Fashion and luxury face $600 billion decline in sales

Analysts are cautiously optimistic on China’s recovery, but brands might not be ready to match demand with new stock.
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Key takeaways:

  • Consulting firm BCG has revised its initial estimates and expects a drop in luxury sales between $85 and $120 billion in 2020, up from its first $40 billion forecast.

  • China is showing positive signs of recovery, but domestic demand might not be matched by supply as luxury production remains on lockdown in Europe.

  • Tourism spending will continue to be impacted at least until the end of the year, with substantial consequences for luxury brands.

A month after it published its initial forecast on the impact of the Covid-19 pandemic on luxury sales, consulting firm Boston Consulting Group is revising its estimates for a more negative outlook. Luxury brands should brace for a decline in sales between $85 and $120 billion in 2020, or around 29.2 per cent of the $350 billion luxury market. The fashion and luxury category as a whole will lose between $450 and $600 billion in sales.

The steep decline, driven by the expansion of the pandemic to an increasing number of regions over the last month, will bring the luxury market to the same levels of 2011, says Javier Seara, BCG’s global sector leader for fashion and luxury. It is also a bigger drop than the one suffered by the industry during the 2008 recession, although Seara thinks comparisons make little sense.

The financial crisis of 12 years ago spared a large part of the wealthier class, wreaking havoc on the middle and lower classes; as a health emergency, the Covid-19 outbreak is affecting all consumers in the same way, albeit with different degrees of intensity in terms of economic consequences. “The previous recession was not a consumer crisis, but a financial crisis,” says Seara, adding that the 2008 recession started first and foremost from banks and then trickled down to jobs and consumer confidence. “What we are living through right now is more deeply and drastically on a human dimension, it has to do with existential anxiety more than financial anxiety.”

According to the report, industry sales have declined up to 85 per cent in China in the space of two months, during the country’s lockdown period. In countries like Italy, France and Spain, the decline has reached 95 per cent. This drastic drop represents an existential danger for fashion companies, which are traditionally poor in cash, are often dependent on private equity and can have high debt levels. “Many companies in the industry will default in the next 12 weeks,” says Seara. He advises companies to prioritise employees and cash flow now, before starting to plan for a post-outbreak recovery, which, in any case, is a long way away.

Even in the best-case scenario, BCG estimates sales will still be down at least 10 per cent in December 2020, in comparison to 2019. “Seeing a recovery in the third quarter of the year and reaching 80-90 per cent of [last year's] sales in the fourth quarter would be quite an optimistic situation,” says Tianbing Zhang, Deloitte APAC consumer product and retail sectors leader.

An uncertain road to recovery

After suffering as the first epicentre of the pandemic, mainland China is also emerging as the first country to cautiously approach recovery, which is not only a consequence of being ahead on the emergency timeline compared to other regions. The country had a reasonably solid pre-outbreak economy, high consumer confidence (Chinese consumers represent over a third of global luxury spending) and relies less on tourism spending than regions like Europe and the US. BCG sees China recovering faster and more positively than all other regions, reaching a 5 to 10 per cent decline in sales in December compared to the 15 to 20 per cent decline expected in southern Europe.

“Chinese customers are already going back to shopping; we see a fast recovery of the willingness to buy and of the Chinese consumer confidence,” says Federica Levato, partner at Bain & Company. Bain has previously forecasted that Chinese consumers will make 46 per cent of luxury consumption by 2025, up to 33 per cent in 2019. Despite the impact of the coronavirus emergency, Levato sees this trend happening faster than anticipated. Zhang says at the beginning of this week industry associations saw a 30 per cent increase in footfall in shopping malls in major cities over two weeks ago.

The persistence of travel bans, at least until the emergency is curbed and under control across the world, is likely to accelerate the repatriation of Chinese luxury spending. Again, Levato thinks this is likely to happen faster than what Bain anticipated in 2019, when they predicted 50 per cent of Chinese luxury consumption becoming domestic by 2025. While this represents an opportunity for luxury brands, it also has a sizable downside. “Even if the demand comes back, there is a question mark in terms of whether the brands can provide enough new products in the next few months to meet the demand,” says Veronica Wang, a partner at OC&C Strategy Consultants. Most luxury factories and manufacturers are located in Europe and are currently closed, with no certainty about when they will be reopened and in what capacity.

Goodbye to tourism spending

For Seara one of the only key learnings from the recession of 2008 is that, once the emergency has passed, brands will face a completely new scenario. “There is not much value in planning for business as usual,” he says. One of the most significant changes is likely to be in tourism spending and travel shopping, as travelling between countries will continue to be curtailed and possibly more onerous than before. BCG estimates there will be a delay of up to three months between the restart of local economies, including the reopening of business activities, and the beginning of spending on travel.

“I don't see a recovery in tourism sales anytime soon, probably not until the fourth quarter of this year, if we assume that by then the whole world has put [the emergency] under control,” says Deloitte’s Zhang.

Bain sees some silver linings in intra-Asia travels, which could show signs of recovery in Q4 2020 given that the region is further ahead on the emergency timeline than the West. If so, luxury spending may only contract by between 10 and 15 per cent, rather than a 30 to 35 per cent worst-case scenario Bain outlined in a report on Friday.

The situation, however, remains critical. Tokyo has seen a recent spike in coronavirus cases, prompting the governor to say the capital could go into lockdown. Hong Kong, whose luxury market is particularly dependent on mainland Chinese consumers, has seen retail sales plummeting 21 per cent in January. The Hong Kong Tourism Board (HKTB) has said “zero visitors” will enter the city in the upcoming months, while inbound and outbound flight passengers dropped 68 per cent in February.

Strategies for the new normal

To face the drop in offline spending, many brands have invested in online strategies. According to Bain’s Levato, digital shopping is likely to accelerate both because consumers have more time on their hands, but also because interacting with e-commerce sites has become a necessity. “It has somehow unlocked the digital shopping [experience] for many of the markets that were somehow lagging behind, not only on the core luxury and fashion customer but also on the broader population,” she says, noting that people of all ages have now flocked to online grocery shopping.

For BCG’s Seara, aside from shifting investment, marketing spending and inventory from Europe to China and South Korea, brands need to carefully optimise their next three seasons, choosing what can be taken off the Spring/Summer 2020 market and sold next season, what orders should be cancelled and what stock should be liquidated. “Not optimising for summer sales has consequences for the next few seasons, so we are very adamant with brands in saying it is the moment to really think about what is the plan for the next few seasons as a whole, because it's very interconnected.”

Decoupling the supply chain from the traditional seasonal model could be the answer. Bain suggests brands invests less on unnecessary expenditures like fashion shows during the crisis period and revise when products should be dropped, the number of SKUs and the way they are presented to customers.

George Arnett contributed reporting.

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