a shopping destination, also considering the difficult situation of Hong Kong,” Achille said. “Those who will return to travel to Europe and the United States will be more independent travelers than groups and shopping is not expected to be the main reason of their trips.”
Among the sectors more impacted by the crisis, wholesale is expected to go through a very complicated phase. For example, in Italy, where the free circulation of people among the different regions was reintroduced on Wednesday, 46 percent of independent wholesalers might experience a lack of liquidity this year and their situation will be worsened by the aggressive competition of global online retailers offering early discounts on spring 2020 collections ranging from 30 to 40 percent.
“In Italy, the stores reopened two weeks ago, but the results are way below expectations,” said Pitti Immagine ceo Raffaello Napoleone, highlighting the difficulties of the sector. “The situation is worsened by the lack of tourists, who are so important for our country’s economy.”
With 13 percent of consumers who started to browse online for luxury goods during the emergency and with 14 percent of global shoppers expecting to make fewer purchases in physical stores after the crisis, the digital channel has become key for luxury brands to support their business and potentially grow. In particular, CRM activities became crucial to intercept customers and meet their needs and desires, and developing partnerships with specialized e-tailers will be relevant to guarantee good service and meet shoppers through different touch points. According to the research, brands’ online penetration is expected to increase 14 percent in 2020 and 20 percent in the next two years.
Financial constraints are also undermining the stability of the Italian supply chain, which is composed of small and medium-sized companies, which are facing two main issues: a lack of orders and cash. According to the survey, between 60 and 70 percent of producers are suffering from financial instability due to a contraction in orders and payments, which might cause in the most severe situations the disappearance of niche top producers. In addition, 42 percent of luxury manufacturers are worried about clients’ potential offshoring practices aimed at cutting costs.
In addition, the COVID-19 emergency surely shook the traditional runway and trade show schedules with several cancellations of resort shows, postponement of fairs and the decision to turn the upcoming men’s fashion weeks into digital events. While the emergency is certainly having an impact in the short term, it might also influence the fashion schedule in 2021.
While more and more designers and brands are talking about reducing the number of collections and organizing shows closer to in-store sales, Carlo Capasa, president of the Italian fashion chamber, expressed his vision, shared also by the French fashion body.
“I think we should maintain men’s and women’s fashion weeks separated and we should also keep the same dates to exalt the creativity of designers. If shows are moved closer to the delivery of the collections in store, that creativity would be penalized. We need to protect the work of fashion magazines that shoot and present collections before they are available in stores, and to give consumers the chance to have enough time to digest the creative message behind a collection,” Capasa said. “In a B2C perspective, brands might organize virtual presentations and events for final customers when collections hit the shops.”
Another issue that the luxury industry is currently facing is that of excess inventory, which this season might triple, especially in the apparel segment, due to the sales drop, reaching 150 percent of expected spring/summer 2020 sales when calculated at retail price. Labels that have a strong fashion content, limited directly controlled distribution or that are small will be more affected by the issue since consumers will focus more on established brands offering investment pieces.
The study contends that even before the pandemic, the world of luxury was clearly polarized between value creators and value destroyers. In the post-COVID-19 scenario, this polarization will significantly increase with the market driven by “super winners” accounting for 177 percent of the industry’s profits.