Article

Fabiana Fregni 22 June 2020

Reinvention Not a Luxury: The Road Ahead for Luxury Goods Companies

The world has changed drastically in the wake of the pandemic. Irrespective of the specific words used to convey this thought or how clichéd it sounds, there is no getting away from it. Entire industries are having to reinvent themselves. While those such as aviation and hospitality remain largely crippled even now, some green shoots are visible in consumer product industry sectors. But significant trends are evident, and these could completely change the game, let alone the rules. The luxury goods space is a prime example.

Demand for luxury goods is changing

In the post-Covid19 world, there is a tangible shift in terms of what constitutes “essentials” and what is “luxury”. Consumers- and especially those from the younger generations- are realizing that jobs can be lost easily and that saving for a rainy day is advice that is just as applicable now as it was when their parents or grandparents were their age.

Frugality is becoming an accepted way of life. There is a greater emphasis on “value”, and conspicuous consumption will decline. After all, a $50 watch can tell the time as well as a $1000 watch. And hey, my mobile phone has a built-in clock anyway- so do I even need the $50 watch?! These trends will have significant implications for luxury goods from a demand perspective.

Supply side changes too will play out

In the past couple of months there has been a growing sense of anger against China, which is seen as the origin of the Covid19 virus. While there is perhaps no incontrovertible evidence to prove this, public perception is what makes or breaks brands, leaders and even economies. In a globally interconnected world, it is this same public sentiment that can also break supply chains.

Well-known fashion houses based in Milan have, for years, been using materials (and in many cases, even labor) sourced from China. Many Swiss watch brands too import cases or dials from China; only the movements are truly “Swiss-made”. This strategy goes against the spirit of “heritage-based origin” A similar situation prevails with automobiles and electronics as well. Chinese companies manufacture a large share of Apple’s products. China’s ascent to becoming a global manufacturing hub has been propelled as much by well-known luxury brands that sourced cost-efficient raw materials from China as it has by bulk purchase of finished goods by companies operating at lower price points. But there is now a growing call worldwide to “decouple” from China and create alternative sourcing destinations. This process will take years to play out- and even then, not fully. But it is certainly an important trend for various industries.

An unintended consequence of the pandemic-induced economic squeeze may also be the emergence of a market for second-hand luxury goods. Pre-owned luxury cars and watches have been around for some time, so why not other luxury goods like clothes or handbags or even footwear? This trend could well gather steam as:

  • families declutter their homes (Ms. Marie Kondo’s KonMari method is now quite popular) and in the process, monetize luxury goods they no longer need; and
  • there are people willing to buy second-hand luxury products in good condition (nobody needs to know that where you got your Balenciaga jacket from. Capisce?).

Luxury goods businesses must respond with new strategies

Companies in the luxury goods industry will need to reimagine themselves in response to both demand and supply side trends in the business. Here are a few ways in which they will need to do so.

  • They will have to reconfigure supply chains not just to reduce dependence on China, but also to raise the level of local content to address growing nationalistic calls. Shifting suppliers to new locations will impact cost structures. Faced by consumers who are becoming more conscious of price than the brand name, luxury goods makers may need to rethink their product range and design. Logos may become less obvious, and the brand may need to rely more on creative style and flair.
  • A new category of consumers is emerging: more aware and mindful of the provenance of what they buy and also more alive to the need to not appear insensitive when buying luxury goods.
  • Companies will therefore have to reposition their products and brands and change how they market them. Attracting and retaining customers from this new segment of consumers will require marketers to build brands around tradition and authenticity as well as factors such as local manufacture, no child labor, sustainable materials etc.
  • Over the past decade or so, China has emerged as a significant market for luxury brands both in terms of size and growth rates. If global companies decide to reduce dependency on Chinese suppliers, there could also be tit-for-tat response by Chinese consumers who choose to buy domestic luxury brands instead of imported ones. (China already has local luxury brands). This will mean that global luxury goods companies will need to look for new markets or find new ways to grow.
  • “Place” is one of the traditional Ps of marketing; it refers to where products are sold and how they are distributed. Traditionally, luxury goods are sold in exclusive outlets (company-owned stores, high-end department stores, airport duty-free shops etc.). After all, “exclusivity” creates a halo around brands, making them even more aspirational. But in the new environment, luxury companies may need to more proactively embrace E-Commerce either on their own or in partnership with leaders in the E-Commerce space to expand their reach into new markets and new segments.
  • As they expand into E-Commerce, luxury companies will need to adopt cutting-edge technologies such as AI, ML, VR, AR, Analytics, Voice-activated commerce etc. to help them better understand not just new prospects but also changes to customer preferences based on how the pandemic has affected their lives and lifestyle choices.

Luxury businesses will need a new type of leaders

To lead functions such as Supply Chain, Marketing, E-Commerce etc. in this new, emerging landscape, luxury goods businesses will need hire the right talent. These executives will know to question status quo, change outdated organizational traditions and infuse a new and vibrant culture. They may come from other consumer product sectors, but will hold the key to future growth powered by innovative disruption and differentiation powered by technology and new creative energy.

To find the right kind of talent you need to partner with executive search specialists who understand not just executive search, but also the nuances of the luxury goods domain and possess the expertise needed to assess candidates for their suitability for and fit with specialized roles such as E-Commerce Director or Supply Chain Head. We at LS International offer this combination of capabilities, expertise and experience. After all, we have placed several Director and VP level executives in a wide range of consumer product companies. Write to me on Fabiana@ls-international.com to schedule a free exploratory call- we’re sure we can help.