January 18, 2021
Business Retail

Luxury Turns From Conspicuous To Conscientious In 2021: Challenges And Opportunities Ahead

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Woman with mask looking at a closed fashion clothes storefront.Clothing shopping during coronavirus outbreak shutdown.COVID-19 quarantine apparel retail store closures.Small business loss concept.

Woman with mask looking at a closed fashion clothes storefront.Clothing shopping during coronavirus … [+] outbreak shutdown.COVID-19 quarantine apparel retail store closures.Small business loss concept.

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As 2021 dawns, the effects of the 2020 global Covid-19 pandemic will bring profound and lasting changes to the luxury market and present a whole new set of challenges for luxury brands. Unprecedented may be an overused term, but it is the only word to describe 2021 after the troubles of 2020.

It was the year the global personal luxury goods market imploded, losing €64 billion ($79 billion) in sales resulting in a 23% decline. That is the greatest year-over-year drop recorded in the nearly 25 years Bain & Company tracked the luxury market. Even in the 2008-2009 recession years, global luxury sales declined less than 10% and that over a two-year period.

With sales reaching only €217 billion ($331 billion) in 2020, luxury won’t climb out of its hole until the end of 2022 or early 2023 when it will finally reach 2019 levels of €281 billion ($344 billion).

2020 reset the world’s luxury market, as travel stopped, shops were closed and luxury brands were forced to fully embrace e-commerce as the only viable way to keep sales going and luxury consumers engaged.

During the extended time luxury consumers spent at home and in isolation, they reassessed their values, priorities and spending habits. As the vaccine slows then eventually stops the spread of the Covid-19 virus, luxury consumers will emerge from their cocoons, but the disruption to their lifestyles and the vulnerability they felt will not be forgotten.

Looking to 2021, it will be a year of transition bringing in a new era of conscientious luxury and ushering out an extended period of conspicuous consumption that has propelled the luxury market for the last 50 years or more.  

Based on a just completed analysis of a survey of ~500 luxury insiders, including executives in luxury goods companies and experiential service providers and advertising and marketing agencies that support luxury brands, here are the key challenges and opportunities that 2021 will present:

Challenge – World economy hangs in the balance

The full economic impact of the pandemic has yet to be felt and many questions remain. How quickly can the vaccine create herd immunity and what is its potential against the new virus strain emerging?

Combine these questions with the new foreign and domestic policies the Biden administration will put in place and the clean up required after the Trump administration and 2021 is sure to be a year of uncertainty on the economic front.

The World Bank expects global GDP to contract 5.2 percent in 2020. Calling it the “deepest global recession in decades,” the World Bank added, “Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages.”

While Oxford Economics forecasts global GDP to bounce back to 5.2 percent growth in 2021, that will depend upon the rapid deployment and success of the vaccine. Even so, the global economy will only reach pre-crisis levels by year-end.

On the domestic front, the U.S. economy, the strongest in the world at $21.4 trillion in 2019 as compared to China’s $14.3 trillion according to the World Bank, declined by nearly one-third in the second quarter 2020. It recovered in the third quarter, but with the federal budget deficit at an all-time high of $3.1 trillion and unemployment levels almost double what they were before the pandemic, the U.S. economy goes into 2021 in a weakened state, despite the current robustness of the stock market.

Opportunity – Manage business operations to conserve cash but maintain consumer connection

While the affluent consumers are more shielded from economic ups-and-downs than those with less financial resources, they weren’t immune from its effects during the 2008-2009 recession.

Back then, they took a hiatus from ‘shop-till-you-drop’ spending and waited till the worse was over before reentering the luxury market. The same scenario is likely to occur again.

Given what we’ve all been through in 2020, it just may not feel right to spend on luxury in 2021. Not only that, but it may be considered wholly inappropriate to do so, with so many others struggling to make ends meet.

Luxury companies should prepare for continued shortfalls in 2021. Businesses must manage for efficiency and to preserve cash flow. Supply chains need to be tightened to reduce waste and to be more responsive. The human resources on which luxury businesses depend must continue to be engaged, developed and rewarded.

But while luxury companies are tightening up on the corporate side, one area they can’t afford to cut is marketing and advertising. Fifty-one percent of the advertising agencies surveyed expect their luxury clients to reduce advertising budgets in 2021. This is a mistake for all brands, but most especially for luxury ones, which derive their value from creating aspiration and desire.

Marketing professors, Nirmalya Kumar at Singapore Management University and Koen Pauwels from Northeastern University, wrote in Harvard Business Review:

“Most companies reduce spending in recessions, especially on marketing items that may be easier to cut (certainly relative to payroll). But that is today’s equivalent of bleeding – an old-fashioned but once widespread [medical] treatment that actually reduces the patient’s ability to fight disease. Companies that have bounced back most strongly from previous recessions usually did not cut their marketing spend, and in many cases actually increased it.”

One thing is for sure, the established players that have weathered previous recessions will only get bigger and stronger after this one.

“Covid has added to the pressure from demand going to a very concentrated number of winning brands,” Francesca Di Pasquantonio, who heads up luxury goods equity research at Deutsche Bank, told Vogue Business. “This creates conditions that are favorable to selling to others, merging with others or joining forces to be able to scale, but also to leverage expertise and talent.”  

Challenge – Digital luxury to continue unchecked

Bain reports that online share of sales in the luxury market nearly doubIed in 2020, rising from 12% in 2019 to 23% in 2020. This rapid shift will continue with the expectation that e-commerce will be the leading channel of distribution for luxury goods by 2025.

Brick-and-mortar luxury retail will suffer as a result with a decline in the number of stores operated by brands, as well as a drop in wholesale retail networks in 2021.

Amazon could emerge as a major threat, given Jeff Bezos’ “Your margin is my opportunity” posturing. Where else can Bezos find greater margins than in luxury?

Early this year, Amazon opened “Common Threads” storefronts for independent fashion brands in association with Vogue and the Council of Fashion Designers of America. Then in September, it launched its Luxury Stores mobile app exclusively to Amazon’s 150 million Prime members. Oscar de la Renta was the first brand on offer.

Christine Beauchamp, president of Amazon Fashion, told Vogue, “We’re excited about creating an elevated and inspiring customer experience, while also infusing innovative technology to make shopping easier and more delightful.”

Opportunity – Program  the human dimension into digital storefronts

Luxury brands were slow to adapt to e-commerce because of the widely held belief that e-commerce’s transactional nature was at odds with luxury retail.

“What caused luxury brands’ initial hesitancy was the perceived incompatibility between the hallmarks of luxury’s cachet—exclusivity and rich customer experience—and the democratic reach of online media’s channels for interactive communication and e-commerce,” reported Wharton’s Jay H. Baker Retailing Center in an in-depth study of online luxury retailing.

The greatest opportunity for luxury brands is to program into online technology that emotional dimension. Lippincott, the strategic consultancy, calls this Sensitive Technology, which describes when the digital experience is centered around human thoughts, feelings and behaviors.

Digital technology has to bridge the gap with the human side of luxury. “There are certain limits as to how you can bring brand equity across digitally,” says Daniel Langer, CEO of brand strategy firm Équité and professor of luxury strategy at Pepperdine University.

“We have to acknowledge these limitations and work around them. The sensual touch, feel and in the case of perfume, the scent, are missing. If we cannot let people smell, for example, then we have to find out what else we can do. How else we can tell the story of the brand because people aren’t necessarily buying the fragrance only because of the scent. They are also buying the fragrance because of the brand, its brand equity and how you tell the story of your brand,” he continues.

Challenge – Luxury consumers will take time to emerge

The global luxury travel and tourism industry, estimated by Statista to have totaled $831 billion in 2019 in direct spending, ground to a halt early in the pandemic. In that study, luxury travelers were defined as people with assets over one-million U.S. dollars, who spent on average $2,400 per travel day.

By year’s end in 2020, Statista estimates the luxury travel market will total only $545 billion, which is in keeping with McKinsey that predicts the overall global travel industry will end 2020 down 35%-to-48%.

Besides direct spending on travel, hospitality and dining, tourists also buy lots of things in the places they visit. Jet-setting luxury travelers account for between 20-to-30% of luxury goods sales, according to McKinsey.

Travel’s recovery to pre-pandemic levels will be slow, with air travel not expected to reach 2019 levels until 2024 and hotel demand delayed until 2023.

Where luxury travelers venture and how quickly they do so will be determined by local Covid-19 case numbers and the positive effect of the vaccine. But in the short term for 2021, luxury travelers are expected to stay closer to home and continue to be cautious about making bookings.

Opportunity – Capture luxury consumers’ delayed experiential spending

Since the 2008-2009 recession, the market for luxury experiences, like travel, dining and entertainment, has grown at a much faster pace than that of luxury goods. That all ended in 2020. However, the money luxury consumers weren’t spending going out was turned elsewhere, with a big chunk devoted to improving their experiences at home.

This resulted in growth in the home furnishings and furniture, home appliances, home improvement and electronics sectors, as well as a bounty to service providers who helped decorate, install and maintain home environments. Throughout 2021, luxury consumers will continue to invest in home, but that is likely to start to ebb as they begin to feel safe leaving their homes.

As soon as luxury consumers can escape confinement, it will usher in a “Roaring Twenties” for experiential luxury providers, but it will also curtail home luxury spending. So home-focused brands and service providers need to make the most of their opportunities this year.

In the meantime, luxury consumers will continue to indulge heavily in experiential luxury goods, which Bain defines as fine art, luxury cars, private jets and yachts, fine wines and spirits and gourmet food. 

Bain predicts, “Experience-based goods are expected to recover at a faster pace than personal goods, while experiences will lag in the recovery given strong reliance on tourism.”

Challenge – Consumers will be deliberate and careful about purchasing luxury goods

The pandemic resulted in a radical reset to luxury consumers’ priorities. They spent time evaluating what they need versus what they want and needs took precedence.

With luxury the most discretionary of purchases, affluent consumers couldn’t justify buying new clothes or fashion accessories when they have no place to go or people to meet. Nor did they feel comfortable buying a flashy new piece of jewelry or an expensive watch that conveys a culturally-insensitive message to others.   

This restraint will continue in 2021. They will remain cautious about indulging in personal luxury goods, most especially high-ticket fashion, jewelry and watches.

It may result in an end to social-status signaling, if not permanently, at least as long as so many fellow citizens face difficult personal circumstances and the public’s concern about income inequality grows.

There will be exceptions, most notably in China, where luxury sales grew 45% in 2020. Everywhere else, sales cratered, led by Europe down 36%, the Americas off 27%, and Japan down 24%, according to Bain. 

Opportunity – Consumers will look for meaning and purpose to justify high-end purchases

Luxury goods brands that have continued to bolster their value proposition and connect with their prime customers will come back stronger, maybe not in 2021 but 2022 and after.

Équité’s Daniel Langer advises luxury brands to “build the strongest possible brand equity, create the strongest possible value for customers, and connect as much as possible with them.”

He adds, “Maybe they will not buy your brand on day one, but they will not forget if you do something for them now. If there’s no memory, there’s no loyalty.”  

Once luxury consumers emerge, they will dig deeper into the meaning and purpose of brands that they choose to connect with, looking for brand values that match their own.

It means more than just brands taking a stand on the environment, sustainability and socially-responsible business practices, along with support of cultural values like gender, race, sexual orientation and income equality.

As good as these ideals sound and important as they are, there is an inherent disconnect for an industry that at its roots is made for the “haves” to suddenly be concerned about the “have nots.”

“Luxury brands have struck a Faustian bargain, as Louis Vuitton and other conspicuous logo-wear brands have, between being demotic, meaning of the people, and yet preventing a vast majority from experiencing their goods on the other,” says Benedict Auld, CEO and founder of brand strategy consultancy Lapidarius.

“You can’t have it both ways. LVMHs’ strongest adherence isn’t to social impact, except for the top 1% of human society, which control about 80% of the wealth and who are the product of income inequality and have a vested interest in its continuation,” he continues.

Louis Vuitton’s logo-laden $900+ face shield is a case in point. It’s conspicuous consumption carried to extremes.

Auld sees such logo-centric displays diluting brand value rather than creating it. “Catering to the idea of showing monetary income status via branded goods is the last gasp of any quote, unquote luxury brand,” he shares. “It’s what luxury brands do when they have no other meaning to offer.”

Conscientious consumption, rather than conspicuous consumption, will be consumers’ driving force in future.

“We have to take a holistic perspective. This health crisis and the way we are reacting to it is a symptom of underlying weaknesses,” Meaning.Global’s Dr. Martina Olbertova says. “It is a wake-up call to brands. It can serve as a great catalyst for brands to transition to the new luxury paradigm.”

Opportunity – Return to what made luxury great

Olbertova warns luxury brands not to expect business to return to normal after the crisis abates. “Luxury brands need to be thinking about future-proofing their businesses in ways that go beyond catering to different markets,” she shares. “They need to think about serving people’s essential needs that revolve around what is scarce and luxurious.”

She believes that by simply diversifying the markets in which they operate, like the rush to China, they’ve potentially devalued their brands. The future-proofing opportunity lies in enhancing the quality and timelessness of the products and services offered.

“Ultimately, the symbolic value of luxury isn’t going to change,” she continues. “Many of these luxury brands have been around for hundreds of years. There is always going to be demand for something that is handcrafted, premium quality and of lasting value.”

Luxury brands must return to their roots and enhance their true legacy value. By following popular culture trends and producing more high-priced, mass-produced stuff with prominent logos and shouting about it on social media, luxury brands discount rather than build their value.

True luxury whispers. It doesn’t scream.

Olbertova believes this crisis that slowed the whole world down will give luxury brands a pause to look inward to probe more deeply into what their brands mean now and can mean in the future.

“This is a time to create and strengthen brand perceptions, which ultimately creates value. That’s all anchored in meaning,” Olbertova concludes. “