Several luxury goods companies reported an increase in China this spring as people showed up after weeks of locking, causing some Analysts have called it a “spending revenge” trend – the release of demand when people are not forced to stay home.
That was despite a 40% drop in Tiffany’s net global sales in May. “Our business performance in mainland China, which was the first market affected by the virus, is indicative of a strong recovery,” CEO Alessandro Bogliolo said on Tuesday.
“Evidence shows that China is recovering,” wrote Luca Solca, an analyst at Bernstein, in a note released late last month. Researchers at his company have created a “recovery index” to monitor consumer confidence, which shows that the climate among Chinese buyers has improved significantly by May.
Due to the recent increase, China could be the only market where luxury retailers are seeing a recovery this year, according to Claudia D’Arpizio, a partner at Bain Consulting.
“It was actually very, very positive,” Edgardo Osorio, founder of the Italian shoe brand Aquazzura, told CNN Business. “China has always been, but is now, more than ever, one of the fastest, [responsive] customers.”
Chinese customers may spend more money on goods at home because they cannot travel so easily. Two-thirds of sales by Chinese buyers usually take place outside of China, according to analysts.
However, much of the world still faces the pandemic, limiting travel abroad and the opportunities people have to spend extra money.
“Instead of going on holiday, they can buy a Chanel bag,” said Fflur Roberts, head of luxury goods research at Euromonitor, who added that an increase in spending is also happening in other countries, including South Korea. “We see signs of the market returning to some extent.”
Some buyers may also have a “psychological effect – return to normal life,” D’Arpizio said.
Recovery in China is important because buyers there are vital to the global luxury market. They account for 35% of all sales worldwide, according to Bain. Five years from now, the consultants’ estimates suggest that it could reach up to 50%.
But the industry is still in pain
But success in China is only part of the story. As customers stay home elsewhere and hold luxury shopping in favor of basic markets or cheaper, unnamed products, the sale of luxury personal items – including bags, shoes and clothing – is still expected to be a huge success.
Bain predicts that global sales of these items could fall by as much as 35% this year, with expected revenues ranging from 180 to 220 billion euros (about $ 204 billion to $ 250 billion). That’s up from an estimated 281 billion euros ($ 319 billion) last year.
“Coronavirus is forcing companies to reconsider almost every business model,” Roberts said.
The recent increase in sales in China “does not offset the loss of sales for luxury brands by Chinese consumers worldwide,” D’Arpizio said. “Total spending by the Chinese is much lower than last year.”
The increase in “revenge costs” is not expected to last long. “We see this as a temporary outcome,” D’Arpizio added.
What the industry really needs are tourists, from China or elsewhere, he said. “We expect the trip to be the last guide that really comes back to normal. It will take many months, probably more than a year.”
The way we shop has changed
To address the new reality of greater domestic market supply, companies need to adapt their strategy and understand how to reach more local customers.
This prompted companies to open more stores in mainland China, collaborate with local artists and create partnerships with Chinese players. This trend seems to be accelerating.
And while travel is limited, brands may need to tailor offers to each market, according to analysts.
This is a central axis for businesses, which are usually based on the intersection of travelers and do not always spend significant time developing strategies for individual countries.
“This is also a big change for stores in Europe that were really meant more for tourists – a store in Paris or a store in Milan,” said D’Arpizio. Now, “growth will come from local customers.”
Boutiques are here to stay
Some luxury luxury brands that are usually available in e-commerce are also rethinking their strategies.
Swiss watchmaker Patek Philippe, for example, recently began selling watches on the Internet for the first time due to the crisis, according to Roberts, a researcher at Euromonitor. The company did not respond to a request for comment.
This suggests a subtle change, although some brands say that the charm of going to a store in person will not go away soon.
“For me, my boutiques decorate them like my home,” said Osorio, Aquazzura’s boss. “You need a physical presence because you want the end customer to show up and understand [the brand]”
The brands also see the stores as an opportunity to “gain visibility”, according to D’Arpizio. That’s why companies will continue to invest in airports, even if no one can visit them now, he said.
Even as challenges increase, conventional retail “is rooted in the whole world of luxury,” Roberts said.
He predicted that companies could eventually reduce the number of stores they operate or the size of each store – but they are unlikely to be completely eliminated.
And while Osorio defended the importance of a brick shop, he acknowledged that the coroner had pushed him to think about his strategy in new ways.
The executive recently began simplifying his business, deciding that instead of making four collections a year, he would make only two. He has also instructed his team to restart his website to become more mobile friendly.
“After an incredible two months where I was literally thinking, ‘How can I survive?’ “Now it’s time to dump her and move on.” “It was actually the most creative four weeks of my life,” Osorio said.