Hope and resilience are beginning to emerge all over the news. Jean-Paul Agon, CEO of L'Oréal, recently promised the market that the “Roaring 20’s” are just around the corner: “Like a flower after winter, beauty is ready to blossom as soon as COVID goes away.” Is it time for a renaissance in the retail sector – and is this the case for luxury?
As vaccines are rolled out globally, luxury retail markets have begun to reopen with some markets like China showing double-digit growth. With pent-up shopping demand potentially bringing teeming hordes hungry for tactile shopping experiences back to stores sometime this year, how can luxury retailers prepare to meet these new challenges?
There is an enormous opportunity for luxury retailers to start over with a fresh, bold, innovative approach – to shed the past waste and inefficiencies that brought many a hallowed brand into the dustbin of history, and embrace new models that tightly align the needs of brands’ customers and talent.
Bringing together insights from some of the most influential leaders in the industry, find out what the future holds for luxury retail in this SimpliField report on the eight biggest industry trends in 2021.
The 'Bling Dynasty' is Back and Exceeding Expectations
Recovery is expected to be led by Chinese consumers, who will account for almost half of global spending on luxury goods by 2025, up from a third in 2019. The Chinese market is seeing a quick market rebound, explained by its large customer base of repeat and first-time luxury buyers.
In Mainland China particularly, luxury brands have already started to reap the benefits of post-quarantine shopping: in April, Hermès’ flagship store in Guangzhou received record-breaking sales of at least $2.7mn on its reopening. Similarly, luxury brands in China already returned to pre-COVID offline activation levels by July 2020.
Local purchases have boomed due to limited travel and the Chinese government has reinvigorated the nation’s strong growth spirit. In fact, the share of purchases made locally reached 80-85 percent this year and going forward, it is expected to remain high at 65-70 percent even as domestic purchases regain relevance especially in China and the broader Asian region.
Luxury brands are rushing to open more stores in China and expand their online offering on platforms such as Alibaba’s T-Mall Luxury Pavilion. The biggest so far is a $1.1 bn deal between Alibaba and Richemont investing in the online fashion platform Farfetch to expand e-commerce in China.
The Outlook for the US Luxury Market Is Rosier Than One Would Expect
In the US, there is hope for a strong rebound: as equity markets have remained at all-time highs, wealthy individuals sheltering in place have continued to accumulate wealth and are now feeling emboldened to reward themselves.
This phenomenon was coined by the Biden campaign as a ‘K-shaped recovery’: those at the bottom part of the K are sadly in worse situations today, but those in the upper part are relatively relaxed. Although this situation won’t last forever, it does mean the US market rebound will be swifter than expected.
The North American luxury market is expected to see 14 percent growth and remain solid as positive signals show early increases in purchasing luxury goods. Plus, unlike Europe, US luxury isn’t as reliant on travel retail with an offer more tailored to the local American market. The map of luxury consumption has however been redrawn to move away from city centers and large department stores.
Local Empowerment is Critical for Recovering European Markets
European luxury markets are under immense pressure as tourism flows have evaporated. The World Tourism Organization revealed that the number of tourists in 2020 decreased by 60-80 percent worldwide, with Europe accounting for half of the world’s tourist arrivals.
Unfortunately, the European luxury industry is complacent, with some brands doing 80 percent of their business from tourism, which just isn’t happening right now. The latest Business of Fashion Report indicates that even in a positive ‘Earlier Recovery’ scenario, Europe is expected to see its luxury sales decline by 23 to 28 percent in 2021 compared to 2019.
In comparison, Vincent Vuillaume, International Retail Director (Luxury Watch Industry), points out that stores in other markets “were relying a lot on the local customers. […] if you have a good database, if you have a good relationship with your local customers, of course, the rebound will be much quicker than if you’re just waiting for your customers, or if you have to find your local customers and start fresh.”
Localization to develop better relationships and provide valuable local services will be key to staying relevant and attracting local European customers. Plus, with uneven and repetitive confinement measures put in place across Europe due to COVID-19, retailers must now efficiently and effectively incorporate health and safety regulations if they want to optimize sales.
The New Luxury Buyer is Female and Younger Than Ever
The new luxury shopper is no longer just the active, rich, European or American male, but increasingly female, younger, international, more diverse, and inclusive. Some also speak of the emerging dominant luxury segment as the ‘HENRYs’ (High-Earners-Not-Rich-Yet) -- in other words, those luxury big spenders are aged 43 on average, with an income of over US$100,000 and investable assets of less than US$1 million.
Referring to the concept of ‘Women-omics’, Erwan Rambourg, Managing Director and Global Head of Consumer & Retail Equity Research at HSBC, author of “Future of Luxury” highlights the fact that emerging markets are not just about tapping into access growth, but that “the future is female.” In fact, the 2020 Singles’ Day clearly reflected that the key emerging clientele for luxury was the single Chinese woman. Even online, luxury e-commerce demographics are now close to an equal gender split with 53.4 percent female and 46.6 percent male shoppers.
Women also have more means today: couples marry later, the salary gap is narrowing, and employment participation rates are going up. “I think women will move the needle significantly for the usual suspects of female-driven sub-segments…But beyond that, you can also think about a lot of male-driven sub-sectors that will get a huge boost from female purchases,” said Rambourg.
The luxury buyer is also getting younger: by 2026, Millennials and Gen Z will make up more than 60 percent of the spending. Plus, they are more affluent, making 30 percent more luxury purchases than the overall luxury population. This means brands are targeting a massive digital-savvy audience, which will have impacts not just on online purchasing, but also ranging from brand building to PR communication, which is all happening online. Plus, younger consumers today have yet again proved they’d rather prioritize experiences over purchasing goods.
The Awakening of Conscious Luxury
Brands will also need to reshape themselves internally to better align with this new customer base: “The fundamental shift, and one that should have the boards, the executive committees and the management teams in luxury change eventually, is more women, younger consumers throughout, and obviously minorities as well,” said Rambourg.
Vuillaume strongly emphasizes that there are also important longer-term customer concerns to be addressed by the luxury industry today beyond the pandemic, including climate change and manufacturing practices: “COVID-19 is a small wave that's overtaking the world right now, but right behind it you have social change and climate change coming. It’s true that this younger consumer, she’s asking more questions than we would have asked at her age around ethics, how products have been manufactured and what your brand is doing for the community.”
Consumption is going down for financial reasons, but also because customers have realized that every purchase they make can also be aligned with what they stand for in political, economical, social, and environmental matters. Catherine Roggero-Lovisi, Former President, North America at Revlon states: “A company that is going to be remembered is a company that is not going to push you to buy one more item, but that is going to push you to buy a better item. Less is going to be more.”
The secondhand luxury market is booming, dominated by online marketplaces like TheRealReal, Vestiaire Collective, ThredUp, and Poshmark planning to go public. Pilot projects with some of the most popular luxury brands, usual skeptic to resale, are ramping up: for instance, Gucci and Burberry have already invested in developing reselling via TheRealReal end 2020.
Amazon Luxury: Major Brands are Taking a Wait and See Approach
Online luxury sales are skyrocketing due to the pandemic: when in 2019, 12 percent of luxury sales were online, predictions show that by 2025, these will represent a third of luxury sales.
But major brands are still very much taking a wait-and-see approach to the brand new Amazon Luxury e-commerce. Unlike Oscar de la Renta, most luxury brands are developing a learning curve on online shopping, with some working strictly with their own retailer or .com, and others relying on wholesale or multi-brand platforms. Many restrictions exist for luxury brands on those channels, particularly in terms of brand messaging based on a very fine balance between exclusivity and accessibility.
In fact, for his just-released book, Rambourg interviewed many luxury brand leaders: “Although the luxury sector has a lot to learn in terms of service to consumers and of data, potentially from Amazon, I do believe that the more recent move from luxury brands has been really to tighten control...There’s been a move towards cutting physical wholesale and cutting multi-brand online wholesale.”
Only time will tell, but it seems the luxury store experience is still essential to luxury shopping and that brands are not currently losing any sleep over this announcement.
The Relationship Between Your Talent and Customers is as Important as the Stores
The truth is that the success of luxury stores relies on great customer experience and that great customer experience relies on talented and empowered sales associates.
As Rambourg puts it: “There was an interesting quote from Michael Burke, the CEO of Vuitton. He was asked, 'What are your 400 and some stores going to become?' His reply was to say, 'I have 12,000 stores, which are actually the sales associates.' During the crisis, where stores might be shut, or operating on restrained hours, it’s important to empower your talent to really go after that more intimate relationship, that better service, and around building that emotional tie. Hopefully, that will help consumers come back to that given brand.”
Vuillaume echoes that, “At the end of the day, what we expect them to establish is the relationship with the customers and make them become their number one go-to person every time the customer has a question about luxury. Sort of like a luxury concierge. Customers should be able to call them and ask for the best places in town and make them become part of the family. That’s obviously in an ideal world, but that is part of the goal.” Not only will this engender positive brand image and word-of-mouth, but it can also potentially increase basket size in a time when foot traffic is low.
Providing support and training today is even more important for sales associates to simultaneously ensure compliance to health and safety regulations, apply new sales methods and offer excellent customer service: “Going back to the field and to the teams that are in the trenches to write the future is extremely important. If you have somebody on your team, it means that you trust them to make a decision and to represent your company or your brand. And it also means that they have the intellectual capacity to do it and the training to do it,” said Roggero-Lovisi.
Brands Continue to Consolidate and Innovate As Categories Shift
More than ever, luxury consumers are looking for timeless luxury products. Experience-based goods are on track to be down only 10 percent in 2020, compared with a 23 percent drop for luxury goods. However, less tied to trends or seasonality and with strong online sales, skincare, makeup, footwear, and leather goods are better positioned to rebound than luxury watches and jewelry, which are still very reliant on retail sales and international travel.
The trend towards luxury classics is reflected as large luxury groups continue to consolidate and lead the way. Already in FY2019, Deloitte found that, for the first time, the Top 10 luxury companies contributed more than half of the total luxury goods sales of the Top 100 companies. Among these, companies like LVMH, Kering, Richemont, and Chanel were also among the Top 10 highest net profit margin companies.
This consolidation is bound to pursue beyond 2020, following the footsteps of LVMH acquiring Tiffany & Co. with a concluded record deal of $15.8 bn.
This does not mean leading brands have stopped innovating. On the contrary, many industry leaders are looking up to brands like Gucci and Vuitton, impressed by innovations such as ‘Gucci live’ (a new digital approach to omnichannel sales) and new monogram logo designs (including Virgil Abloh’s collection in Shanghai redefining Vuitton’s DNA for younger customers). Rambourg reminds us that, just like Moncler’s innovative shop windows, luxury brands must always look to surprise their customers: “They might hate it. They might love it, but whatever happens, they’ll notice it, and that’s the purpose.”
In terms of product categories, the strongest growth will be in leather goods (+16 percent), followed by cosmetics (+15 percent) – and within that segment, skincare performs better than make-up.