Translated by
Nicola Mira
Jun 5, 2020
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Luxury industry pessimistic about rapid recovery from Covid-19 crisis

Translated by
Nicola Mira
Jun 5, 2020

The crisis caused by the Covid-19 pandemic will leave long-lasting scars in the luxury sector, and recovery will be slower than predicted, according to a report entitled ‘A perspective for the luxury goods industry during - and after - coronavirus.’

The survey, whose findings were revealed in a video conference on Wednesday, was conducted with decision-makers from luxury labels, retailers and producers in Europe and the U.S. by consulting firm McKinsey & Company, in partnership with the Italian Fashion Chamber (CNMI) and Pitti Immagine.

One of the last catwalk shows before the Covid-19 pandemic struck - Burberry

The fashion and luxury industries have been severely affected by the Covid-19 pandemic. Between January 1 and March 18 2020, the sector lost nearly 30% of its stock market value (the fashion industry lost 42%, luxury goods lost 31%). The market capitalisation of leading fashion and luxury labels plunged, their share prices falling by 32%, while those of departments stores lost 50%, and independent labels fared a little better, their share prices losing 26% on aggregate.

Also, the survey found that personal luxury goods companies are expecting a revenue downturn of between 20% and 60% in 2020, while their EBITDA will suffer heavy losses too.

The general outlook is extremely uncertain. McKinsey is predicting that, to generate the same level of sales recorded in 2019, the sector will have to wait until the second half of 2021. A forecast that appears to be shared by a sizeable number of fashion and luxury industry executives. Between April 2 and 10, McKinsey's researchers put forward severak different scenarios to over 2,100 of these executives.

80% of luxury sector leaders said their sales have dropped by up to 40% from start of year

For 31% of those surveyed, the most pessimistic scenario was the most plausible. The scenario predicted “a fresh spike in Covid-19, a return to growth only in the long term, and a weak worldwide recovery.” According to this scenario, global luxury goods sales are expected to drop by €130 to €140 billion in 2020, down from the €390 billion the industry was worth in 2019, and by another €40 to €50 billion in 2021.

Nearly 15% of interviewees opted for a slightly less pessimistic scenario, one in which “the virus has been contained but the sector is damaged, and long-term trend growth will be weaker.” Another 11%, instead, predicted “a fresh virus spike accompanied by slow long-term growth.”

Only 16% of interviewees went for the most optimistic scenario, predicting that “the pandemic will be contained and growth will bounce back,” allowing the luxury market to lose only between €100 and €110 billion in 2020, and to recover between €2 and €12 billion in 2021.

Entrepreneurs and senior executives are dealing with the “significant impact” caused by the crisis, and 80% of them mentioned their sales have dropped by up to 40% from the start of the year. They also indicated that the crisis has impacted several aspects of their business.

They think that the main risks for the luxury industry are linked to a drastic slump in consumption (for 26% of them), to excessive inventory (for 23% of them), to the aggressive discount policies of retailers and marketplaces (for 21% of them), and to pressures on corporate liquidity (for 13% of them). Some of them (9%) are also concerned about losing in-house skills.

Fashion accessories and cosmetics are expected to be the most resilient sectors. The survey's authors also underlined that the wholesale channel is expected to suffer the most, as consumers are postponing purchases and the channel's share of online sales is limited.

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