COVID-19’s Impact on Luxury

The $380 billion luxury industry enjoyed years of success, its growth spurred by the creation of new luxury goods like high-end sneakers and casual wear, and reduced prices for some luxury items, making them attainable for more consumers. Success was rising and the future looked good for the industry, that is until the coronavirus started to spread in China. The pandemic crushed much of the progress the industry had made when it forced stores to close and reduced consumer purchasing to bare essentials. So where does luxury go from here? 

The sector has made it through economic crises before. The SARS outbreak in 2002-03 was not as detrimental to luxury because the industry was not as dependent on China as it is now. Chinese consumers also pulled the industry out of the 2008-09 crisis when western demand for luxury goods waned. With COVID though, Chinese consumers have been heavily affected by the pandemic and are unlikely to be the safety net this time around.

The luxury industry is also intrinsically global which plays a direct role in how those goods are bought. Shopping for luxury items while traveling has long been a large source of income for the industry. Buying a brand in the country where it is made in has always had a heightened appeal for vacationers. Anywhere from 20-30% of industry revenues are from buyers making purchases outside of their home countries. Now, though, travel restrictions between countries could hurt this tradition.

The virus was particularly devastating when it first reached Italy where many of the luxury brands are headquartered. Italy accounts for more than 40% of global luxury-goods production, according to McKinsey, where factories are largely shut down. Because of these shutdowns, the Italian market suffered more than any other, seeing double-digit declines. Sales continued to rise early on in the pandemic in France, Germany, the UK, and Spain because of tourism but quickly plunged once governments imposed quarantines and closed stores to stop the spread of the virus.

The luxury market in the Americas and airports has also felt the full impact of the pandemic. As Chinese tourism waned and most luxury brands closed their United States stores, the trend began to follow what happened in Europe. Similarly, the sharp drop in travel reduced the purchase of luxury goods that often happens in airports.

Most interesting, though, is the relationship between the luxury industry and China. Chinese consumers represent 35% of the global personal luxury goods market and accounted for 90% of the growth in the market in 2019 according to Bain. When the pandemic first hit, nearly every luxury brand in China had to temporarily close their stores, says Bain, which created “deep double-digit year-over-year sales declines.” More broadly, Asia saw a large drop in sales, plunging particularly low in China. Other Asian countries have felt the brunt of the virus two-fold because Chinese tourists can no longer come and purchase goods and no stores are open for local spenders to buy from.

Despite these facts, China, for now, is also leading the recovery of the industry. Luxury stores that have been able to reopen in China have seen luxury purchasing return much faster than predicted. This is both because China corralled the virus more quickly and effectively than the rest of the world, prompting its earlier reopening and because the tourist shopping that is usually done outside of China can now only be done at home.

Globally, luxury sales are set to contract 25-45% in 2020, according to estimates by the Boston Consulting Group. Conversely, BCG has predicted that China will actually end the year with luxury sales as much as 10% higher than 2019 numbers. On top of this, Bain predicts that the Chinese will account for 28% of the luxury market by 2025.

Unlike China, however, most European countries are set to feel the effects of the virus on the industry long after 2020 ends. A prolonged slump in tourism, little local demand for luxury goods, and a continued economic slowdown could keep the industry in the gutter for another few years. BCG has also predicted that American and Japanese consumers are already planning on spending less on luxury goods because they are expecting a recession created by the pandemic. In the U.S. specifically, BCG expects that “the luxury market will be further hurt by the closings of some department stores and high-end retailers, as well as by the current social and political climate.”