Several luxury companies reported a problem in China this spring as people emerged from weeks of blockage, sparking what some analysts call the trend for “cost revenge” – the release of limited demand after people are not forced to stay at home.
This was despite a 40% drop in Tiffany’s global net sales in May. “Our business results in mainland China, which was the first market to be affected by the virus, are indicative of a steady recovery,” CEO Alessandro Bolliolo said during a presentation of the company’s revenue on Tuesday.
“The data show that China is in a recovery mode,” wrote Luca Solka, an analyst in Bernstein, in a note published late last month. Researchers from his company created a “rebound index” to track consumer confidence, which shows that sentiment among Chinese buyers improved significantly in May.
“Revenge of expenses”
Due to the recent lift, China may be the market in which luxury retailers are seeing a turnaround this year, according to Claudia D’Arpizio, a partner at consulting firm Bain.
“It was actually very, very positive,” Edgardo Osorio, founder of the Italian shoe brand Aquazzura, told CNN Business. “China has always been, but especially now more than ever, one of the fastest, [responsive] customers. ”
Chinese customers can spend more money on goods at home because they can’t travel that easily. Two-thirds of sales from Chinese buyers typically occur outside China, according to analysts.
But much of the world is still dealing with the pandemic, limiting foreign travel and the opportunities people have to spend.
“Instead of going on holiday, they can buy a Chanel bag,” said Ffluur Roberts, head of luxury goods research at Euromonitor, who added that similar profits were happening in other countries, including South Korea. “We are seeing signs of the market coming back to some extent.”
Some buyers may also be after a “psychological effect – to return to normal life,” said D’Arpizio.
The rise 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. After five years, consultants’ estimates suggest it could reach close to 50%.
But the industry still hurts
But success in China is only part of the story. As customers elsewhere stay at home and stick to luxury shopping in favor of essential purchases or cheaper, unbranded goods, sales of personal luxury items – including bags, shoes and clothes – are still expected to take a huge hit. .
Major projects that global sales of these items could cut by up to 35% this year, with expected revenues of 180 billion to 220 billion euros (about 204 billion to $ 250 billion). This is compared to the expected 281 billion euros (319 billion dollars) taken last year.
“The coronavirus is forcing companies to rethink almost every business model,” Roberts said.
The recent jump in domestic sales in China “does not counteract the loss of sales of luxury brands by Chinese consumers worldwide,” said D’Arpizio. “The total cost of Chinese is well below last year.”
Nor is the boost in “revenge costs” expected to last very long. “We see this as a temporary effect,” D’Arpizio added.
What the industry really needs are tourists from China or elsewhere, she said. “We expect the trip to be the last driver to really return to normal. It will take many months, probably more than a year.”
How we shop has changed
To cope with the new reality of greater service in the internal market, companies will need to adjust their strategy and figure out how to reach more local customers.
This has pushed companies to open more stores in mainland China, collaborate with local artists and form partnerships with Chinese players. This trend seems to be accelerating.
And while travel is limited, brands may have to adjust offerings in each market, analysts say.
This is a key point for businesses, which usually rely on the crossroads of travelers and do not always spend significant time developing country-specific strategies.
“It’s also a big change for the shops in Europe that were really more for tourists – a shop in Paris or a shop in Milan,” D’Arpizio said. Now “growth will come from local customers.”
The boutiques are here to stay
Some historical luxury brands, which usually adhere to e-commerce, are also rethinking their strategies.
Swiss watchmaker Patek Philippe, for example, recently began selling watches online for the first time because of the crisis, according to Roberts, a Euromonitor researcher. The company did not respond to a request for comment.
This suggests a subtle change, although some brands say that the appeal of going to the store in person will not go away soon.
“For me, my boutiques, I decorate them like my home,” said Osorio, head of Aquazzura. “You need a physical presence because you want the end customer to show up and understand [the brand]. “
Brands also see stores as an opportunity to “gain visibility,” according to D’Arpizio. That’s why companies will still continue to invest in airport stores, even if no one can visit them right now, she said.
Even as challenges grow, conventional retail is “rooted in the entire luxury world,” Roberts said.
She predicts that companies may reduce the number of stores they work in or the size of each store, but they are unlikely to withdraw completely.
And while Osorio defends the importance of the brick and mortar store, he acknowledged that the coronavirus is pushing him to think about his strategy in new ways.
Recently, the CEO set out to simplify his business by deciding that instead of releasing four collections a year, he would only make two. He has also directed his team to restart his website to make it more mobile-friendly.
“After an amazing two months in which I literally just thought, ‘How do I survive this?’ “Now it’s about, ‘How do I perceive my brand in the future?'” Osorio said. “Those were actually perhaps the most creative four weeks of my life.”