Luxury: the hopeful comeback of optimism

After a catastrophic first half of 2020 courtesy of the pandemic, a wind of optimism seems to be picking up across the luxury industry. But for the time being it’s only a cautious breeze. “There will be no return to pre-crisis levels before 2022,” says Arthur Jurus, chief economist at the private bank Landolt & Cie. “After contracting by 22% in 2020, sales should grow by 20% this coming year. Business will therefore remain, at best, 4% below its pre-COVID level. Uncertainty about this figure persists, particularly as we await the figures on Christmas sales, which usually account for one-third of annual revenues.” René Weber, Luxury Goods Senior Analyst at Vontobel, strikes a similarly cautious note: “As far as watch exports are concerned, the recovery is expected to reach 15% in 2021 after a 25% drop last year. While it is certainly a strong rebound, it will take another two to three years to get back to 2019 figures. This also holds true for the entire luxury industry.”

For Arnaud Cadart, portfolio manager at Flornoy & Associés, luxury has in fact already recovered. This is especially true for the most desirable brands in the sector, he says. “We saw a clear rebound in sales in the third quarter of 2020 at Louis Vuitton, Christian Dior and Hermès. And the numbers look quite encouraging also at Gucci and Saint Laurent. Customers indulged in the 500 to 5,000-euros product niche as an alternative to a dinner at a fine restaurant or a trip that never happened. What’s more, Western customers have filled the void left by the conspicuously absent Asian tourist clientele. For the next twelve months, we can expect a more marked resurgence of very exclusive luxury.” While experts do not necessarily agree on the extent of the recovery, all confirm a clear rebound in the sector this year. Guia Ricci, a luxury expert in the Milan office of the Boston Consulting Group, is one of them: “For 2021 we have now revised our estimates and we expect global sales of luxury products to settle between +5% and -5% compared to 2019,” she says.

These encouraging projections are explained firstly by the imminent arrival of COVID-19 vaccines all over the world, which will serve a number of purposes. For one thing, they should dispel the specter of lockdowns to come – initially at least – while also reviving the tourism sector, an essential driver for the luxury industry. But there’s more. “Vaccines will restore the confidence of all economic players,” says Jurus. “For the luxury sector, the reopening of physical points of sale and above all greater international mobility will be a game-changer. Before the crisis, transit consumer spending was the second most important growth driver after e-commerce. But in 2020, the number of passengers decreased by 63%. The potential for a rebound is significant, but will only materialize in the second half of 2021, after the vaccination campaigns.” Cadart also adds that the wealthier classes, while perhaps not hit as hard by the global health crisis, need economic visibility to buy the most expensive products. “Vaccines seem to be the light at the end of the tunnel, especially since they seem to be very effective. Wealthy customers will be craving some oxygen after vaccines help bring this nightmare to an end. Demand for luxury tourism and hotels should pick up again, perhaps premium boating as well, there will be a return to status symbols,” he says.

In the post-COVID era, the luxury industry will also more markedly reflect the growing influence of China. “Economically, China is coming out of the crisis a winner, since the country went through only a one-month lockdown and activities were back to normal by the third quarter,” says Jurus. “Financially, the inflow of foreign capital will help finance a debt that can be considered sustainable and the Chinese economy will offer higher returns than other developed countries. For the luxury sector, this means that part of the population will become wealthier fast, especially the new generations, and it will be essential to reach out to them quickly. And the way to do that is through e-commerce.” René Weber agrees: “For the first time, mainland China is now leading the way in Swiss watch exports, to the detriment of Hong Kong, which has lost its prominence. This trend will continue with the opening of China to the free movement of goods, for example in Hainan, which means that Chinese consumers will not have to travel outside of the country to buy luxury goods. But of course, we still hope that Chinese travelers will return as key international customers.” This trend has been quantified by the Boston Consulting Group, as Guia Ricci explains.  “Purchases of luxury goods within China's borders are expected to increase by 30-40% in 2021 compared to 2019.” Arnaud Cadart is bullish about the Chinese economy. “This rebound is going to be spectacular and will give purchasing power to its population, which already accounts for 40% of the demand and is expected to rise to 50% in a few years,” he says. “China’s entry into the WTO in 2001 will finally make at least one European sector happy!”

While 2021 is expected to be the year of recovery, it should also usher in a major consolidation phase for the sector. Jurus has little doubt: “In 1990, 2000 and 2008, transactions were halved. The market then normalized in two years. In 2021 we expect to see the same pattern. The luxury goods industry will first go through a phase of operations linked to bankruptcy sales or forced asset disposals. This applies particularly to Europe, where nearly half of the 100 largest companies are located, and where bankruptcy proceedings have been suspended in 2020, which will postpone bankruptcies until next year.” Cadart, meanwhile, looks ahead to where this is going. “Crises accelerate the widening of the gap between healthy players and everybody else,” he explains. “The three major French companies - LVMH, Kering and Hermès - entered the crisis in good shape and they have emerged stronger. Richemont and Swatch Group are expected to recover in 2021 with a better focus on very high-end watchmaking and jewelry. Italian brands were weaker when the crisis hit, and with the exception of Moncler and possibly Prada, the others have been struggling and may become targets for LVMH and Kering, or perhaps some new predator. However, financially they are not at the end of their rope and can therefore maintain their freedom through family control. We have seen that a ‘public’ company, in the Anglo-American sense of the term, that is not controlled, like Tiffany become easy prey. Burberry could be next.” It seems that this coming year promises to be exciting one for the luxury industry...