The popular luxury brands across the globe have turned their focus towards the manufacture of essential items to protect health professionals and those working to combat COVID-19. A slew of the world's luxury brands announced they would make sanitisers, medical overalls to surgical masks. Louis Vuitton's parent company LVMH declared it would convert its perfume factories to manufacture anti-viral solutions and also non-surgical face masks and hospital gowns. Gucci announced it would manufacture medical overalls for medical professionals, while Bvlgari transformed production towards handing out free-hand sanitisers for the Italian public services. So did Kering Group, the parent of French fashion houses such as Alexander McQueen, Yves Saint Laurent, Balenciaga, to produce 3 million surgical masks.
With luxury products taking the backseat in the global coronavirus crisis, sales are likely to drop to 35 percent by the end of 2020, according to a recent report by Bain & Company, a management consultant firm. According to various studies, the impact may be very subjective in regards of the country or the target population.
However, some in the luxury products sector believe the slowdown is just right for brands to reinvent themselves. They can now use this pause in the business to digitize their processes and enhance their systems and technology. This will allow them to develop operational efficiencies and provide personalised experiences to the consumers, said Smita Jain, Director, Master in Global Luxury Goods & Services Management, S P Jain School of Global Management in an interview with Firstpost.
Excerpts from the interview
The luxury sales sector, like many others, is looking at a steep drop in sales due to COVID-19. What lies ahead?
The novel Coronavirus has dramatically changed things overnight. The pandemic has presented a paradigm shift in consumer behaviour, be it on daily lifestyle or spending on luxurious goods. COVID-19 has slashed revenues in half for most brands, but the luxury industry still remains hopeful that Chinese consumers will return to their previous levels of consumption soon after the outbreak stabilises. The pandemic may bring a major change in the consumers' mindset and the value system that underpin their luxury buying decisions.
What is the cumulative economic impact of this segment on India's GDP?
According to a UN Report, India's GDP growth for the current fiscal year is expected to slow down to 4.8 percent from 5 percent, a warning that the COVID-19 pandemic is expected to result in significant adverse economic impact globally. Last year in October, Statista-an online portal for statistics, had estimated India's luxury goods segment to be worth $8 billion and forecast 6.6 percent CAGR growth during 2019-23. But, with the coronavirus outbreak, the future of Indian luxury market has once again become questionable.
What could be the hit on turnover/revenues and month-on-month growth
Brands will constantly need to adjust their quarterly and annual outlooks as the COVID-19 pandemic and the situation around it evolves. Most of the top luxury power houses be it LVMH, Richemont or Kering are expecting a decline in turnover by nearly 15 percent.
What will be the losses to the sector?
The coronavirus could be a black hole for the industry tha, for years has managed to remain hidden to any kind of external volatility, be it macro-economic or political. The luxury industry has forged through the global market but with a huge dependency on Mainland China for its supply chain. The worldwide scope of the outbreak is particularly bad for luxury, even though it is one of the most globalised industries on the planet. As per a recent study by Boston Consulting Group in association with Altagamma, it is predicted that COVID-19 can bring down global luxury sales between 30 billion euros to 40 billion euros. With the store closures and customers staying under lockdown, the luxury market has been severely hit. The industry will see the sector's value drop to 309 billion euros (around 335 billion) a 5-year low.
What would be the impact on employment at the grassroots level-daily wage earners, artisans hired by these brands
A number of large luxury companies have pivoted to address urgent public health needs. At the same time, with thousands of workers relying on the luxury goods industry to make a living, be it factory workers, store employees or artisans and craftsmen at a nation-wide and global level, the industry leaders are planning measures keeping in mind long-term strategies to ensure basic survival of their businesses. Artisans and daily wage earners will find it difficult to secure their finances due to the sudden pause in businesses. If we take Indian artisans, most of them represent the lower-class income segment who have relocated from their home towns to find a better income-earning opportunity. Due to the pandemic, they are out-of-work. However, large conglomerates are paying their employees or at least providing food and shelter. This situation may continue for a couple of months given that work-from-home option is impossible given their nature of jobs.
What would be the disruption in the supply chain due to restriction on the import of luxury goods
China may no longer be the priority territory for luxury brands to look towards for their supply chain. Currently, more than 70 percent of the global luxury products in the fast-moving luxury goods category (FMLG) such as small leather goods, cosmetics and hand bags are being produced in China. The supply chain side will see a slow transition with brands shifting their focus to new territories such as Vietnam, Taiwan and India. These markets have already been contributing, but only on a small scale in comparison to Mainland China. It may take a couple of years before we see a complete shift resulting in brands gearing up their production with full force with these new markets in place.
How long and deep you think would the impact of the virus outbreak continue for this sector?
The pandemic may continue till 2021, as stated by WHO in their research. However, for now, it is safe to say that businesses will define new set of terms to resume operations and find new possibilities to ensure they can make a smashing comeback by the next year. Most of the luxury business have their flagships and headquarters in the European region. For now it can be seen that 'flattening the curve' message across all of the European Union is finally being taken seriously. By 2021, we expect luxury business to make a comeback. However, possibly their approach towards re-entering the market will be slowed down, buyers will be more careful and humble in their buying preferences. After the crisis is over, brands will be more reluctant to aggressively launch new collections six times a year. Instead they will adopt a minimalist approach and less-is-more will be the new mantra for the luxury sector.
Will this lead to consumers accepting their local products and designers more
Yes, given the current government restrictions on global import / export and worldwide travel restrictions, both brands and consumers would have to re-look their sale /purchase options in their home markets at least for the next quarter. This would create an even playing field for both local designers and home-grown brands. Most luxury consumers prefer to buy luxury products from international brands during their travels. The restrictions would mean that the consumers would now shift their purchase patterns completely. Their purchase decision towards a particular brand or designer in the local market would be based on the level of digital engagement that the brand can seamlessly engage them in. Storytelling, craftsmanship and complete transparency would be the primary methods of brand engagement in the digital space.
Will the luxe brands revamp their accessible price points reflecting the reduced spending power of many customers?
Yes. One of the key drivers for brands to revamp their strategies would be to explore new product categories at a cheaper price point or revitalise their brands to bring in new strategies or completely diversify. This would be a global trend due to the heightened omni channel approach that brands are already beginning to embrace. The global luxury consumer will see a new era, where luxury brands will explore market with dual strategies both at an accessible premium/entry level price point and where luxury will become more and more exclusive. The middle market consumer will drive sales for brands playing at the lower level while the niche luxury consumers will become more conscientious towards their purchases. Italian brands like Armani, Gucci and Prada that are known to be more commercial and unconventional in their approach would take the lead, catering to all level of customers. It would be interesting to see how traditional and classic French/Swiss brands (high fashion jewellery and watches) are going to re-invent themselves due to the global shift in perception of luxury post-the pandemic.