New normal will be an accelerated version of pre-crisis one, say Filippo Bianchi, Guia Ricci of BCG
May 3, 2020
Filippo Bianchi, managing director and partner, and Guia Ricci, principal of Boston Consulting Group (BCG) in Milan, have outlined to FashionNetwork.com the findings of their firm’s latest study on the impact the Covid-19 crisis is having on the luxury market. The study, entitled ‘The Covid-19 crisis: luxury industry scenarios’, identifies inventory levels, distribution, geography, manufacturing and digital capabilities as the five main challenges labels will have to deal with in the coming weeks.
FashionNetwork.com: How will the luxury market evolve post-Covid-19?
Filippo Bianchi and Guia Ricci: The new normal we are glimpsing on the horizon will be an accelerated version of what was already happening before the crisis, and of what occurred during the lockdown period. Luxury groups will primarily need to take action on five aspects of their business.
FNW: Which are they?
FB and GR: Inventory management, a new balance between distribution networks, a new commercial geography, rebooting the supply chain and accelerating the digital transformation: these are the five challenges facing the industry. To begin with, luxury labels need to deal with inventory levels. The expectation is that only 30% to 40% of Spring/Summer 2020 items will be sold, as opposed to 60% to 65% in normal times. Labels will therefore be confronted with huge volumes of unsold products before end-of-season sales begin, products they won’t want to sell off cheaply and which they can’t destroy. They will immediately need to learn to manage their inventory across several seasons, by trying to understand how to reintroduce the same products the following season.
FNW: Will this have an impact on distribution too?
FB and GR: Yes, it’s the second element luxury labels will have to deal with. The sector’s distribution channels, and their relative weight, will change. On the one hand, the extensive penetration achieved by e-tail during the lockdown period will still be a feature, and the volume of online sales will further increase. On the other, multibrand retailers will be the main losers. Department stores were already declining before the crisis, some facing complex financial issues. Besides, after the end of lockdown, people will be afraid to shop in high-footfall environments like department stores. Multibrand retailers too will struggle to deal with the situation, faced with excess inventory as well as slumping margins and revenue.
FNW: What will change in terms of geography?
FB and GR: A new commercial geography will take shape. Until now, between 30% and 40% of luxury goods were purchased by Asian consumers, especially Chinese, and half of these purchases were made outside China, chiefly in Europe. Travel retail will be one of the distribution channels that will take the longest to recover. Luxury goods consumption will reshuffle geographically, and will flow back into China itself, creating problems to retail sales outside China.
FNW: Is restarting production another of the luxury industry’s main priorities?
FB and GR: It is, and all the more so since the lockdown period occurred at a most tricky time for the industry. In normal times, the sector would have been busy producing prototypes and samples for the Spring/Summer 2021 collections. If workshops and artisans aren’t allowed to start operating again in two to three weeks at the most, six months of revenue will be lost, not just one, and the entire industry will risk becoming much more fragile as a result.
FNW: The fifth aspect is digitalisation. Which changes are to be expected?
FB and GR: It isn’t simply a question of expanding e-commerce, but of accelerating digitalisation at all levels. From the collection development cycle to the prototype production process to commercial campaigns. All of this will become increasingly virtual, making it possible to curtail sample production and physical sales campaigns. It’s a significant opportunity to make production cycles faster, more flexible and less expensive.
FNW: What will change in terms of luxury goods consumption?
FB and GR: We are not expecting major changes. Volume-wise, consumers will buy more of some luxury products and fewer of others. Initially, the crisis’ economic impact will of course influence purchasing behaviour to some extent, but drastic changes will not occur. It will take time before a new status quo will be reached.
FNW: What impact will the Covid-19 crisis have on luxury sales in general, and specific product categories in particular?
FB and GR: We estimate that luxury goods sales will fall by between 25% and 45% in 2020. Considering that many uncertainties still remain, and that many stores are still shut, we have elaborated two different recovery scenarios, a fast and a slow one. This is confirmed by the initial feed-back we are receiving from China, which heralds a slow return to pre-crisis levels. Cosmetics, which usually have lower average prices and are a market in which the share of online sales is much larger, will recover more rapidly, limiting the sales shortfall to between 20% and 30%. The slump will be more significant instead for watches, between 40% and 50%, as they are chiefly distributed via multibrand retailers. Leather goods will slot in between the two, with an estimated sales shortfall of 30% to 40%. Accessories are the iconic product category in luxury, but also one of the worst affected by the lockdown, since they cannot be used during it.
FNW: Which organisational steps should luxury companies take to best manage these challenges?
FB and GR: They must react in a fast, agile fashion by setting up multi-functional teams empowered to take decisions. This was unthinkable before the coronavirus crisis. Luxury labels must understand what works best and make the most of it, while at the same time being extremely dynamic in their organisation.
FNW: Who will be the winners and losers?
FB and GR: The wholesale channel and small production workshops are the weak links in the textile/apparel supply chain. It will mostly be down to the individual labels to support their own supply eco-system. More generally, the industry will polarise. Powerful players will come out of the crisis stronger, and weaker ones will become even more fragile. We also expect a surge in acquisitions.
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