According to a study by Boston Consulting Group (BCG), the luxury market is currently facing significant challenges as a result of the Covid-19 crisis. The study, titled ‘The Covid-19 crisis: luxury industry scenarios’, highlights various areas in which luxury labels will need to address in the coming weeks.

One of the main challenges identified is inventory management. The study predicts that luxury labels will only be able to sell around 30% to 40% of their Spring/Summer 2020 items, contrasting with the 60% to 65% sold in normal times. This means that luxury labels will need to find effective strategies to manage the large volumes of unsold products before end-of-season sales begin. They will need to explore methods to reintroduce these products in future seasons.

Distribution is another significant challenge for luxury labels. The study suggests that the reliance on online sales, which was heightened during the lockdown period, will continue to be a prominent feature. This means that luxury labels need to further develop their e-tail capabilities to cater to the increase in online sales. However, multibrand retailers are expected to struggle as consumers may be hesitant to shop in high-footfall environments such as department stores. Moreover, multibrand retailers will also have to find solutions to deal with excess inventory, lower margins, and declining revenue.

Furthermore, the study predicts changes in the geography of luxury goods consumption. Historically, 30% to 40% of luxury goods were purchased by Asian consumers, particularly Chinese consumers, with a considerable portion of these purchases made outside of China, primarily in Europe. However, the recovery of travel retail may take longer, resulting in luxury goods consumption shifting back to China. This poses challenges for retail sales outside of China.

Restarting production is also a critical priority for the luxury industry. The lockdown period coincided with a crucial time for the industry, as it typically would have been busy producing prototypes and samples for the upcoming Spring/Summer 2021 collections. If workshops and artisans are unable to resume operations in the next few weeks, the industry could potentially lose six months of revenue, making it more fragile as a result.

Lastly, the study underlines the importance of digitalization for the luxury industry. It suggests that luxury labels must accelerate their digital transformation across all aspects of their business, from collection development to prototype production to commercial campaigns. By embracing digitalization, luxury labels can achieve faster, more flexible, and less expensive production cycles.

While major changes in luxury goods consumption are not expected, the study predicts a decline in luxury goods sales by 25% to 45% in 2020. Different product categories will be affected in varying ways, with cosmetics expected to recover more swiftly compared to watches and leather goods, which may experience larger sales shortfalls.

To overcome these challenges, luxury companies must respond quickly by establishing multi-functional teams that have the authority to make decisions. They must also adopt a dynamic approach to their organization and leverage strategies that work best for their business. The study suggests that the industry will witness winners and losers, with stronger players emerging stronger and weaker ones becoming more fragile. Additionally, an increase in acquisitions within the industry is anticipated.

Useful links:
How luxury brands can reinvent themselves in the next normal
The impact of Covid-19 on the luxury market in Italy