Paris, France – Nobody expected the numbers to be good. In fact, as several European luxury homes were willing to report sales and earnings for the spring quarter – when the coronavirus lockdowns peaked and forced boutiques around the world to close – investors and analysts braced for the worst contraction ever the modern luxury industry.
But when industry leader LVMH reported Monday that first-half earnings fell 68 percent and analysts’ forecasts had missed out on more than half a billion euros, it was clear that luxury investors would expect an even more rocking ride than expected.
Second quarter sales of the group, including brands Louis Vuitton, Dior and Sephora, fell 38 percent. Gucciowner Kering’s top line fared even worse, with a 44 percent drop in sales, while Italian luxury shoemaker Ferragamo saw a 60 percent dip. “I don’t think we’ve ever seen such a perfectly negative alignment of planets against us,” said Jean-Jacques Guiony, LVMH’s Chief Financial Officer.
“The figures are objectively very poor,” said Francesca di Pasquantonio, an analyst at Deutsche Bank. “As painful as we thought the deleveraging would be in the industry, it was actually worse.”
In the presentations this week, most people agreed that demand had recovered significantly since June, especially in China, and most were optimistic that customers’ desire to buy luxury fashion on the other side of the pandemic would remain intact . Other bright spots were a surprising uptick in the US for some brands and signs of resilience for labels like Bottega Veneta and Prada.
But with little insight into when major corporate drivers like international travel and pedestrians bounce back to luxury boutiques, hopes for a “V-shaped” recovery, making the coronavirus pandemic a transient shock, largely gone. More and more brand managers expect the recovery to be gradual, with some acknowledging that the crisis is likely not only to persist well into the next year, but to reform the sector more deeply than missed sales.
So, what can the latest presentations of results tell us about the new normal of luxury?
China is more important than ever
Luxury is apparently a European industry. But make no mistake. In terms of who makes the purchases, the industry’s fortunes are inextricably linked to China: customers from the country, a powerful center for creating new prosperity, have made up for more than a third of luxury sales and the vast majority of luxury growth in In recent years.
The pandemic has only accelerated dependence on luxury for Chinese shoppers, as demand in China recovered earlier and more strongly than in other regions. Although most luxury brands are not yet close to a full recovery, the share of sales by Chinese consumers is increasing. Bee Burberry, which reported results two weeks ago, sales to Chinese customers declined by “mid 20 percent” in the spring of the quarter, compared with a 45 percent drop for consumers overall. Chinese nationals were already on track to generate more than half of total luxury sales by 2025, but may be more likely to reach a majority in light of current trends.
In addition to the growing importance of Chinese customers, brands are seeing an explosion in sales in mainland China itself. After long preferring to buy luxury goods at lower prices on shopping trips abroad, Chinese customers have gradually “repatriated” their spending in recent years. That trend has accelerated as the pandemic interrupted most international travel: Kering said mainland Chinese sales have risen 40 percent from the previous year, with growth rising in the second quarter. LVMH said the biggest brands, Louis Vuitton and Dior, had seen a whopping 100 percent growth in certain weeks. But even these spectacular figures are not enough to offset the money of Chinese customers are not expenses for traveling abroad.
Tourism in question
Even though the share of China’s domestic spending had already risen before the pandemic, luxury brands were unprepared for Covid-19’s overall decline in tourist spending. In addition to investments in travel retail by LVMH and Cartier owner, among others Richemont, extensive shopping networks in European shopping centers such as Paris reflect the broad assumption by managers across the industry that record-high tourism has only increased in recent years.
Now, most international travel will halt to cut revenues for LVMH, which owns the duty-free retail chain DFS and the hotel chains Belmond and Cheval Blanc. But the bleak prospects for tourism were also raised by Kering as a major headwind, Moncler and Burberry.
“There are many moving parts. All we know and are clear about is that the lack of tourism will continue in 2020 and probably most – or at least the first half – of 2021, ”said Jean-Marc Duplaix, Kering’s Chief Financial Officer . (The UN World Tourism Organization endorsed that opinion in a statement on Tuesday, saying that most experts panel members do not expect international tourism to recover in the second half of 2021, although some are still recovering in the first half of expect next year.)
A long-term drop in travel numbers will lead to more revenue loss, said Deutsche Bank’s Di Pasquantonio. “On average, tourists spend about 40 percent of the luxury sales. Some of this can be recaptured from local markets, but not entirely. ”
While most brands say it’s too early to think about cutting through shops in tourist centers, leases are likely to be carefully evaluated when renewed.
E-commerce sales skyrocketed during the coronavirus pandemic – they tripled for Kering’s Bottega Veneta and more doubled at Prada. LVMH’s Guiony said the e-commerce figures were “too good to be reported,” and might not set too high a bar for future presentations.
While digital sales numbers may not remain so high, the growing importance of digital communications, e-commerce, and the integration of digital contact points with brick-and-mortar stores in the industry is expected to continue on the other side of the coronavirus pandemic.
Options like click-and-collect are gaining popularity as a result of the pandemic, and brands that have long resisted e-commerce are now recognizing its strength more clearly. After launching e-commerce in the US only last year, the CEO of Dior said in a recent interview that the brand is gaining significant market share during the pandemic, in part by reaching the “low-hanging fruit” of new online customers who never had access to a physical Dior store.
Kering has said it “puts omnichannel capabilities at the heart of our distribution strategy,” while Burberry will launch a “social store” on Friday in partnership with WeChat operator Tencent. This week, Moncler promised to make all of its initiatives digitally the first priority.
“Every project, ranging from the definition of collections to product development and the concept definition of events, must be” digital-first “,” said Moncler’s chairman and CEO Remo Ruffini. Even as sales fell 29 percent in the first half year, the ski clothing maker decided to invest in bringing its e-commerce business into its own hands, ending Yoox Net-a-Porter’s white-label service .
Now that brands are promoting themselves in the future, the need to keep a close eye on costs can also spur the transition to digital. Even as digital fashion shows got mixed reviews this summer, executives have taken note of their potential to cut costs. Some brands plan to resume physical fashion shows this fall, but splashing at expensive personal events won’t be the standard.
European luxury brands have been largely on the same waves of economic growth in the US, Japan and China for decades. Even if performance varied, most companies tended to move in the same direction. However, polarization has increased in recent years as demand has been driven by more discerning, digitally savvy customers and large groups such as LVMH and Kering used their scale to dominate the market. Well-funded, fashion-conscious labels like Gucci, for example, saw massive growth in the latest wave of Chinese demand, while weaker brands struggling to renew their offer stagnated.
During the pandemic, the gap between luxury winners and losers continues to widen as ever, as only the brands with the most clearly defined and desirable offerings have been able to move the product without retail traffic. While sales for the spring quarter at LVMH fell 38 percent, the smaller and less trendy Ferragamo saw sales drop by as much as 60 percent.
This kind of branched performance is likely to continue as polarization has become a self-fulfilling prophecy: the strongest brands can drive flavors, reinvest higher profits and grow faster than the market. The smaller luxury companies that experience an operating loss during the pandemic may need to further reduce investment, leaving them even further behind industry leaders like LVMH and Kering as demand picks up.
US Rebound, Prada Optimistic
While the luxury industry’s recent financial results reflected the unprecedented difficulties the industry is facing – as well as the rocky road ahead – the news of the week was not without positive surprises.
In the US, where the coronavirus pandemic has been compounded by political turmoil, luxury sales for some brands have actually recovered in June. Louis Vuitton sales in the US in June were roughly in line with last year, and Dior returned to growth, said LVMH’s Guiony. Kering and Prada also pointed to improvements in that market.
Other bright spots included a more modest decline for Kering’s Bottering Veneta: sales in the first half fell 9.5 percent, well above the industry average, as owner Kering continued to invest in the brand’s revamped aesthetic under British designer Daniel Lee.
Prada was also optimistic, despite an operating loss of € 180 million for the first half. Director Patrizio Bertelli called the pandemic a “temporary break”. Encouraged by the pick-up in demand since the reopening of stores, the Milanese brand is sticking to its plan to eliminate sales at the end of the season.
Luxury analyst Luca Solca called the results of the brand “a miss, but for good reason.” “It is comforting to see Prada achieve organic retail growth in 1H20 in line with Gucci’s retail growth,” said Solca.
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