Bain: Personal luxury goods market will need years to recover

12 May 2020 6 min. read
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The global personal luxury goods market will need years to recover from a Covid-19 induced downturn. This year alone could see €100 billion wiped off face of market, which will take up until 2022 to recover.

This is according to a new analysis by the Italian arm of Bain & Company. The firm collaborated with Italian luxury brand association Altagamma to present a picture of how the personal luxury goods market will cope with the Covid-19 crisis, particularly as consumers across the globe cut spending in anticipation of a possible recession.

Bain and Altagamma analysed a wide variety of data, ranging from data on the virus and its rate of infection across the globe, to GDP figures and consumer confidence indices. The researchers also went through annual reports and trading statements from personal luxury goods companies across the globe.

Personal luxury goods market - Quarter-on-quarter evolution for 2020E

The results paint a gloomy picture for the market. Barring the financial crisis, personal luxury goods is an economic segment that has been on a steady growth trajectory for decades now, surpassing €281 billion over the course of last year. Thriving luxury markets in the Americas and Europe, combined with a rapidly advancing Asian luxury goods market have all been responsible for this growth.

Each of these markets is now struggling to contain Covid-19 and its resultant economic impact, and luxury spending is often an early victim of financial strain. Demonstrating this, in a Boston Consulting Group survey among Australia consumers, it was found that more than 60% plan to cut luxury spending, shifting their focus to essential spending instead.

The Bain and Altagamma report finds that the first quarter of this year has already generated 25% less value than the first quarter of last year, amounting to a cut of €20 billion. “A strong start to the year in all key regions (Mainland China, Europe, America) was quickly offset by the imposition of lockdowns and the collapse of tourism, which amplified the decline in Europe. Luxury sales in Japan and the rest of Asia also declined, albeit at a slightly slower pace and the consumer mood globally remains subdued,” write the authors.

Personal luxury goods market evolution

This downward trajectory is expected to continue. By the second quarter of this year, the damage is expected to be between €35 billion and €45 billion. The third and fourth quarters are also expected to see a dip from last year, although this is when a small glimmer of hope might begin to emerge, depending on the economic outlook that unfolds.

The report paints two possible scenarios for the third quarter, which might determine the extent of the fall in luxury goods revenues. In the first scenario, the Asian market will begin to pick up again driven by China, and “intra-regional” tourism will resume to some extent, although long-distance tourism might remain subdued. In this scenario, the quarter-on-quarter dip for the sector will amount to less than 10%, or €5 billion to €15 billion.

In scenario two, local markets across the globe will remain slow, while tourism will also lack momentum. This scenario would drive revenues down by 20-25% from the last quarters of last year, possible taking the decline for the whole year up to the tune of €100 billion.

A profound transformation

Either way, the sector is expected to take at least two years to recover to pre-Covid-19 levels, although the nature and composition of the market is likely to change significantly. “There will be a recovery for the luxury market but the industry will be profoundly transformed,” said Claudia D’Arpizio, a Bain & Company partner and lead author of the study.

Personal luxury goods market main breakdowns

“The coronavirus crisis will force the industry to think more creatively and innovate even faster to meet a host of new consumer demands and channel constraints,” she added. Shifts are anticipated in retail channels as well as in key markets for the personal luxury goods sector.

For instance, China occupies just over 10% of the global personal luxury goods market at present. By 2025, the report expects it to account for nearly 30% of the global market. An almost identical boom is expected for online retail, which is expected to grow from its current share of 12% of the personal luxury goods market across the globe to nearly 30% by 2025.

These are some promising indicators for the market. However, the sector that was previously being touted for glittering growth in the near future is now tasked with steadying the ship and staying afloat.

According to Federica Levato, Bain & Company partner and report co-author, personal luxury goods companies must take charge of their survival and recovery. “The speed of future market growth will depend on luxury players’ strategic responses to the current crisis and their ability to transform the industry on behalf of the customer.”

“As consumers slowly emerge from lockdowns, the way they see the world will have changed and luxury brands will need to adapt. Safety in store will be mandatory, paired with the magic of the luxury experience: creative ways to attract customers to store, or to get the product to the customer, will make the difference.”