What COVID-19 Means For Luxury Brands
What is COVID-19?
A cluster of unknown pneumonia cases was reported in Wuhan, Hubei Province on December 31, 2019, which was later identified to be caused by the novel coronavirus, COVID-19. In January 2020, the World Health Organization declared COVID-19 a world health emergency. Since then, this virus has turned our lives upside down. As of May 10, there have been over 280,000 deaths worldwide, with the US being the country with the highest COVID-19 death toll.
Economic Impact of COVID-19
According to the data released by the U.S. Bureau of Labor Statistics on May 8, the unemployment rate in the U.S. skyrocketed from 4.4% to 14.7%. The United States is not the only one that is suffering. The global economy has been paralyzed, and governments are struggling to implement fiscal and monetary policies in response to COVID-19.
COVID-19 has also negatively affected many industries. One industry that comes to mind right away might be the airline industry. Due to a sharp decline in the number of travelers, the airline industry is experiencing one of the hardest hits.
But you probably haven’t thought much about the impact of COVID-19 on the luxury industry, or have you?
What Are Luxury Goods?
Luxury goods are goods that are not necessary but deemed highly desirable by many. They are disproportionately consumed by wealthy people, and the purchase of such goods is often seen as conspicuous consumption. Despite its exceptionally high-priced products, the luxury goods market has experienced steady growth over the last few years.
Luxury Market in 2019
In 2019, Deloitte had an optimistic outlook on the luxury goods market despite the slowdown in the economic growth of major markets, including China and Europe. In fact, the luxury market grew by 4% in 2019, which was largely driven by Asian buyers. Chinese consumers accounted for 90% of the global luxury market growth in 2019.
Luxury Market in 2020
However, like many other industries, the luxury industry has been hit by the COVID-19 pandemic. According to Bain & Company, global luxury sales could fall up to 35% in 2020. The first ominous sign was noticed when the virus quickly started spreading throughout China in January 2020. China had to virtually stop its economy to slow down the spread of the virus, yet the virus had already reached countries around the globe. When it reached Europe, home to many well-known luxury brands, their operations became under risk. Many have shut down their stores as the countries go under lockdown and health concerns over the virus grow. It is questionable if reopening businesses would completely solve the problems that luxury brands are facing right now.
COVID-19 and Pent-Up Demand in Asia
Some high-end brands, however, experienced a sharp increase in sales after Coronavirus lockdown was lifted in China, which could be seen as a good sign. In fact, the Hermes flagship store in Guangzhou, China reported $2.7 million in sales in just one day. Oddly enough, China was not the only one. On May 13, over 100 South Korean shoppers started queuing up outside the Lotte Department Store in Seoul at 5am, hoping to purchase Chanel handbags ahead of expected price hikes.
Despite the worldwide economic downturn, luxury goods experienced unusually high growth in sales after some Asian countries eased their social distancing restrictions. This ‘recovery’ is most likely to be due to an explosion of ‘pent-up demand’, which is often seen right after a recession or depression. Pent-up demand builds when consumers decide to hold off making purchases due to the pessimistic outlook on the economy. Once the economy starts to recover, pent-up demand is released as consumer confidence increases, and people tend to spend more money than usual.
COVID-19, An Unexpected Threat
Nevertheless, our lives are permanently affected by COVID-19, and nothing will be the same as the pre-coronavirus era. Consumer sentiment has been plunging, with the U.S.’ Consumer Confidence Index dropping from 132.6 in February to 86.9 in April 2020. Travel restrictions and fear of contracting the virus will also stop many from making international travels for a while. Even though some positive trends have been spotted in the luxury goods markets across Asia, with a large fall in the number of tourists, the sales revenue of luxury brands will inevitably decline globally.
Luxury goods have a high-income elasticity of demand, which means the sales performance of luxury brands largely depends on people’s wealth. Unfortunately, COVID-19 negatively impacts the wealth of people around the globe, not just those with low income but also the wealthy. According to the Economic Times, the richest people in the world have lost over $200B during the COVID-19 crisis. Morgan Housel, the author of “The Psychology of Money,” said that the coronavirus crisis could lead to “a generation of supersavers” and increase cash hoarding.
We are still in the middle of the pandemic, and it is difficult to accurately predict how the luxury market will continue to be affected by COVID-19. However, what we know is that COVID-19 has changed the ways we live our lives, and it also has altered consumer spending habits, which would affect not only the luxury goods market but also the consumer goods and services industry overall.
References:
News Release. Bureau of Labor Statistics, U.S. Department of Labor , www.bls.gov/news.release/pdf/empsit.pdf.
Kenton, Will. “Conspicuous Consumption.” Investopedia, Investopedia, 29 Jan. 2020, www.investopedia.com/terms/c/conspicuous-consumption.asp.
Global Powers of Luxury Goods 2019. Deloitte, www2.deloitte.com/content/dam/Deloitte/ar/Documents/Consumer_and_Industrial_Products/Global-Powers-of-Luxury-Goods-abril-2019.pdf.
“Personal Luxury Goods Market Grew by 4 Percent in 2019 to Reach €281 Billion.” Bain, www.bain.com/about/media-center/press-releases/2019/fall-luxury-report/.
D'Arpizio, Claudia, et al. “Luxury after Covid-19: Changed for (the) Good?” Bain, 3 Apr. 2020, www.bain.com/insights/luxury-after-coronavirus/.
15, License Global | Apr. “Hermes Sells $2.7m Luxury Goods in One Day as China Lifts Lockdown.” Licenseglobal.com, 15 Apr. 2020, www.licenseglobal.com/retail/hermes-sells-27m-luxury-goods-one-day-china-lifts-lockdown.
“United States: Consumer Confidence Index: Economic Indicators: CEIC.” United States | Consumer Confidence Index | Economic Indicators, 1 Apr. 2020, www.ceicdata.com/en/united-states/consumer-confidence-index/consumer-confidence-index.
