The Luxury Slump: What’s happening with the world’s largest fashion houses?
By Serena Wong
Abstract
The luxury industry has faced its fair share of fluctuations ever since the pandemic struck. From sharp drops in physical traffic to completely revamping the platforms used to sell luxury items, companies have had to navigate a complicated industry with wildly unpredictable consumer behaviours and preferences. When the pandemic subsided, the luxury industry faced a huge surge in luxury spending from pent-up demand, setting record levels of growth and profits. Why has the industry now gone into a slump? This issue briefly dives into the performance of major fashion houses such as LVMH, Kering, and Hermès, alongside their reasons for declining performance, whether that be cyclical or structural.
Overview of the Luxury Industry
The luxury industry has evolved tremendously from its original form, and the term ‘luxury goods’ is now widely used in our modern society. But what really is luxury? And why has it become one of the most dynamic and unique-performing sectors in the post-pandemic era?
In its earlier stages, luxury fashion was represented through haute couture items – tailor-made pieces of art designed to celebrate the wealth and social status of prominent aristocrats. It was a tool to display economic and social successes, only available to the elite customers who could afford to spend exorbitant amounts of money. These traditions were soon broken by the democratisation of luxury. Collections became accessible to the emerging class, and the industrial organisation system only accelerated their affordability. Italian houses such as Versace and Armani began to challenge the traditional French haute couture model by responding flexibly to rapidly rising demand. In the late 20th century, collections drew inspiration from the fast-moving world around it, such as streetwear trends. Both supply and demand in the luxury industry were completely transformed as pieces began to be mass-produced and accessible to a far larger share of the population, breaking down the longstanding social stratification (Cabigiosu, 2020).
In today’s world, how does a firm stand out in the luxury market? Brand heritage has always been one of the most relevant factors in a fashion company’s standing. Despite the massification of luxury goods, consumers still actively seek that their purchase conveys a story and the notion of rarity or sacredness. Fashion houses have had to rebrand as they target a new generation of young and fresh consumers who search for a blend of tradition and modernity. How fashion houses handle the rebranding process has been a crucial determinant in their recent performance (Cabigiosu, 2020).
The geography of current consumer nationalities is also an intriguing aspect to observe. According to the Kering 2022 Financial Document, 33% of group revenue stemmed from the Asia-Pacific region, with Western Europe and North America following closely behind at 27% (Kering, 2022). Over the past decade, China has contributed to over 70% of the luxury market due to the huge popularity of brands such as LVMH and Gucci amongst customers in the country (Cabigiosu, 2020). This boost in spending is largely driven by the emerging middle-class segment. However, in 2022, Kering’s revenue fell by 8% compared to the prior year, and this decline was attributed to fallen spending in China from their draconian zero-COVID measures (Kering, 2022).
This issue brief delves into the hardships that the luxury industry faced during the pandemic years, the roaring post-pandemic boom, and lastly, why certain luxury houses are now set to face tumultuous and uncertain futures.
Shifting Landscapes in the Covid-Era:
The onset of the COVID-19 pandemic sent shockwaves throughout the luxury industry. It was accompanied by a sharp drop in brick-and-mortar store footfall as many consumers were confined to their homes with no way of making physical purchases. The value of the luxury market shrank to €1 trillion, a value that had not been witnessed since 2015. It is recorded that the overall luxury industry shrank by 20-22%, with segments such as luxury experiences (luxury hospitality, fine dining, cruises, etc.) being severely impacted and falling by 56% (D’Arpizio et al., 2021). This was largely due to its strong dependence on tourist flows, which were hindered during the pandemic. Hong Kong was one of the most hard-hit countries, welcoming 91% fewer tourists in the January-September 2020 period compared to the year before (McKinsey & Company, 2021).
The period also saw a shift to the digital space, with the share of purchases made online almost doubling in a year from 12% in 2019 to 23% in 2020 (D’Arpizio et al., 2021). Fashion brands across the world have had to completely revamp their networks to cater to a generation of consumers accustomed to browsing and purchasing products online. From January to October, fashion companies that were internet retailers carried 42% higher valuations than regular fashion retailers when indexing equity prices to the December 2019 level. In China, livestream commerce was an innovative method used to bridge the gap between physical and digital dimensions by adding a human touch to the digital shopping experience (McKinsey & Company, 2021).
Although these digital methods were strong substitutes, none of them could really compare to real-life experiences.
So that’s why fresh out of the pandemic, the luxury industry boomed. Bernard Arnault, the CEO of LVMH – a French multinational conglomerate with 75 brands to its name – briefly became the richest man in the world due to recovered levels of post-pandemic spending on luxury goods. As consumers released pent-up demand and splurged on purchases, overall sales at LVMH faced an 84% year-on-year boost which stood at 14% above pre-pandemic levels. LVMH’s largest revenue drivers, including Dior and Louis Vuitton, all reported increases in their market share with record sales, indicating that large firms may have weathered the storm better than smaller businesses (Reuters, 2021). The surge in luxury spending also comes at the hands of a restructured demographic of spenders, where millennials and Gen-Z accounted for a large portion of the growth in the market in 2022. This is due to a boost in levels of affluence as well as increased social media usage by the younger generation (Frank, 2023).
The Luxury Slump:
Unfortunately, the boom didn’t last. The luxury industry is currently falling off a 3-year surge with reports of easing sales at luxury giants like LVMH and Kering – another French multinational corporation with brands such as Balenciaga, Gucci, and YSL to its name. At Arnault’s peak, his wealth was over €200 billion, and he became the richest man in the world, with LVMH being the top company in Europe (Prakash, 2023). Neither of those things now stands as consumers begin to curb their luxury spending. The official LVMH report on Q3 earnings shows that organic sales growth was only 9% in Q323, which is a slower growth pace compared to 17% in the previous quarter (LVMH, 2023). The STOXX Europe Luxury 10 index, which measures the performance of luxury companies such as LVMH, Ferrari, and Burberry, has reported the largest quarterly decline since 2020. The recent September report shows that the luxury bundle is one of the worst-performing sectors amongst a range of thematic gauges, and this is due to factors such as high inflation levels and interest rates (STOXX, 2023). Growth in the luxury industry is now converging towards figures that are more similar to historical averages (Prakash, 2023).
While the luxury industry may be facing a cyclical downturn, companies such as Kering are showing poor performance because of fundamental problems and changes in the company structure. Kering did not manage to benefit from the post-pandemic surge as much as its rivals like Hermès and LVMH did. Gucci and Saint Laurent have traditionally been Kering’s two largest revenue drivers, with Gucci accounting for two-thirds of Kering’s 2022 profits, but sales have fallen at the two firms by 14% and 16%, respectively (Klasa, 2023b).
Why has this happened? Luxury brands such as Hermès made sure to target all ages and price points, but Gucci’s strategy has gone quite narrow by putting a focus on younger, trendy customers instead of the traditional ultra-wealthy older age group who weathered the pandemic better. Customers have also recently been going for a clean aesthetic trend by purchasing long-lasting investment pieces, quite the opposite direction from the colourful pieces that Gucci is renowned for (Klasa, 2023a). There was a switch of creative designer to Sabato de Sarno, who was brought in with the hopes that he would revive Gucci’s fortune, although this stalled Gucci’s progress during the transition. Gucci margins have also been under a lot of pressure as they have been unable to reach the target of mid-single-digit growth and are expecting further dilution of their EBIT margins (Klasa, 2023b).
Additionally, Kering has also undergone a management shakeup. Previous Saint Laurent CEO Francesca Belletini was promoted to the co-deputy chief executive. It is hoped that her promotion will increase oversight of all of the brands, especially after Balenciaga’s disastrous advertisement campaign scandal that sunk profits in the US and UK (Klasa, 2023a).
Lastly, Kering is amid a supply-chain shakeup as they aim to control pricing to a higher degree by streamlining their wholesale distribution networks, a move that only drags down their growth process further (Prakash, 2023).
What’s Next?
Several trends have become very prominent across the luxury and fashion industry in recent years. One of the most prominent moves is the shift in business model to a DTC (direct-to-customer) distribution model.
By eliminating the third-party ‘middleman’ retailer, companies have greater control over their prices. Luxury players such as Hermès have taken on this model to reinforce a sense of exclusivity as customers must actively seek out the brand to make their purchases rather than coming across it randomly on an online retailer. It also enables the company to have access to customer data, which allows them to unlock deep insights. By 2025, luxury companies are expected to hold a 25% share of the DTC market (McKinsey & Company, 2023). However, with a high level of economic uncertainty, brands have to take caution when adopting a solo strategy. Hybrid offerings may prove to be the best of both models. This is because multi-brand platforms carry a lot of value by drawing large volumes of customers to a single location via pervasive network effects and also prove to be a powerful tool in clearing inventory during periods of economic downturn (McKinsey & Company, 2023).
Conclusion
The luxury industry has evolved and adapted over time, but nothing has quite tested its resilience like the COVID-19 pandemic did. While all segments of the luxury industry were hard-hit, many of them managed to not only recover but to exceed pre-pandemic levels after the pandemic subsided. New heights were reached in terms of market share and sales growth.
Highs don’t last forever, and the luxury industry naturally ebbs and flows with the cyclical nature of the economy, as demonstrated by LVMH’s performance and recent convergence of growth rates to historical averages. However, some brands like Kering faced fundamental issues across their management, creative department, and advertising teams which they will need to tackle if they are to eventually emerge as triumphant.
How will the luxury industry perform next? Will they adapt to trends such as the shift to a DTC model or start moving in an entirely different direction?
References
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Frank, R. (2023, January 17). Gen Z is driving luxury sales as wealthy shoppers get younger. CNBC. https://www.cnbc.com/2023/01/17/gen-z-is-driving-luxury-sales-as-wealthy-shoppers-get-younger.html
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