Future of luxury brands: E-commerce and sustainability could remodel fashion industry in post Covid-19 era
The Covid-19 pandemic continues to ravage the nation and its impact on the booming business world has been severe. The financial system is crumbling. As the impact is being felt in ripples across various social and economic sectors, one area that has been hit hard is the luxury industry. Several factors such as strategic marketing, location and economic stability on a national basis go into sustaining a luxury brand's profitability. All of these have been drastically affected by the recession triggered by the pandemic. With the federal mandates of stay-at-home orders in place, the luxury industry has been forced to close its door to the public, leading to foot traffic becoming non-existent. As a result, sales have plummeted, jobs have been cut and there are fewer resources to invest in.
During a crisis, people are less likely to spend on items that are not of immediate necessity, especially when their pay is either being slashed or not coming in altogether. According to a study by Boston Consulting Group, sales in the luxury industry could drop by 25 to 30 percent this year, compared to 2019. Although the crisis isn't affecting every sub-industry within luxury equally, travel and hospitality are hitting rock bottom. For one, the travel restrictions have affected airlines, luxury and premium travel, tourism, global events, travel retail as well as the entertainment and sports industries. The food industry has experienced a sharp decline, except for online deliveries. In addition to that, the overall economic and health crisis could also have long-lasting ramifications on trends, purchasing behavior and prompt colossal changes. Luxury brands will need to adopt a new survival model and fast.
Luxury brands have been known to painstakingly preserve their "crème de la crème", going as far as to dispose of their excess inventory because they refuse to tarnish the brand's reputation by holding a sale. This practice was discontinued in 2018. But looking at falling demand for luxury items during the Covid-19 era with consumers cutting down on spending, luxury retailers can expect a surplus of inventory 32 percent higher than a year ago, as per Vogue. Bain & Co also estimated that this year, the personal luxury goods market could decline by 20-35 percent worldwide (amounting to losses of approximately €60-70 billion). The question that remains is, how are luxury brands going to cope with this pandemic? According to Bain, prior to the pandemic, "The luxury industry was undergoing fundamental change as companies faced mounting pressure to become more customer-centric, digital, agile, and sustainable.” To sustain themselves, luxury brands will have to adapt to new work systems, including sales with generous discounts, digitalization and sustainability.
Luxury brand owners felt the impact when Covid-19 proliferated across China. The citizens of the Asian country comprise 90 percent of global luxury market growth in 2019. Then it wreaked havoc in Italy, home to some of the key players in the luxury industry that faced an additional challenge of operating wherever possible amid a mandated national lockdown. Management consulting firm, McKinsey, highlighted in its recent report that luxury sales for Spring 2020 fashion are nearly 70 percent lower than last year. This is mostly because of store closures, as customers haven't had the opportunity to expose the collections in-store, which is innate to the luxury shopping experience. At the same time, with the luxury market around the world being affected by the coronavirus pandemic, brands are doing everything they can to ensure their employees and customers' health. Some are even assisting frontline public health response in myriad ways like producing face masks, protective clothing and sanitizers.
On the contrary, online sales have seen an uptick. Since the lockdown and subsequent business closures, luxury brands have mostly shifted towards e-commerce to sustain their sales. The market was slow to embrace the digital medium, partly because customers find it difficult to make expensive purchases online, as per Luxury Society. A Vogue Business article highlights the growth of e-commerce in luxury which has inevitably strengthened the direct relationship with consumers and given more control over stocks. With stores closed and no other alternative for business, brands have upped their social media activity and virtual engaging with customers through means of the online stores, emails, live chars, tutorials and virtual fashions shows among others. At the moment, the only feasible manner in which brands can retain their customer base is by creating a new journey for them through the use of digital platforms. Millennials and Gen Z form the larger and fast-growing consumer base for luxury which also gives brands the incentive to go digital with their customer engagements and connections.
While some luxury brands were able to keep business going through online sales in China, others are yet to deploy an alternative strategy and guarantee deliveries. The Chinese prefer procuring luxury items from abroad since they are cheaper, but the end of Chinese tourism in Europe following the lockdown will have disastrous effects on end-of-year inventory levels and income. The trend even looms over the luxury market in the US, with some key players already filing for bankruptcy due to severe disruptions in business. Companies suffer not only on the sales side, but they also have to cope with a supply issue.
Before the pandemic, consulting firms BCG and Altgamma estimated that second-hand market, estimated at $25,941,300,000 in 2018, would rise by 12 percent by 2021. Customers have become more mindful of their purchases, taking into consideration the ethical and ecological aspects of the items. McKinsey's report also highlights that post-Covid trends are pointing to more sustainable practices in the luxury industry with responsible consumption as its focal point. Although the trend of buying second-hand has been around since before the crisis, customers may depend more on used goods. Consumers that have luxury items and are in need of money will offer their products up of sale, albeit at a lower price, but nevertheless expanding supply and creating demand.
Still, many consumers and resellers will face difficulties in their financial resources and could cease their purchases for the time being. The situation may also force luxury brands to reduce the number of collections and products they offer annually. Consumers may also reconsider purchases or rental options.