Will the Future of Retail Be… Liquidation Sales?
It’s safe to say that in times of crisis, the last thing on a majority of our shopping lists is a new Fendi bag. However, you’d be surprised to find that luxury has survived economic crises before. After the recession of 2008, the luxury market did just fine in recovering to their growth potential. Because of growing tourism and wealth in new markets like China and the Middle East and the rise of social media and the added influence of exposure to designer goods for new generations, luxury held their bottom line. This moment feels different, though. The COVID-19 pandemic has managed to put a pause on everything-with high-end fashions as no exception.
Luxury conglomerates LVMH and Kering Group who own a vast majority of the largest names in luxury are seeing stark revenue declines. In the first half of 2020, LVMH had a 27% drop in revenue. Their second quarter reports revealed ending in another decline of 38%. A few indicators as to why LVMH is meeting steady declines can be found in their income statement and regional revenue. The group owns 75 global brands in fashion, retail, cosmetics, watches, jewelry, and alcohol, with a majority of their business in fashion & leather goods and selective retailing. 30% of their revenue in 2019 were transactions in Asia, with 24% in the United States.
When these values are broken down, it’s quite clear to see where problems arise. Asia and the U.S. were of the hardest-hit areas in terms of the pandemic, with drastic shutdown measures and, especially in America, aggressive economic strain. Additionally, fashion and selective retailing are very obviously not top of mind for most consumers at the moment. Even those who shop luxury regularly are focusing their attention on the luxuries of health and family life, and certainly not on the latest designer duds.
Kering reached a 29.6% decrease in revenue in the first half of 2020, met with a 43.7% decrease in the following Q2. The group has an extensive list of fashion, jewelry, watch, and eyewear houses under their belt, ranging from Gucci, Saint Laurent, Bottega Veneta, Balenciaga, Boucheron, Qeelin, Girard-Perregaux, Kering Eyewear, and more. In their 2019 Activity Report, Their revenue breakdown applied a bit differently than LVMH, with Asia-Pacific and Western Europe as the nations each representing ~30% of regional revenue. Where I feel the area that has given them their sharp decline numbers falls is in the breakdown of their revenue by House and product category. Generating 63% of their revenue, Gucci is the money-maker for Kering. Product wise, 55% of revenue comes from leather goods. This combination and lack of greater luxury diversification is negatively affecting Kering’s ability to sustain revenue amidst the crisis. Although Gucci has gained popularity in Creative Director Alessandro Michele’s ideas of reinventing the runway, the leather goods and accessories market is not top of mind for many consumers today.
In order for luxury markets to meet this crisis, they will have to listen to consumers instead of telling them what they want. The designer market is heralded by its attitude that the consumer should follow rather than the other way around, but now things are different. Consumers are going through a massive shift in their economic and social values, and demand different things even at a luxury level. High-end should seek to continue to develop investment and high quality goods, with still promoting ethics within their brand’s mission and manufacturing. They should understand the consumer and meet them where they are psychologically, instead of avoiding serious conversations or problematic situations. In doing this, they will be selling the highest quality of goods and services.
By Adi Shoham