The corona pandemic has crushed luxury goods sales: the European market is shrinking by 36 per cent this year, for the first time since the banking crisis. Bain’s analysts aren’t counting on a full recovery before 2022/2023.
First fall since the financial crisis
The luxury goods market has been hit the hardest during the corona crisis. The suspension of (mainly Asian) tourists strongly affects the industry and, on top of that, only 18 per cent of European and American consumers plan to make luxury goods purchases during the upcoming seasonal period.
For the remainder of the year, Bain & Company predicts times of trouble: in the fourth quarter, the consultancy firm expects a 10 per cent drop of turnover on an annual basis. This follows the worst quarter ever in the second quarter of this year and a slight, but insufficient, recovery in the third quarter.
The luxury goods industry is plunging into the deepest fall in history due to the corona crisis. For the first time since 2009, the market is getting smaller and is catapulted back to its level of 2014. It means a fall of 23 per cent to 217 billion euros for the luxury goods industry.
Profit margin wiped out
Mainland China is the only region in the world to end the year positively, growing by 45 per cent at the current exchange rates to 44 billion euros. This is partly because now consumers are shopping more locally instead of abroad: local consumption has increased on all channels, categories, generations and price points.
Consequently, Europe is suffering the most, due to the collapse of global tourism. Local consumption continued but was unable to compensate: European luxury goods consumption fell by 36 per cent. In North and South America, where the market shrank by 27 per cent, the impact was smaller. In the US, department stores, in particular, are facing an uncertain future as luxury goods consumption seems to be moving away from city centres.
The impact on profits is, in fact, even higher: Bain expects the average operating result to fall by 60 per cent in 2020, halving the margin from 21 to 12 per cent. It is expected that in 2021 half of this profit loss will be recovered. Despite the fall in turnover, the need for investment is high, another factor weighing down profitability.
Online will become the most important sales channel
However, every cloud has a silver lining: just like in every retail industry, the potential for change and transformation is accelerated by unrest. For example, the market share of online sales has doubled from 12 per cent in 2019 to 23 per cent today. In looks like by 2025 online will become the main channel for luxury goods purchases, boosting omnichannel transformation. Consumers are also increasingly demanding luxury brands to make efforts towards diversity, inclusion and sustainability.
Thanks to these evolutions, the recovery will gain momentum over the next three years. According to Bain, the market will return to its 2019 level by the end of 2022 or the beginning of 2023. Depending on future developments of the corona pandemic and the macroeconomic environment, 2021 will be the beginning of that trend, with growth varying between 10 and 19 per cent. However, the luxury goods industry will look very different in the meantime.
