What is the future for the luxury industry after COVID-19?
Barbara Czyzewska, head of our Bachelor specialization in Luxury Brand Management, offers an expert perspective on the post-COVID prospects for the luxury industry.
The COVID-19 crisis is the kind of situation that our world has never experienced before. Not only has it turned into a global pandemic but, more importantly from a consumer behavior point of view, it has impacted individuals from all walks of life and all social and economic statuses.
The virus does not spare members of royal families or top political leaders; individuals who often appear to be resistant to any other kind of crisis. The unique character of this situation has immense impact on consumers’ willingness to spend money or, perhaps more accurately, their perception of spending money.
As reported by the Index of Consumer Sentiment (ICS), coronavirus has strongly impacted the way consumers perceive their financial situation. This sentiment has particularly affected high-income customers (the Index focuses on the American market) and consequently their confidence around discretionary spending. In other words, people no longer feel comfortable spending large amounts of money on goods and services which are not strictly necessary.
Consequently, Altagamma, in association with Boston Consulting Group and Bernstein, estimated that the COVID-19 global crisis will lead a drop of between €30 billion and €40 billion in sales for the luxury industry. Despite these gloomy analyses, however, there is no doubt that the industry will bounce back. The question being when and in what format? There are several elements that luxury companies should be taking into consideration right now in preparation for this revival.
Human nature doesn’t change
One of the most striking characteristics of the luxury sector is that spending is often based not on rational decision-making process and reasoning, but on emotions and feelings. While this unexpected crisis will undoubtedly have a strong impact on societies, it is unlikely to affect the very roots of human nature.
After potentially months of austerity and isolation, customers may, indeed, be willing to go back to their lives from before the pandemic and enjoy luxury services including luxury travel, entertainment, food and beverage and spa services.
According to Chris Gray, founder of consumer psychology consultancy Buycology, the spending in times of crisis tends to be about identity and security. Combining this with the essence of luxury, which is often based on conspicuous consumption or at least signaling status, both luxury products and services are bound to be popular again. We can already see evidence of this mechanism, with Hermès reporting a record $2.7million in sales the first day it re-opened its flagship store in Guangzhou.
When borders re-open for travel
It is difficult to predict exactly what kind of travel and hospitality services customers will be choosing immediately after the crisis. It is safe to say, however, that typical holidays such as ‘sun, sand and sea’, skiing, sightseeing and shopping are virtually certain to be in demand.
Some analysts claim that domestic travel will regain its strength faster than international travel. While this is very likely to be true for low to mid-level services, luxury hospitality businesses will probably start receiving bookings as soon as borders re-open. What they, however, must ensure is that they are ready for when this happens.
To recover fully from the current crisis and the inevitable economic hardship it’s causing, businesses will need to think creatively about their operations. Mergers, partnerships and cooperation between different brands and different sectors of the industry can undoubtedly strengthen the positions of smaller players. What is positive to see is that some countries, and indeed their citizens, are already thinking of the future and promoting themselves as destinations which are willing to welcome tourists as soon as this is possible. Italy and Cyprus being excellent examples of such initiatives.
Don’t ignore the heritage
What is important to remember is that luxury brands are based on stories and heritage. This is a unique time for companies to show what their values truly are and how much they are prepared to give to support these values.
What is today’s news will become textbook case studies and marketing stories for the next few decades. Today is the time to build strong brands for the future. In this difficult situation, many luxury companies are actively supporting the battle against the virus through in-kind or financial donations. Moncler, Richemont Group, Ralph Lauren and Capri Holdings are among the many companies who provided financial contributions to associations and hospitals.
Other corporations, such as the Armani Group and LVMH, have converted their production sites into factories to create materials to help countries with shortages of medical supplies. Bulgari has turned its perfume factories into hand sanitizer manufacturers, whereas Armani Group is producing hospital gowns. Many fashion brands are sewing face masks, which are in high demand worldwide. These are all excellent initiatives, both from social responsibility and marketing strategy points of view.
Such initiatives not only help fight the outbreak, they also show that, in hardship, human safety is the priority for everyone. For luxury brands, such community acts are a way for their companies to show consumers that they truly care about them. All major companies boast excellent corporate social responsibly policies; but in the current situation, these are being put to the test. CEOs and owners of companies around the world are being watched and constantly judged on their leadership skills and on decisions they make in these testing times. Some of them, including Arne Sorenson of Marriott, are seen as modern heroes; others have managed to permanently destroy their brands.
COVID-19 might have changed the way we work, interact, shop and spend time. But it will not change who we are and what we want from life. Having had time to reflect, people will value authenticity and meaningful values more than ever before. And finally, after months of isolation and anxiety, customers around the world will want to experience life again.
Companies which can figure out how to offer experiences instead of services, will be leading the way.