Several luxury goods companies reported difficulties in China this spring as people emerged from several weeks of closure, prompting some analysts have called the trend of “revenge consumption” – the release of increased demand after people are not forced to stay at home.
That’s despite a drop of about 40% in Tiffany’s total net sales in May. “Our business performance in mainland China, where the virus was first on the market, is an indication that a strong recovery is underway,” CEO Alessandro Bogliolo said during the company’s presentation on Tuesday.
“The data show that China is recovering,” wrote Luca Solca, a Bernstein analyst, in a note released late last month. Researchers at his company created a “growth index” to track consumer confidence, indicating that mood among Chinese customers improved significantly during May.
Due to the recent rise, China could be a market in which this year’s luxury retailers see a turnaround, said Claudia D’Arpizio, a partner at consulting firm Bain.
“It was actually very, very positive,” Edgardo Osorio, founder of Italian footwear brand Aquazzura, told CNN Business. “China has always been, but especially now more than ever, one of the fastest, [responsive] clients ”.
Chinese buyers may spend more money on goods at home, because they cannot travel so easily. Two-thirds of Chinese customer sales typically happen outside of China, according to analysts.
But for the most part, the world is still dealing with a pandemic, limiting overseas travel and the opportunities people have to spend excess money.
“Instead of going on holiday, they can buy a Chanel bag,” said Fflur Roberts, head of luxury goods research at Euromonitor, who added that progress is being spent in other countries, including South Korea. “We see signs that the market is returning to some extent.”
Some customers will also be after a “psychological effect – a return to normal life,” D’Arpizio noted.
Recovery in China is important because customers there are vital to the global luxury market. According to Bain, they make up 35% of all sales in the world. Five years from now, consultants ’estimates say this could reach nearly 50%.
But the industry still hurts
But success in China is only part of the story. With customers staying at home elsewhere and staying with luxury purchases in favor of necessary purchases or cheaper, branded goods, the sale of personal luxury items – including bags, shoes and clothes – still awaits a big hit.
Bain projects whose global sales of these items could fall by as much as 35% this year, with expected revenues of 180 to 220 billion euros (about 204 to 250 billion USD). That’s compared to an estimated 281 billion euros ($ 319 billion) taken last year.
“Coronavirus is forcing companies to rethink almost every business model,” Roberts said.
The recent jump in sales within China “does not equalize the loss of luxury brand sales from Chinese consumers globally,” D’Arpizio said. “Total consumption from the Chinese is significantly lower than last year.”
The “consumption revenge” stimulus is not expected to last long. “We see this as a kind of temporary effect,” D’Arpizio added.
Tourists are actually needed by tourists, either from China or anywhere else, she noted. “We expect the trip to be the last driver to really get back to normal. It will take her many months, probably more than a year.”
The way we buy has changed
In order to cope with the new reality of catering more strongly in the domestic market, companies will need to adjust their strategy and figure out how to reach more local customers.
This has prompted companies to open more stores in mainland China, collaborate with local artists and establish partnerships with Chinese players. This trend seems to be accelerating.
And as long as travel is limited, brands may have to adjust offerings in each market, analysts say.
This is a fundamental path for companies, which usually rely on passenger crossings and do not always spend enough time developing strategies for individual countries.
“This is also a big change for shops in Europe that were really meant for more tourists – a shop in Paris or a shop in Milan,” D’Arpizio said. Now “growth will come from local customers.”
Boutiques are there to stay
Some historical luxury brands that are usually kept in e-commerce are also thinking about their strategies.
For example, Swiss watchmaker Patek Philippe recently started selling watches online for the first time due to the crisis, said Roberts, a Euromonitor researcher. The company did not respond to a request for comment.
This suggests a subtle shift, although some brands say the appeal of going to the store in person won’t go away any time soon.
“For me, my boutiques, I decorate them as my home,” said Osorio, head of Aquazzura. “You really need a physical presence because you want the end customer to show up and understand [the brand]”.
Brands also see stores as an opportunity to “achieve visibility,” according to D’Arpizio. That’s why companies will continue to invest in airport stores, even though no one can visit them at the moment, she said.
Even as the challenges increase, conventional retail is “built into the entire luxury world,” Roberts noted.
She predicted that companies could eventually reduce the number of stores or the size of each store, but it is unlikely she will withdraw completely.
And while Osorio defended the importance of the brick shop, he admitted that the coronavirus had pushed him to think about his strategy in new ways.
Recently, the executive has sought to simplify its business, deciding that instead of exhibiting four collections a year, it will run only two. He also instructed his team to restart his website to make it more mobile.
After an amazing two months where I literally thought, ‘How do you survive this?’ Now it’s about: ‘How do I carry my brand into the future?’ “Osorio said. “Those were actually the most creative four weeks of my life.”