Our marketing team shares their insights and data from research conducted by experts in China, on how Coronavirus is impacting the luxury and fashion sector.
We will be drawing from some of our published content and share some exclusive insights from research conducted by our team in China. Let's look at the impact of COVID-19 on the luxury and fashion industry and learnings from China.
We're going to start with an overview of the fundamental or financial implications of coronavirus and then go one layer deeper on four key issues for the fashion industry, covering both its implications and some recommendations on to inspire your business strategies.
How is COVID disrupting the fashion industry
So starting off with the financial impact of coronavirus. Morgan Stanley recently predicted a worldwide recession, whilst Goldman Sachs was only slightly more positive, predicting a zero point three percent growth this year. Now, stock markets across all sectors, including luxury and fashion, have seen a considerable decline. The S&P Global Luxury Index, which tracks the stock prices of the main luxury companies, was down 38% since the beginning of the year. Let's put this into perspective. BCG and Bernstein said that the outbreak could reduce industry sales by as much as 87 billion euros in 2021. And that means a 20% contraction. Now, this disruption is so profound that topics that were at the center of every single conversation, such as diversity, such as sustainability or gender non-conformity, have been somewhat paused for the time being.
Covid 19, or coronavirus, has taken the spotlight, and particularly due to the immediate and long term impact on the industry. Revenue or the financial aspect is just one side of the coin. What are other disruptions to the luxury industry and how can you minimize their short and long term impact?
Let's start by talking about the one of the first victims of coronavirus in the fashion industry, and that was fashion weeks and fashion shows. Here is an overview of what has happened:
New York seemed relatively unscathed by the outbreak, but Milan, London and Paris were all hit to varying degrees. Most of these were structural effects rather than existential ones. Giorgio Armani was among the shows to be held behind closed doors in Milan, while masks and hand sanitizers soon became commonplace sites. By the end of Paris, a lot of appointments have been abandoned and many of the journalists covering it had returned home. Tokyo, Beijing and Seoul fashion weeks were all cancelled, as well as many subsequent cruise and resort collection shows. One of the biggest impacts, which is pretty difficult to quantify, was the lack of Chinese buyers in London, Paris and Milan. Many were forced to stay and watch at home, so may not have been able to see everything that was on offer.
So this could actually have some significant implications from a revenue perspective. So thinking about this, is there anything that brands should be thinking of or doing to protect themselves from these and potential future cancellations?
In terms of getting eyeballs on clothes, livestreaming can work very well thanks to a savvy promotion strategy, over 12 million people in China Watch the live stream of the deal show from Paris on Weibo. Milan Fashion Week also work with Chinese streaming platform Tencent to stream 30 of the shows a mashing amassing 16 million views, which isn't too shabby. Interestingly, Shanghai Fashion Week has announced that it's back online, albeit via livestream, although it's more of a consumer rather than industry focused event.
What is likely as a rise in virtual showrooms draw a wholesale platform that enables brands to showcase their clothes to buyers digitally reported a 400% increase in the average value of each order place compared to its 2019 figures. You know, the capsule collections have long been launched solely online in the past, and that's another route that can be taken and also a great response to the moment given so many models and influencers are stuck at home too.
Let's switch to a slightly different topic, and this is another clear issue around the buildup of unsold inventory. And this is something reported on recently. In particular, demand is dropping in a crucial moment when the spring summer 2020 collections are hitting stores.
Luxury brands have worked really hard to control inventory in recent years. Many have upped prices or reduced markdowns, and that's been reflected in tangible revenue benefits for a number of them. However, some brands have said retail sales over the last two months have dropped by upwards of 50 percent. And as you noted, many of those shutdowns happened right as spring and summer collections began to hit stores. This inevitably will cause a build up of inventory, and some analysts say that it could cause problems right through to 2021. Our latest figures from a couple of weeks ago showed the volume of luxury stock on sale was up by thirty two percent year on year.
Remember, after the last financial crisis in 2008, that promotional activity and discounting by department stores was rife, and many brands found it hard to wean themselves off of off price sales afterwards. They're going to have to make some tough decisions over the next year.
So when thinking about this in particular the brands that are most exposed to this risk, which brands have the highest amount to lose and any steps that these brands can take to mitigate this issue?
So the simple answer is that the more seasonal the brand, the more exposed they are to the problem. It's not easy to build a hero product or clothes that people would like to buy all year round, but any brand that has them will be able to put them back into stores when consumers are ready to buy again.
Outlets have become an increasingly popular way for brands to sell out of seasonal goods, and we expect those to be leaned on heavily here. There may also be appetite for a more creative solution, though that extends the seasonality of these products may be selling them again next year and communicating with customers as to why you are doing so. So sustainability is likely to remain a top of mind concern for consumers after the crisis, and this feels like a possible win.
And exactly on that topic, when talking about leftover stock. Last year, the first thing that comes to my mind is that brands have literally come under fire for burning this excess stock as this creates a huge sustainability issue. So given the current circumstances, how should brands be thinking about this?
Brands have made steps in the last few years to reduce the volume of clothes being destroyed due to sustainability concerns. This has become more urgent, particularly in France, as lawmakers there passed a bill that comes into effect later this year banning the destruction of unsold consumer goods, which theoretically covers all luxury houses based there. Our advice to brands would obviously be to avoid burning their products. The discussion around sustainability is not going away, but has merely been paused and luxury firms should not lose sight of their long term goals.
How are some brands creatively responding to this crisis, creating strength from turmoil?
So let's switch gears a second, and let's talk about something that is a bit more behind the scenes. Italy was in lockdown and recently announced the closure of all non-essential manufacturing. So what does this mean for the supply chain of luxury products and what are implications on this season and potentially on the next seasons?
Absolutely huge. Most European luxury firms had a demand shock, but now they may have a bit of a supply shock to 9 out of 10 occurring suppliers or in Italy, as well as the majority of Prada's own manufacturers. And we know that LVMH has about 30 in the country. Many have continued operating throughout the COVID 19 outbreak, but as you noted since the weekend, all non-essential businesses have been asked to close. It's not about now or next season. Italian luxury manufacturing is a delicate array of 55,000 micro and small enterprises that do not have the same balance sheets as large manufacturers to easily survive the revenue loss of an entire quarter. The overwhelming concern of these artisanal manufacturers was this was their employees. One supplier was operating on reduced capacity when it would be cheaper to close simply to keep paying their workforce. It's a pretty heroic stuff. The long lead times in luxury mean that manufacturers say they will be able to make up for a lot of the slack and activity caused so far.
But the truth of it really depends on when restrictions are lifted and some reduced capacity is likely to be expected until at least next year. The positive signs we are seeing from some fashion brands is an appreciation of the problem and a willingness to work with their manufacturers to help them through it.
That is a great way to save, save manufacturing, and that makes sense. It is obviously a delicate balance between short term funding, short term solutions and sort of the long term implications of these decisions. So are there any other steps that fashion houses can take to protect their supply chain in the long run?
Some analysts have said to us that in the long term, companies will need to think about diversifying their supply chain to better, better mitigate the risks in emergencies like this. That may mean spreading manufacturing across multiple regions to avoid being overexposed when a crisis hits. Though that may mean some cost the reputational equity of the brand, if they don't handle it correctly, another approach is like that of OTB, the parent group of Diesel, whose CEO recently said they were trying to avoid making decisions like canceling orders that may benefit them in the short term, but would penalize the small suppliers they rely on a lot more.
Let's talk about a different topic, let's think about COVID in general and the first and first and foremost, coronavirus is a human tragedy. If we think about the countless human lives and dealing with the human element should be the top priority for any business, frankly. And fashion is not exempt from this, as all other consumer led industries, survival also occurs thanks to their consumers, and showing support for these communities at this time of need is essential. So how can fashion brands show empathy during this time of crisis?
The onus is definitely on brands to help out where they possibly can. A recent Ipsos Mori poll in the US showed that a majority of Americans thought businesses would change their activities to slow the spread of the disease. Some companies have contributed their manufacturing base, with Balenciaga and Stan Lauren exploring how they can manufacture masks and LVMH producing hand sanitizer in their fragrance factories. There have also been donations of money or goods. Armani donated donated 1.3 million euros to Italian hospitals carrying an LVMH, both supplying masks bought from China to the French Health Service. And one of the examples from China itself was Deng, who donated 150,000 of its down jackets to help keep health workers warm. And those are all great efforts, and when thinking about them, obviously the right messaging and communication is is fundamental. But so if we leave for a moment, the human element aside, this also applies to businesses or between businesses.
What are the recommendations here around communication between businesses?
This is an unprecedented time, and we think that transparent communication can be a key component to managing the crisis well. I want to take an example of this from our own stable of brands. Condé Nast Traveler suspended publication in Italy recently, is continuing to operate could be viewed as tone deaf when many Italians are unable to travel at all. This could have had strong business implications, but Condé Nast, Italy's MD, personally called all the advertisers to communicate this decision and said not a single one actually cancelled their bookings. Now this is a clear demonstration of the importance to involve clients in the thinking behind your decisions. And given everyone is under a similar strain right now, there may be a bit more understanding than you think.
When we think about consumers and to their needs, they are now stuck at home and they're looking for new solutions to solve these new needs with the potential implication that these short term fixes could develop into habits and have a long term impact. So to me, it seems like the perfect time to test digital experiences. So are there any interesting practices that brands have adopted?
Consumers are going to be on their phone and on the camera a lot more. We have plenty of app usage data from China that backs that sentiment up. That could mean accelerating any brand's work thus far on augmented reality retail platforms, Shopify say that viewing a product through AR makes the customer about sixty five percent more likely to make a purchase. It may also mean novel experiences that go beyond simply shopping. Gaming app dressed, for example, allows users to dress photorealistic avatars and then purchase the clothes on Farfetch if they want to.
The reason why I bring that up is that while buying fashion may not be a prime concern for shoppers right now, accessing novel experiences via digital technology definitely is, and any work that brands can do in that space has a greater chance of resonating with consumers.
Learnings from China: what will luxury shoppers want to buy and how?
Let's take a look at what is happening in China and try to understand what post-coronavirus looks like. The one thing to note is that the current expectation is that fashion and luxury sales will return to pre-crisis levels only after 2021.
So what does this post-coronavirus future look like for the luxury and fashion industry?
When thinking about recovery in fashion and luxury, China and the Chinese consumer are crucial, particularly because of the high share of overall sales they represent. And because it is a market, the first market to start showing signs of recovery from the pandemic. In fact, shopping malls have started to reopen, with luxury brands reopening their stores across across the whole country and with people starting to queue outside them, similar to what was happening pre-COVID. So all in all, the signs seem to show that China is getting ready for the so-called revenge spend after weeks of being locked at home. The key difference, though, is that the Chinese consumer is now going to spend in China, whereby 70% of Chinese consumers used to do their shopping outside of China, and this was mainly due to the difference in price between China's import tax and brand zone pricing strategies. So with this in mind, this may actually be a clear opportunity for fashion and luxury brands to revise their pricing strategies, particularly for China. And the aim here should be to maximize sales and attempt to make up for the slower growth rates or the slower start of the year.
So how to help brands prioritize decisions at this crucial moment, we'd like to share with you. So here we asked respondents in which of these categories, they made the purchase they made the purchase from in the six months before the coronavirus outbreak highlighted in the light gray. And subsequently, we asked them which categories were they most likely to make a purchase from when things go back to normal? So your post-coronavirus? And that is highlighted in blue. So focusing first on the far left, we see the luxury beauty and cosmetics products, and these have the highest likelihood of purchase, both pre and post coronavirus. And this is quite significant as this category has been known to be a key driver of growth for the luxury industry over the past years. But it has also been hit hard, and if you imagine consumers have had the were unable to go out and therefore this naturally reduces consumption. So are data shows that this category is the most likely to recover? The only caveat is that the drop in 7% in purchase likelihood indicates that this recovery may be slower than expected. In a similar way, we can expect a slower recovery from categories such as the small leather goods and handbags. Shoes and apparel, on the other hand, is a category that stands out.
Both both of these categories are the most likely to benefit from the so-called revenge spending, and apparel in particular has made leaps forward in terms of purchase likelihood with a growth of about 10%. So this is definitely a category to prioritize. So we've identified what consumers are likely to purchase now. We have fashion brands own e-commerce, leading all other channels. And this is particularly interesting in the context of luxury fashion. If we think historically luxury brands have been fairly skeptical in their adoption of e-commerce, preferring the more controlled store environment. But if we think about consumers, the pandemic is still fresh in their mind, and the promise of this high, high touch or in-store service may somewhat lose its appeal. Although I think that no luxury brand is underestimating e-commerce or digital at present, this should be a clear prompt to dial up this channel, particularly for apparel and the other categories I mentioned. So, E-commerce, all in all, may not be sufficient to mitigate the losses entirely, but the brands that get it right and those that manage to maintain a luxury experience online may also be the ones best placed for recovery.
So in summary, here are three things that we'd like you to take away from this article.
The first one is to think long term, and that is to show empathy and be transparent in communications. Protect your supply chain and particularly stay top of mind for your consumers.
The second one is to prepare for revenge spending and in particular, think about the shoes and apparel categories, or as these are the most likely to benefit from Chinese consumers were then spent.
Finally, explore digital innovation. Ideas that seemed not feasible or less of a priority just three months ago should be revisited. So take this opportunity to rethink your e-commerce experience and essentially explore live streams and virtual fashion showrooms as we mentioned earlier.