The pandemic has caused a sharp contraction in many sectors and one of the most affected is that of luxury goods. McKinsey expects a drop in turnover, worldwide, between 35 and 39% for 2020 compared to 2019.
There are several reasons that explain this sharp decline, well above the average for the economy.
First of all, this crisis is different from the financial crisis of 2008. The threat to economic well-being is added to that to physical well-being, or even to life. Insecurity is great and the intensity of anxiety is a new sensation for most people, who tend to focus on daily life and on how to avoid being infected.
Secondly, the use of luxury goods is very much linked to socializing, leaving the house, attending the workplace, seeing friends, going on vacation or simply being seen by other people. If no one can see you, why follow fashion, dress elegantly, buy an expensive accessory or a luxurious car?
In a period of social isolation like the current one, luxury (and its exhibition) is declined on other aspects: the well-being generated by having a large and comfortable home, the time you can spend with your family, health and vitality .
But what will happen when this dark period has passed and we can resume our normal activities?
There is no doubt that the repressed demand during the various lockdowns and isolations will have an outlet and that there will be an almost physiological “rebound” of the luxury goods market. But what will the pace of this recovery be? Will there be an explosion or will the experience of the pandemic change consumer behavior, substantially resetting the concept of luxury?
In Guangzhou, China, on the first day after reopening, the Hermès store had a turnover of US$ 2.7 million; and long lines formed outside the shops of the major international brands. People almost wanted to exorcise the pandemic, throwing themselves into the purchase of luxury products. It is as if the return to normality has been celebrated by rewarding oneself through the newfound access to luxury.
According to a study by Bain & Company, carried out in full pandemic, the trends in the luxury sector in the coming years will be as follows:
– Return to 2019 turnover only in 2022 or 2023
– Strong growth of the online channel, which must reach a share of 30% by 2025
– Consolidation of the importance of the Chinese market, which by 2025 should absorb almost 50% of sales of luxury goods
– Explosion of the participation of the so-called “Generation Y”, the Millennials, which by 2035 could represent 40% of the market (today 4%)
And in Brazil?
In the prolonged period of mobility limitations (never a real lockdown, but many restrictions) the phenomenon of e-commerce of luxury products has exploded in Brazil. The pandemic has dramatically accelerated the development of this channel. Many companies that had always shown themselves reluctant or hesitant were forced to be present online in a more structured way.
Given that the store experience is essential for the luxury consumer, e-commerce solutions are only a palliative. However, as long as this situation persists, the major luxury brands will have to guarantee an exceptional experience, even in e-commerce. Therefore: an ultra-personalized relationship with the customer, flawless deliveries and an impeccable after-sales service.
With the return to normality (or to that “new normal” full of health precautions) it is still difficult to predict how the luxury goods market in Brazil will behave.
According to consultant Malinda Sanna, founder of Spark Ideas LLC, people will celebrate with the perception of a narrow escape. In the US and Brazil, more hedonistic countries, the trend may be to “spend and have fun like if there was no tomorrow”.
But who in Brazil will really be able to afford it? The pandemic is hitting hard not only the lower social classes, but also the middle and upper middle class. It’s hard to imagine queuing up outside the luxury shops on Oscar Freire street or the Cidade Jardim shopping mall in São Paulo. And to this scenario we must add the strong devaluation of the real, which in 2020 lost more than 30% of its value against the dollar.
While this price increase may be a relative problem for the super-rich, foreign luxury brands have become much less affordable for the upper-middle class.
It may be time to think about a “moving the brand down” operation, through the creation of a product line dedicated to Brazil, less expensive and therefore more accessible.
This situation can offer great opportunities to brands that will be able to intercept the pent-up demand, which will explode at the end of the pandemic.
The important thing is to arrive prepared and with a good strategy when the pandemic ends and the party begins, no matter how big or small.
Appendix: the luxury goods market in Brazil
At the end of the first decade of the 2000s, several brands focused on a presence in Brazil through their own or franchised stores. Brazil was considered the most promising emerging country, after Russia. The audience was made up not only of the “super-rich”, who could afford to shop abroad (especially in the US), but of the increasingly large upper-middle class, in search of quality and status. To facilitate access to consumption in this new segment, the possibility – unprecedented compared to other markets – to make purchases in installments, using a credit card.
It is in this period that many international luxury brands have landed in Brazil with their own stores, helped in this sense by the strong growth of the most luxurious shopping centers. Just mentioning the main ones of Sao Paulo: Iguatemi, JK Iguatemi and Cidade Jardim.
Among the brands that landed in Brazil were Dolce & Gabbana, Gucci, Valentino, Pucci, Jimmy Choo, Ermenegildo Zegna Dior, Chanel, Burberry, Louis Vuitton, Cartier, Vacheron Constantin, Tag Heuer and Longchamp.
With the 2015-2016 recession, consumer behavior has changed. Many rich or new-rich, impoverished by the crisis or seeing more and more neighbors forced to close factories and shops, have begun to consume more carefully and less ostensibly. The upper middle class, hit hard by the loss of purchasing power, was forced to give up the purchase of part of the luxury goods it was beginning to get used to.
According to Euromonitor research, the Brazilian luxury goods market contracted by 8.5% in 2017.
In 2018 and 2019 the market started to grow again, but always below its potential: the turnover was around 26 billion reais and Euromonitor estimated it could reach 29 billion in 2023, before the pandemic arrived.