2020 - A Turning Point for Luxury
1. Let’s start with the biggest game changer of the year: Coronavirus. A year of tragedy and profound transformation that we will never forget. A century ago, the 1918 Spanish flu was followed by the roaring 20s, and many predict the decade ahead of us will be roaring as well.
The luxury industry was not immune to the devastating impact of Covid-19 and the market size fell by 23% vs 2019, or back to 2014 levels. It is expected to recover by 2022-2023.
The Pandemic acted as a great accelerator. On one hand, it pushed into bankruptcy or extinction a wide range of companies which were already struggling before the crisis, but had survived so far thanks to a generally positive economic context. You know how they say: The rising tide lifts all the boats. On the other hand, a lot of companies were able to weather the crisis and emerge from it stronger. These companies usually had more cash on hand, a diversified revenue stream through geographies and channels, a better agility to pivot to digital and adapt to changing customer behaviors. Luxury brands need to transform and give birth to a new model. Luxury is evolving from brand-centric to customer centric, from controlled marketing campaigns to authenticity and purpose, from exclusivivty to transparency and inclusivity.
So, let’s review the trends which emerged from Coronavirus.
2. The first global trend was the digitization of our industry. At a time when the entire world went into lock down and we were all stuck at home, smart phones and computers became our escape route to normalcy. While the 2008 subprime crisis generated a guilt factor and no-one wanted to be seen buying luxury goods, the 2020 pandemic was not a liquidity crisis and it led to revenge shopping as people around the world witnessed the fragility of life. Brands had to quickly pivot and ramp up their digital capabilities to counterbalance the closure of their entire store networks. Online shopping for luxury goods doubled its share of the market to 23 percent in 2020 from 12 percent in 2019. It will become the #1 channel for luxury purchases by 2025, driving the omnichannel transformation. It is said that the technological gains of the past 12 months equate to what analysts predicted would take 5 years. The trends to follow in retail tech are livestream shopping, video consultations,virtual stores, AI, AR and VR, click and collect, seamless checkouts, big data and analytics, true omnichannel experience, product discovery, and much more.
3. This leads to the 3rd trend, which is the downfall of brick-and-mortar stores. Consulting firm Bain expects no growth in the number of stores operated directly by brands in 2020 and a possible decline in store networks in 2021. Looking ahead, brands have to transform their retail network by adjusting footprints, maximizing the customer experience and generally evolving the role and ergonomics of the stores. If Online shopping drives more than 30% of luxury sales in 2025, it means that 70% of the business happens in a physical store. Retail is not dead, far from it, and shoppers will simply have different expectations from a store visit. A lot will be done around curated and personalized experiences, powered by data and CRM. The high-touch elevated experience which used to set the luxury store apart from mainstream brands will also need to be re-invented, and we can expect to see a lot of new features, from hospitality, to services. The role of sales associates is also evolving, and in the words of Michael Burke, Chairman and CEO of Louis Vuitton, they closed 450 stores but opened 10,000 by empowering every sales person to interact with clients and sell on their phones from their homes.
4. Another major consequence of the Pandemic was the re-balancing of the global luxury map following the complete stop of international tourism. It created 2 trends: Repatriation and Localization. Repatriation meant that wealthy clients around the world started spending money in their home countries instead of abroad. Localization means that brands had to start working their local clients to make up for lost income from tourism. At the same time, we observed a trend in people moving away from city centers, which further encouraged brands to adopt technology enabling their sales associates to connect with local clients remotely.
The clear winner of these trends is China, which emerged as the number 1 luxury market. Mainland China is the only region to end the year on a positive note, growing by 45 percent. Europe suffered tremendously from the complete collapse in global tourism and overall sales fell by 36 percent. In the Americas, the luxury market fell by 27 percent. With the repatriation trend set to last, it is imperative for brands to develop their China presence and capture market shares.
5. Another major trend emerging from Covid is the change in consumer profile and behavior. We have witnessed a generational shift, with younger generations expected to drive the growth of the next 5 years, especially Gen Z. Chinese consumers will represent 50% of the luxury clientele by 2025. Digitally native, this new wave of consumers constantly engages with online content and values convenience, speed and curation. Luxury brands need to adapt to the habits, channels and codes of this generation to win them over. It is imperative for brands to adapt to the expectations of this audience, not only in terms of product offers and distribution channels, but also on brand values and posture about social and environmental issues. This unprecedented emphasis on tackling social and racial injustice is a reality that brands need to reckon with and embrace. Customers vote with their dollars, and this activist consumer generation will shop brands which align with their vision and purpose.
6. This is the perfect segway to the next trend, which is Sustainability and Impact. Luxury customers are becoming more environmentally and socially aware. It is becoming absolutely non-negotiable for brands to be diverse, inclusive, sustainable and ethical. In the midst of the pandemic, many brands and luxury groups spontaneously stepped up by providing a tremendous amount of human and material support to front line workers. However, a lot of brands also faced criticism for their lack of diversity and inclusion in the wake of the Spring 2020 protests demanding social justice. Customers’ expectations and scrutiny have increased exponentially and even though most brands have been communicating on sustainability and CSR for years, it is now time for concrete actions and brands such as Stella Mc Cartney or Patagonia have shown the way for militant-brand. From Kering, LVMH, De Beers to Farfetch and Outdoor Voices, many have unveiled long-term initiatives to measure their impact and hold themselves accountable against goals on issues spanning from sustainability to social impact and ethical practices. Brands have a responsibility to the environment, their workers, their partners and the entire value chain.
7. Now that we have discussed all the trends which shaped our industry in the past 12 months, who are the winners!
First of all, in this year of digital acceleration, Amazon’s share increased by 76% and Shopify by 166%. Black Friday broke records this year, with more than $9billion generated in the US, or a 22% increase vs 2019.
The resale market is also booming. It is expected to reach $64b by 2025. As luxury brands need to create new revenue streams, the second-hand market is an obvious choice to capture a significant business built on their brand equity and awareness. Gucci partnered with The Real Real, and brands like Levi’s or Patagonia are running their own second-hand websites.
Talking about new revenue streams at a time when traditional channels are saturated, we have seen a few omnichannel alliances in an effort to boost growth and capture new clients. We think of Sephora at Kohls or Ulta at Target, and we predict that this is just the beginning. Amazon Luxury also came to life and is getting traction as brands are diversifying their digital ecosystem.
Looking at traditional Luxury brands, predictions of a K-shape recovery are proving accurate, and most luxury powerhouses have posted positive results in the last few months, confirming the recovery.
8. However, the pandemic accelerated the Darwinism of luxury and countless companies permanently closed stores, filed for bankruptcies or purely shut down. Amongst the most notorious stories, we find Neiman Marcus, which came out of bankruptcy after restructuring and eliminating $4 billion dollars of debt and $200m of interest expense. There were also Brooks Brothers which was acquired by Simon Properties for $200m. Simon also partnered with Brookfield Management to acquire the bankrupt department store chain JC Penney. Other notorious brands filing for chapter 11 protection include Aldo, J. Crew, Muji USA, Ann Taylor and Loft, Top Shop or True Religion to name a few. Some companies were not able to make it and simply shut down, such as Lord & Taylor, Century 21 or the historical Debenhams department store chain in the UK. In this context merger and acquisitions accelerated and we saw a few mega deals this year!
9. The biggest deal in the luxury industry was the LVMH - Tiffany acquisition saga !
An agreement was reached in November 2019 for LVMH to buy Tiffany for $16.2bn but the pandemic created an opportunity for Louis Vuitton to try and get a better deal. After a bitter dispute during which both companies sued each other, they finally reached an agreement for the merger to go on, at a lower price, saving LVMH about $400 m. The transaction is expected to be completed in early 2021.
So, why does it matter ? First of all, this is the biggest acquisition For LVMH and for the Luxury industry overall. What’s in it for Tiffany? The iconic American brand will benefit from LVMH considerable resources to continue its transformation efforts and expand internationally. We can probably expect new product categories to be added, like handbags and soft accessories, similar to what LVMH did after acquiring Bulgari in 2011. Now, why did LVMH buy Tiffany? Well, it accomplishes multiple strategic objectives. First of all, it almost doubles the size of its smallest division, Jewelry and Watches, which includes Bulgari, Chaumet, Hublot and Tag Heuer to name a few, and puts competitive pressure on Richemont. The merger also gives LVMH a stronger foothold in the US market. From a manufacturing standpoint, it will give LVMH better control over the supply chain thanks to the 5,000 Tiffany artisans who cut diamonds and design its jewelry.
10. news, the $1.1 billion dollar mega deal between Richemont, Alibaba and Farfetch. What does it look like? Richemont and Alibaba both injected $300m in farfetch and $250m in a new Chinese joint ventures. Kering also pitched in with a $50m ticket from its investment arm, Artemis.
Farfetch will open shops on Tmall Luxury Pavilion, its luxury outlet platform Luxury Soho and its cross-border marketplace Tmall Global.Farfetch will close its 18-month old partnership with JD.com but will keep its existing partnership with Tancent’s Wechat.
So, what's in it for each company? For Farfetch and Richemont, it’s a way to further expand their business in China through Alibaba’s dominating position. For Richemont, China has become the #1 market and the deal will help accelerate their digitalization and technological progress.
For alibaba, it is a bet on Luxury eCommerce and a way to attract a significant number of independent and niche brands through a Farfetch storefront on Tmall’s Luxury Pavilion, as Farfetch have already done the legwork in recruiting thousands of these brands
This deal marks 2 interesting trends: first of all, the consolidation of ecommerce, which is currently fragmented between many platforms and websites catering and sharing the same luxury customer base. The other trend is the unusual alliance between Richemont and Kering, which are the 2 largest luxury groups far behind LVMH. Both Johan Rupert and Francois Henri Pinaut will be part of a strategic committee that will aim to "[lead] the digitisation of the global luxury retail industry,"
It is an excellent news for Farfetch, which is still not profitable by the way, even though management announced it is on track to reach profitability by 2021.
It is less of a good news for Yoox Net a Porter, which sees its biggest rival receiving a $1.1 billion dollar injection from not only its owner, Richemont, but also one of its stronger partners, Ali Baba, even though Richemont they did not lose confidence in Yoox NAP.
There were a few more significant deals this year. First of all, the iconic streetwear brand Supreme was acquired by VF corps for $2.1b, and joins a portfolio of VF brands including Vans, North Face, Eastpack and Timberland.
Moncler also acquired Stone Island for $1.1 billion dollars, which is the first acquisition for Moncler.
Finally, another deal worth noting was the failed acquisition of Victoria Secret for $1.1billion by Sycamore Partners, which ultimately retracted from the deal due to the pandemic. Both parties sued each other until they settled in May and the deal was ultimately canceled.
What a year it has been !