The Luxury Industry during and after the Coronavirus Pandemic

The break-out of coronavirus pandemic has greatly impacted the whole world. People stayed at home during lockdown, or wearing masks all day during their work after the slightly alleviation. Not only the daily life has been changed dramatically, but also the business world. The most impacted business should be those who rely highly on world trade. The world trade in 2020 is expected to plummet by between 13% and 32% due to the disruption of the normal cross-border economic activities. The transportation and travel restriction rendered the sectors with global and complex supply chain more vulnerable compared to local business. This essay will highlight the impact of coronavirus on the luxury industry which both relies largely on the world trade with its complex supply chain and which turned out to be one of the industries most damaged during the pandemic.

Financial survival

As the dramatic decrease in sales, luxury brand had to take some financial measures to make sure the survival of brands. One essential way is to manage the cash by cutting cost of unnecessary market activities such as postponed fashion shows. Cash could help mitigate the high risk derived from debt leverage. Companies with low free cash flow, which relied highly on revenue to pay interest would have inflated leverage risk during pandemic. For example, Fauchon, a luxury dessert companies with 134 years history went bankruptcy during the pandemic due to the interest problem.

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Besides, brands need to reconsider all the necessary marketing expense so that to adapt to the pandemic situation. Advertising expenses should privilege mobile and TV. Reallocation would make expenses more suitable and realistic.

Moreover, many companies expected to survive through M&A strategy. Crises created new avenues for luxury brands to develop. The vertical M&A helped brands with the suppliers issue and helped manufacturers with distribution issue may reshape the ecosystem and provide survival and developing opportunities for existing companies.

Last but not least, brands need to pay attention to the investors’ point of view. It is reported that investors foresee a significant Covid impact with Cars, Hotels, Restaurants, Cruises, and Retailing as most negatively affected sectors. Apparel, Watches Yacht and Private jets may remain stable. And Costmetics & Fragrances and Furniture are expected to experience an slightly growth while digital luxury would benefit greatly from this pandemic. For the geological segment, Asian and Middle Eastern markets are expected to recover soon from the pandemic while Europe and Latin America may suffer for longer period during the next several years. From the perspective of investors, brands could adjust suitable fund raising strategy for both its survival and potential growth opportunities.

Customer and employee protection

When the pandemic first break out, the priority of every company would be to protect the health and safety of all people involved in their business, for example, their employees, their customers and their business partners. Before the lockdown, several brands began to communicate with employees on infection risk concerns and provided work from home options. During the lockdown period, almost all the physical business stopped and companies’ technical department need to quickly deal with the online working platform problems so that to ensure that the working communication between all employees continue smoothly. However, there are millions of people who rely on the luxury industries to make a living and their work are almost in-place work, for example, factory worker, retail-store employees and artisans and craftsmen. The luxury industry need to develop a long-term strategy to ensure its social responsibilities on these stakeholders, even if the cost of this responsibility would worsen its operating condition under low demand period. Therefore, to keep facilities operating, and to maintain its ability to afford workforce, with the chemical production line of perfume and manufacturing line of clothes, many companies transferred its products to hand sanitizer and masks. For example, by repurposing its production facilities, LVMH not only mitigated the risk from coronavirus but also generated rewarding revenues. This action also improved the brand reputation for customer centric and high social responsibility.

When the Covid-19 condition alleviated and business restarted, the highly demand for social distance urged the companies pay as much attention as they could to the in-store sanitation condition during purchases by in-store social distance indicators, posters, sanitizer in front of stores and compulsory limitation for in-store people number. With these actions, although business recovery slowed down, the stakeholders’ safety is protected.

However, all these strategical measures above require high resilience and adaptability of luxury brands. The coronavirus breakout began a Darwinism competition condition for all luxury brands. Those companies with lower risk, economies of scale, or vertical integration could regain its vitality after this pandemic while others may run out of business.

Supply chain

A) Suppliers

More than 40 percent of global luxury-goods come from Italy. Although there’s a trend of vertical integration in the luxury industry. The Italian suppliers still played an important role at the beginning part of the supply chain. The Italian factories or craftsmen-based small studios have temporarily shut down. Considering the lack of stable supply due to the pandemic, luxury companies had to reallocate the existing inventories across regions and channel, giving priority to markets that are less affected, quickly recovered and fulfilling online channel first.

For those companies with internal factories, producing luxury personal protection goods would be a possible measure to cover the loss and maintain revenue.

B) Merchandizing

Luxury brands need to not only adjust merchandise during the pandemic, but also make long-term plans to deal with the coming “revenge spending” after the lockdown period. “Revenge spending” is the term used to describe the floating demand after several months of indoor and mostly low-consumption life. According to the report, in terms of price, high-end and low-end luxury items are more attractive during “revenge spending” compared with other products of the middle price. Besides, it is reported that handbags and small leather goods sold better than ready-to-wear apparel during the crisis. The reason behind it could include the size-difference between brands and the less developed virtual showroom. Although the analysis of profitability condition and the shifts of segments highlighted would increase non-operating cost, these shifts could turn out to be increasingly profitable during the “revenge spending” period and might cover part of the loss incurred during the lockdown.

C) Distribution: online

The e-commerce of luxury industry has never been crucial before. In the luxury industry, the products represent only part of value while the rest rely on the meticulous service in-store. Before coronavirus, in-store services can never be over-emphasized by luxury brands themselves. Therefore, the online shopping is viewed as a lack of significant value for customers. However, during the pandemic, the priority of luxury companies is to improve its online pages and to cooperate with e-commerce platforms to increase the available distribution channel. Through these channel, luxury brands still need to provide high-quality service and shopping experience for customers, maintaining the service value, so as to attract customers.

D) Logistics: alternative and supplemental delivery options

Due to the lack of workforce during pandemic, goods delivery became an urgent problem for all the business world. For luxury industry, the primary concern would be the safety and punctuality of delivery. Luxury goods need to be protected carefully because the delivery service is a determinant issue of the service value. Not only should the products be undamaged but also aesthetical (even for the delivery box), so that to guarantee the superior quality and customer impression on items. Although the quality-demanding delivery would result in high operating expenses, the low-quality delivery would be the last choice of brands since it would hurt long-term brand image which determine the value and the survival of brands in the future.

Digital shows of haute-couture luxury brands

The spring and fall fashion weeks as the most important marketing activities of the haute-couture luxury brands, remains an essential way to maintain vibrant relationship with customers and business partners. As the pandemic swept across western Europe in February and March, the Spring 2020 fashion shows were either cancelled or moved entirely online thanks to the digital livestream platforms. For example, as a significant market which contributed almost two third of global growth in luxury spending, Chinese market of luxury has been benefit from fast growing APPs like Tiktok. Despite these possible solutions as a result of highly developed technology, the change from physical fashion shows to online ones has both decreased the influential ability of the fashion shows and denied the collateral influence of celebrities. Celebrities attending a fashion week usually has collateral effect on the fashion show itself and also on the all the luxury brands. The absent of one important influential factor will result in the potential loss of customers’ attention and the loss of revenue.

There has been a lively discussion about what would the future of the fashion show be like. On one side, people are arguing that during the coronavirus pandemic, the digital fashion show on live stream platform give this industry the opportunity to make a change, from the costly show which presenting a collection outdated, because of the fast developing fashion trend and long preparation period for a stage show, to an immediate information through social media. According to them, the fashion week, as an once-needed intermediaries of the fashion press is now losing its important role with the developed technology. On the other side, people still regard fashion week as an tradition in this industry. For example, according to the Fédération de la Haute Couture et de la Mode (FHCM), the governing body of French fashion, the Paris Fashion Week women’s shows will take place as usual in real life from Sep. 28 to Oct. 6. They expect that there would have at least some audience, if not a full room. Whether physical fashion show will continue to exist will still remain a question.

Customer loss

The worldwide outbreak is particularly harmful for luxury industry, one of the most globalized industries overall. It has shut down several growth engine that had supported luxury brands over the last two decades, especially Chinese consumption (both in China and at tourist destinations throughout the world). The outbreak of coronavirus and the strict lockdown regulation in China harmed the one of the biggest market for all luxury brands. However, luxury shopping would likely restart first in China if the virus remains under control. And the travelling restriction would make luxury goods need in tourist destination move to local luxury stores. Luxury brands need to reallocated the supply to capture the coming opportunities.

Customer behavior change

During this pandemic, customers made purchases through online channel. If the online shopping experience could reach the expectation of customers, the convenient e-commerce channel might be an important distribution channel from now on, even after the influence of coronavirus.

Besides, consumers’ behavior may change because of this pandemic. As we know, this virus came from animals driven out of forest for the deforestation. People may put more attention on the environmental sustainability. Customer central luxury brands need to pay attention to the behavior change and make adaptive plans.

Conclusion

The pandemic has swept over all segments of luxury industry. For the survival and for the potential future growth, luxury brands need to pay attention to stakeholders, analyze all the activities it included and make adaptive plan for the future change.

Bibliography

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2. Deloitte, “Fashion & Luxury Private Equity and Investors Survey 2020”. https://www2.deloitte.com/content/dam/Deloitte/pt/Documents/consumer-business/deloitte-ch-en-2020-global-fashion-luxury-private-equity-survey.pdf
3. McKinsey & Company, “China Luxury Report 2019”. https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/how%20young%20chinese%20consumers%20are%20reshaping%20global%20luxury/mckinsey-china-luxury-report-2019-how-young-chinese-consumers-are-reshaping-global-luxury.ashx
4. Marc Bain, “Paris fashion shows will sashay on, despite all the reasons to cancel”, Quartz, June 24, 2020. https://qz.com/1872789/despite-coronavirus-paris-fashion-week-is-happening/
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7. Antonio Achillie, Daniel Zipser, “A perspective for the luxury goods industry during—and after—coronavirus”, April 1, 2020, https://www.mckinsey.com/industries/retail/our-insights/a-perspective-for-the-luxury-goods-industry-during-and-after-coronavirus#