Perspective: Luxe In Flux

 The year 2020 has obviously been one of the most trying in recent memory -- for people across all economic strata, and for virtually every company.  But looking ahead, optimism for a strong 2021 is beginning to grow, particularly as the rollout of COVID vaccines begins.   

Luxury brands and markets have been particularly hard hit in 2020, as discretionary spending has cratered, the experience economy has shriveled, and consumers have re-thought their priorities.  McKinsey’s analysis of the global fashion industry, for example, found a 25-40% drop in revenues from 2019 to 2020, and a stunning 93% drop in profits.   

The year 2021 won’t bring instant changes -- in fact, things will likely get rougher over the new few weeks/months before they get better.  As luxury brands look ahead, here are a few sweet spots to accelerate their growth.   

The economy has been bifurcating since the early 1980s -- the notion of “rich getting richer” is an economic fact, not a subjective political talking point. Economic bifurcation is one of many trends intensified by The Corona Economy (just as it was intensified by 2008’s “Great Recession”). 

The wealthy tend to be senior executives -- they have kept their jobs, seen their portfolios rise, bought and decorated vacation homes (“Corona compounds”), etc.  Everyone else, from the HENRY’s (high-income-not-yet-rich) and the “mass affluent” on down, are saving rather than spending; their aspiration is not to buy luxury, but simply to hang on, and just not slip further down the economic spectrum.  

Markets will continue to bifurcate accordingly.  The wealthy will seek top quality, and be willing to pay accordingly; consider that luxury brands that came out of 2008 in the strongest position were truly elite brands that refused to discount, like Louis Vuitton and Hermes. Mid-market offerings will struggle, and value-oriented offerings will see more customers.  When there is a mass-market return to an interest in something with a luxury feel, it will skew more H&M and Rent The Runway, and it will have to deal with still-skittish consumers who have been trained to wait for the sale.  

Asian markets have been crucial to luxury’s growth over the past decade, spanning a variety of categories, from apparel and accessories to dining and travel.  Luxury growth is poised to resume in Asia, driven by a variety of economic and cultural factors.  Consider, for example, McKinsey’s (largely pre-vaccine) projections about growth in the fashion industry (comparing 2021 to 2019)...

• China: 5-10% growth 
• Europe: 2-7% decline
• United States 7-12% decline

This is an obvious recommendation, but one that can be surprisingly difficult to implement in a luxury context.  Luxury has always had connotations of excellent service and exquisite surroundings, of elegantly wrapped gifts and the emotional appeal of being handed a Tiffany blue box.  

In my book Selling to the New Elite, I detailed how most wealthy people today grew up middle-class, and maintain those middle-class value sensibilities even after a liquidity event puts them into a different stratum.  Selling luxury, then, requires less of a traditional salesperson, and more of a docent -- someone who can educate, who can tell the story of the brand, who can explain the fine distinctions of the brand that underlie a premium price.  

The question then becomes how to deliver a luxury experience in a digital context.  No one owns the magic formula yet.  It is an area ripe for innovation, as leading brands explore augmented reality, virtual reality, live streamed fashion shows, on-demand customer service video chat, etc.

As a percentage of the population, very few people buy luxury.  But those who do typically buy at the high-end across a variety of categories.  Top prospects for luxury cars are also top prospects for high-end homes and fashion apparel and fine dining and so on.  Opportunities for creative partnerships abound.  An accelerant will be the coming wave of merger and acquisition activity in the luxury space.  Smaller players are struggling -- the holding company behemoths like LVMH and Richemont have deep pockets and are poised to snap up smaller struggling players at a discount. The behemoths will look to leverage their expansive brand portfolios, and will find that cross-selling promotions will increase their revenue per customer.