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OPINION: The Impact Of COVID-19 On The Luxury Industry

FUNKE OSAE-BROWN

The Coronavirus pandemic is changing so many things; the way we live, interact with ourselves, the way we work, the way we shop and more. In January, 2020 kicked off with a lot of promises and we are all excited at some of the opportunities coming our way. We looked forward to a great year and decade. Alas, things will take a remarkable turn by the start of the last month in the first quarter.

Since the COVID-19 pandemic broke out, the luxury industry has been adjusted to the spread of the virus and its likely enormous effects on the sector. The first effects were felt by Luxury brands when Covid-19 spread through China. 

In a report by Bain and Co, China accounted for 90% of global luxury market growth in 2019.  Conversely, as of March 25, its forecast that the luxury market globally will contract by 25% to 30% year-over-year in the first quarter of 2020.

Italy is some of the worst-hit countries by the virus and it is where most global luxury brand has its headquarters. It is also where key suppliers and artisans of luxury goods are located. 

As the pandemic is still on, it is difficult to predict accurately what its full impact on the broader economy and the luxury industry specifically will be. Its duration will depend on the response of governments and consumers. However, one can look at the immediate economic impact of the crisis.

In a report by Forbes, on April 2, four luxury professionals from McKinsey, Digital Luxury Group and Lamborghini had a special IMD webinar on the significance of the COVID-19 crisis for the luxury industries. Fifty-five executives participated.  

And some of them are concerned about the uncertainty of the times yet they are optimistic that the luxury industry will rebound. Ironically, the uncertainty and optimism best described the mood of the industry. An instant poll conducted during the webinar showed 10 per cent of those who attended felt the crisis would be negative for their businesses, 24 per cent were unsure of its impact, while two-thirds thought it would bring positive changes. However, they were uncertain how long the crisis will last, which was of great concern to them.

The pandemic poses a serious threat to the sector as Gross domestic product drops, unemployment increases, and spending power reduces drastically. 

Already, the stock markets around the world have come under severe strain, with an attendant dive in consumer confidence and their willingness to spend. 

The crisis is not affecting every industry within luxury equally, of course. Luxury travel is one of the worst-hit sectors as airlines are grounded, luxury cruises stopped, leisure spots closed, hotels, spas, cinemas and more inclusive. Luxury and premium travel and tourism, travel retail, travel companies, global events, and the entertainment and sports industries are drastically affected. However, luxury retail, driven by online sales, may not suffer as others in some countries.

Africa’s nascent luxury sector could be experiencing its worst times at the moment as most manufacturers of luxury brands on the continent fall under SMEs. They are forced to cut cost, cut down on staff strength, sales dropped drastically since the pandemic spread across major cities in Africa.

Some brands in the fashion and beauty industry have been forced to diversify into manufacturing face masks, Personal Protective Equipment or sanitisers to cushion the effect on their businesses. Countries like Kenya, the Gambia that are reliant on tourism are already counting the cost. The purchases of luxury goods and services by tourists will continue to be disrupted by travel restrictions.

No doubt, the impact of the pandemic varies from sector to sector. In the automobile industry, the pandemic landed in Europe during an already traumatic transition to electric vehicles that have emaciated the profit margins of many well-known automobile giants. In the luxury watch sector, the predicament deals another blow, following 2019 slowdown caused by Hong-Kong’s political turmoil.

With key luxury souks around the world now affected, brands are doing everything they can to protect the welfare of their staff and customers, through store closures and other measures. They are also assisting the frontline public health response where possible by offering to use their factories for the production of essential goods such as hand sanitizer or PPE.

For example, Hermès Group, last month, announced it will retain the basic salary of its 15,500 employees worldwide.  Gucci began #GucciCommunity campaign to alleviate this crisis by “helping health services with equipment and powering the scientists who are working on vaccines and treatments”. It made two separate donations of 1 million euros each to crowdfunding campaigns.

Likewise, Dolce & Gabbana provided funds for Italy’s top university scientists, Giorgio Armani gave €1.25 million to hospitals in Milan and Rome as a donation, Bulgari helped purchase a state-of-the-art microscope for the Lazzaro Spallanzani hospital in Rome. The LVMH transformed some of its perfume factories to manufacture hand sanitisers.

Finally, going a bit back to history, the luxury industry is known to always do well in crises. The 1930s and 1940s great depression is an example, although the industry was way smaller during those years than it is now. Industry analysts are optimistic the industry will bounce back. The pandemic will work as a driver of change and a breakup point depending on how economic, social and technological dynamism play out. 

This article was first published in BusinessDay.

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