Luxury’s growing focus on sustainability showed no signs of slowing down last month. A BoF report revealed that Hermès is betting on mushroom-based leather. Ralph Lauren introduced Color on Demand, a cotton dyeing technology that minimizes waste water, as well as a new circularity strategy that allows consumers to resell, recycle and even rent out Ralph Lauren clothing. Meanwhile, Estée Lauder and Safilo are committed to using sustainable plastic in their packaging and eyewear products, respectively. And Kering took a 5 percent interest in the resale site Vestiaire Collective, where sustainability was the key to the rationale.
“Our youngest customers use circularity in the way they think about their fashion purchases, and they are very aware of the sustainability commitments of brands,” Gregory Boutté van Kering told BoF. “It’s a shift that could shape the luxury industry for decades. It is therefore about playing an active role in this. “
The truth is that luxury has a troubled history when it comes to sustainability and it is consumers who have so far forced the industry to clean up their business. The first to feel the pressure was the diamond industry to introduce the Kimberley Process to address the issue of so-called ‘blood diamonds’, although brands like Tiffany have recently taken this some steps further through a diamond’s journey from mine to follow the retail industry to ensure that environmental and ethical standards. Then came the widespread ban on fur and a close look at how exotic hides were mined. And who can forget the question of animal testing in beauty?
China presents an interesting challenge for luxury brands as they want to clean up their supply chains. Recent reports of forced labor in the cotton industry in Xinjiang have led brands to reject cotton from that region. Burberry was one such brand, but as a result, the British label lost a high-profile ambassador, fell through a popular video game, faced boycotts from Chinese consumers and was bombarded by seriously negative mentions on Chinese social media. This is a tough pill to swallow for a company that generates more than 40 percent of sales from Chinese customers.
But fundamentally, the luxury sector has yet to reconcile its focus on sustainability with the increasing demand for its products and the need to drive growth. Indeed, there is a deep tension between what is good for the world and what is good for shareholders that must be resolved if the industry is to make real progress.
Last month ushered in a chorus of positive trading updates and increases in sales growth forecasts for the current year. Despite the potential for further disruption from Continental Europe’s third wave of infection, companies such as Burberry, Tod’s, Ferragamo, Swatch, Prada and Brunello Cucinelli reported a recovery in business in the early trading months of 2021. Notably, Cucinelli increased its sales growth expectations of 15 percent to a reach of 15-20 percent for this year and Prada expected to return to pre-pandemic levels as early as this year.
The Savigny Luxury Index (“SLI”) gained more than 6 percent in March thanks to encouraging trade updates, while the MSCI gained 5 percentage points as the world continues to get vaccinated.
SLI versus MSCI
Kering ended the month at 12 percent, boosted by broker upgrades and wider recognition of its sustainability credentials.
Capri Holdings gained more than 9 percent in March, underpinned by the US roadmap to recovery, boosted this month with the passing of a $ 1.9 trillion Covid bill.
Shares of Moncler fell nearly 5 percent this month, apparently influenced by reports that CEO Remo Ruffini sold a 3.2 percent stake in a block trade.
Safilo lost nearly 3 percent of its value in March thanks to its fourth quarter results, which marked the end of another difficult year for the eyewear group. The company’s sales growth outlook for 2021 is the lowest in the SLI universe and, along with Tapestry (which lost 2 percent of its value this month), is the only single-digit growth outlook for this year.
What to watch
On May 1, the animal testing requirements imposed by the Chinese government on imports of “generic” cosmetic products, including makeup, body wash and lotions, will end. This has been a bane to the moral compass of beauty brands willing to sell in China, not to mention the significant damage that would be done to their image (and sales) in the West by agreeing to their products on animals in exchange for access to an important new market. While it was possible to sell cross-border to China through online resellers without animal testing, we should now expect a gold rush from beauty brands on domestic online platforms and through physical channels.
Pierre Mallevays is Partner and Co-Head of Merchant Banking at Stanhope Capital Group.