The current situation and prospects of the luxury market are keenly observed by analysts following the pandemic-induced economic downturn.
In the last few days, Bain & Company, in collaboration with Fondazione Altagamma, released its updated industry report, highlighting the need for new global strategies for the sector. Among the most important notes there is the decline expected in the short- and medium-term and the further strengthening of Chinese centrality.
If so, how much and for how long?
The world luxury market will face a difficult 2020, with an estimated contraction of between 20% and 35% of the global business volume. The impact of the lockdowns and the emotional reaction have led consumers to be cautious with their spending and full recovery, i.e., to the pre-COVID-19 levels, is not likely to occur before 2023.
In a matter of such importance, not all observers, of course, agree in assessing the timing and impact of the pandemic on the market. However, there are huge unknown factors that are independent of the different observers’ perspectives: nature, range and duration of the COVID-19 crisis. In addition to the fall in demand, given by more prudent and cautious spending habits, other important factors also play their part.
Critical demand factors
Fear, for example, is observed in the same China as evidenced by the data on customers flows in shopping malls. Browsing at leisure in a mall has been replaced by an approach to purchasing characterized by quick-ins and quick-outs, with food and essential items at the front of most shoppers’ minds. As expected, the decline in foot traffic, already decreased in the pre-COVID-19 period, penalizes above all restaurants and fashion. It will be of interest to assess the Italian consumers’ attitudes following the reopening of many businesses scheduled for today (se si mantiene “per oggi”) o for May (per ampliarla al mese di maggio).
The fear of losing one’s work is also another factor that — at as-yet unpredictable times — will alienate large portions of customers from the luxury market. The high-end segment will suffer the consequences less than the others, while the fluctuations in the other market segments will be significantly more alarming.
China’s growing centrality
According to Bain, in this situation of uncertainty, the importance of China for luxury operators will be even more marked, accounting for nearly 50% of the global luxury market by 2025, valued well over 300 billion Euros.
Our western world economy is in the process of slow recovery or that, in some sectors, has not yet started. The tourist industry has been hit hard by the worldwide travel bans, and department stores, which have been in a state of slow crisis for several years, are seeing a further decline in sales, and some luxury goods categories are paying the lack of viable online sales platforms to compensate for the closure of physical channels.
In the case of China, on the other hand, the presence of a consolidated e-commerce infrastructure contained the fall in luxury demand and, to some extent, has not even suffered it.
In 2019, Bain predicted that China’s luxury spending would have accounted for 50% of the domestic market by 2025. The pandemic may have strengthened this trend, with a substantial share of spending targeting national brands. In order to get a competitive edge, global brands will need to adopt an effective strategy to localise to the maximum their offerings.
In the luxury market, China continues to be the top consumer country with first-rate trends. Among these, the expansion of the younger consumer base under the age of 45, which will account for 150% of the luxury market growth by 2025. Millennials and Generation Z will represent 50% of the market, while the baby boomers base will continue to shrink.
Adapting to target Millennials and Gen Z
In order to build on these trends, luxury players will need to overcome the shortcomings and limits of the digital structuring and operating model of their business. The zeitgeist of the above targets demands for an innovative and enhanced omnichannel offer, which in turn must be supported by advanced tools capable of analyzing consumer demand and behaviour in the purchasing cycle, with an increasingly marked attention to the creation of advanced experiences, generable exclusively in an evolved omnichannel model based on adequate technological innovations and culture.