Crisis or Change? Covid-19 and the Luxury Retail Industry

By Mila Zettel

Pre-coronavirus, the luxury retail industry had been enjoying years of unmatched double-digit growth. LVMH, the world’s largest luxury conglomerate reported a record year in 2019, with a revenue of €53.7 billion. Meanwhile, its rival Kering stated that it had for the first time hit a recurring operating margin of more than 30% across all of its brands. The luxury retail industry’s wasteful business practices had been criticised for years, and still, at least from the outside it seemed like the €300billion industry could not be toppled. 

When the Covid-19 pandemic struck at the beginning of this year, all of this changed abruptly. With the world under lockdown, the global economy has crashed and could be soon experiencing its biggest contraction since WW2, predicts McKinsey. In a financial and humanitarian crisis like this, it is no surprise that luxury sales have drastically declined. With an average contraction of 40% in global revenue year-on-year, luxury is experiencing its worst quarter to date. But, for an industry based on interconnected value chains across the globe, this crisis affects more than the bottom lines of its giants. Economic contractions can have grave humanitarian repercussions and hit the industry’s workers in developing countries like Bangladesh, India and Ethiopia the hardest. 

As a report in this month’s New York Times Magazine explains, the virus has ground the industry “to a complete halt.” So, what does this pandemic mean for the luxury retail industry? And what will its future look like in a post-Covid world? Given the unprecedented economic repercussions of the coronavirus crisis, it is unlikely that the industry will be ever able to fully recover from this blow. This is why a joint report by McKinsey and the fashion publication Business of Fashion suggests that “it’s time to rewire the (luxury) fashion system.” This means that rather than racing to return to its pre-corona bottom lines, the industry should use this crisis as a catalyst to reinvent itself and reset the increasingly outdated values upon which it was built. 

Economically, Covid-19 has already forced businesses to reconsider their business models and value chains. In a bid to survive the pandemic, companies have made sweeping changes to their operating models. Examples include laying off employees, reassessing product assortments and securing liquidity by using governmental loans and renegotiating existing credits. Beyond that, the pandemic has pushed businesses to reexamine their store networks and growth opportunities; for example, with Asia being luxury’s fastest growing market, companies should focus on expanding into emerging Asian countries like India and Indonesia. Reinventing global supply chains will also be crucial in tackling this crisis. Actions such as nearshoring production, strengthening risk and resilience planning, and stopping non-core assets could significantly boost firm’s autonomy and flexibility, as argued by a recent McKinsey report.  

Second, this crisis has highlighted the importance of (luxury) businesses pivoting strategic, sustainable and future-proof value propositions. For example, while former American retail giants Neiman Markus and Brooks Brothers announced bankruptcy at the beginning of the crisis, e-commerce websites such as “Vestiaire Collective” (which resells “preloved” and vintage designer items) soared in popularity. The Business of Fashion describes this crisis-enhanced polarization between fashion’s innovative winners and its struggling losers as “the Darwinian Shakeout.” The term implies that in the cash-strapped and discount-driven economy that we are experiencing due to Covid-19, businesses have to be strategic in spotting emerging market opportunities, driving innovation and responding to consumer demands- if not, they will run the risk of insolvencies and consolidations. If there is one consumer demand that the pandemic has exacerbated, it is for businesses to scale up their digital capabilities and pursue innovation in areas like social media and e-commerce. As the above example shows, while traditional brick-and-mortar retail stores are failing to attract digital-first customers, disruptive e-commerce websites are able to plug that very gap. 

The coronavirus crisis has pushed the luxury retail industry to the brink of its collapse, and in doing so, highlighted how it is based on a system that is not only out of touch with the current state of the world, but also unsustainable to maintain. One pain point is the industry’s incessant cycle of overproduction and discounting, which devalues the industry’s products. Because of this, the British label Burberry admitted it had been literally burning $37 million of stock per year to maintain “brand value.” Another is the fact that companies like Louis Vuitton, Fendi and Max Mara pay their workers less-than-minimum and unregulated wages under the sophisticated guise of “Made in Italy”, which, while arguably being a far cry from the sweatshop working conditions of fast-fashion retailers, are unjust. With a rebound to pre-coronavirus sales out of reach, it seems like the crisis is offering the industry an opportunity to rebuild its modus operandi for a future beyond the pandemic. 

What is more, luxury consumers are increasingly displaying what Bain& Company calls “a heightened social and environmental consciousness.” This highlights how crucial it is that luxury companies start incorporating sustainability into their business models, and adopting purpose-driven, rather than solely profit-driven action. A prominent example of a luxury company championing more inclusive and environmentally-friendly practices is Gucci, Italy’s most valuable luxury brand. Last year, the company declared it would be going carbon neutral, while this year, it announced it would be rejecting resource-intensive, seasonal fashion shows in lieu of “a new”, and more sustainable “path forward.” However, industry-wide change cannot be achieved by one company alone and instead calls for sustained, strategic and organized action across all aspects of the luxury retail business. Companies have been long pledging meaningful change, most notably via the “Fashion Pact”, an industry-wide acknowledgement of environmental issues. In the wake of Covid-19, such public action statements have only increased. Yet, it remains to be seen how much will translate into serious action and how much will remain lip service aimed at pleasing critics and engaging disillusioned consumers. 

In disrupting financial markets and consumer behaviours, Covid-19 has shifted the luxury retail industry’s supply chains and operating models and highlighted the need for strategic and innovative business models. More importantly, this crisis has brought questions surrounding luxury’s unsustainable and irresponsible business practices into focus, hereby opening up a timely opportunity for the industry to reconsider its set ways. In an ideal world, the luxury retail industry would emerge from this pandemic holistically rewired; realistically, it remains to be seen whether this pandemic will succeed in triggering any consequential, industry-wide change. 

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

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