April 30, 2020
By Abhay Gupta
The recent COVID-19 coronavirus has perhaps been the biggest disaster that the world and luxury have ever faced. Nothing of this magnitude ever was imagined or experienced even after the two world wars, famines or the financial mayhem of 2008.
However, with every such past crises, history has been witness to human resilience, the race’s ability to adjust and create a new normal. Life goes on – time and tide wait for none, as they say.
With every crisis, there comes new opportunity. Time and time again, this has been proven true.
Despite the telephone having been invented in late 1800s, it became a new normal immediately and only after the first world war.
Likewise, in 2003, post-SARS, Taobao emerged from Alibaba and became a new phenomenon. In India, 2016’s demonetization of 86 percent of the currency led to digital money and its leader Paytm as the new normal.
9/11 changed travel security and Mumbai’s 26/11 changed hotel security as a new and accepted normal forever. And the COVID-19 lockdown is already making work from home, digital banking, ecommerce and social distancing the new normal.
How about luxury?
In 2019, the luxury business was estimated to be worth 281 billion euro at 4.1 percent CAGR. Many of the top luxury groups and brands enjoyed double-digit growth for several quarters. Ninety percent of the growth of the entire business was thanks to Chinese customers alone, reaching 35 percent of the value of luxury goods, according to a 2019 Bain study.
Luxury, since its very origins, meant slow pace, attention to the detail and custom made. Rarity was the reason that justified a high value of the product.
Luxury was the story of passionate creators aiming to leave a lasting mark in the history of excellence. More art than commerce was the true essence of luxury.
Soon after the corporatization of luxury, segmentation and targeting became the norm.
Luxury positioned itself as an industry that sells items often bought for status, self-gratification, differentiation or even the feel-good factor.
However, in a time comparable to a war-like scenario, luxury will not be a priority for many of those customers who used to stock wardrobes of pricey items that lost their appeal after just one season.
Per a study by Harvard Business Review, during a recession or crisis such as the one ongoing, the normal market segmentation does not hold true. It changes into four different categories of:
Luxury essentially targets the last two of the above.
So, will luxury have a setback?
Yes surely, but will bounce back quickly simply because for someone whom luxury is a way of life, his or her benchmarks will not change? A hedonist enjoys what he or she buys. His or her taste levels do not accept anything lower than what he or she perceives as acceptable. He or she was always buying for his or her own satisfactions and will continue to do so.
On the other hand, the aspirant for whom luxury is a treat, a social declaration of success, a feel-good trophy, he or she will continue to live for the moment. Of course, quantity will be replaced by quality.
So what will post-COVID-19 luxury look like?
After the COVID-19 crisis dissipates, we will see brands and companies fall into one of two categories.
There will be those that do not do anything, hoping such a disruption will not ever happen again. These companies will be taking a highly risky gamble.
And there will be firms that heed the lessons of this crisis and make investments in mapping their supply networks so they do not have to operate blind when the next crisis strikes. They will rewrite their contracts, operating procedures and processes so they can quickly figure out solutions when disruptions occur. These companies will be the winners in the long term.
Luxury sales are expected to suffer a year-over-year decline of 25 percent to 30 percent, according to the latest research from Bain & Company (see story).
Aspects that are expected to continue into 2021 and beyond include:
The evolution and duration of the pandemic will surely be impacted by the response of individual governments and populations. However, Bain predicts that the market is likely to recover in two different schematics for 2021 and forward.
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Credits: Research inputs from Bain & Company; Harvard Business Review and a study by the author, "Corona Virus and its impact on Indian luxury," available as an extension to The Incredible Indian Luxury Bazaar.