Historically, luxury brands have gone to great lengths to preserve their elite status, including going so far as burning excess inventory rather than sully the brand’s reputation by posting a sale price – a practice that was largely stopped in 2018. But with falling demand fueled by Coronavirus and 58 percent of consumers we surveyed recently cutting spending, luxury retailers are looking at a glut of inventory 32 percent higher than that of a year ago, according to a Vogue piece quoting EDITED retail analyst Krista Corrigan.
Further, Bain & Co. estimates that this year, the personal luxury goods market could contract 20 percent to 35 percent worldwide.
It begs the question: What will luxury brands do with all of that merchandise? Will Coronavirus finally drive luxury brands to value margin preservation over brand preservation?
The answer may lie in what the majority of retailers have long understood – put customers in the center of decisions.
Vogue Business published an article last August titled “What happens to luxury during a recession?” stating that brands are better prepared for a recession than they were a decade ago, thanks to better inventory controls and less dependence on third-party retailers. But, according to Bain, even before the pandemic, “The luxury industry was undergoing fundamental change as companies faced mounting pressure to become more customer-centric, digital, agile and sustainable.” Now, as they reset short-term targets and adopt new ways of working to cope with Covid-19, companies can still move toward these longer-term goals. And that may mean – gasp – discounting.
As I discussed during my recent interview on Cheddar, according to our most recent survey, 48 percent of respondents felt they’d need a 30 percent or more discount to make a retail purchase, while 25 percent of respondents felt luxury brands should offer 30 percent or more discounts post-pandemic.
And we are already starting to see first-mover luxury brands start to make this shift. For example, according to Bloomberg, Neiman Marcus offered Tom Ford glasses, which usually sell for about $400, at 50 percent off on its website last month. Customers could purchase a Derek Lam striped shirtdress from Saks Fifth Avenue for $237 – which represents 40 percent off the usual price. Nordstrom was also offering a Salvatore Ferragamo slide sandal for $225, down from $375.
However, Ed Yruma, an equity research analyst at Keybanc Capital Markets commented in the piece that deals like those are “highly uncharacteristic” [for luxury brands] but he notes that the unusually low prices could end up giving consumers the extra nudge they need to make a purchase. Go figure.
So what is a luxury retailer to do? McKinsey’s recent report highlighted that luxury sales for this year’s spring season are as much as 70 percent lower than last year as consumers had no opportunity to explore collections in-store, something that is foundational to the luxury shopping experience. McKinsey also notes that luxury retailers must determine now to phase in the 2020 fall and winter collections and develop a plan for dealing with unprecedented levels of unsold 2020 inventory—”without resorting to steep discounts, which jeopardize brand equity.”
Looking ahead to the near and long term, luxury brands are now going to have to learn to walk the delicate line between, at least for a while, offering the right product at the right price the first time around in order to make as many full price sales as possible, and this means connecting with the voice of the customer. This will also minimize how deeply a brand needs to lean on the off-price market to unload inventory. Here are a few ways luxury brands can connect with customers in the short and long term:
The luxury market was slow to embrace eCommerce, partly because expensive purchases are difficult for consumers to make online, according to this article in Luxury Society. George Arnett from Vogue Business discussed the rise of e-commerce in luxury which led to more direct relationships with consumers and more control over stock. Further, the in-person experience of the purchase is as personal as the purchase itself. Now, with stores closed, and with no other choice, many luxury brands are connecting and engaging with customers virtually, with not only an online store, but direct emails, live chats, virtual fashion shows, tutorials, and product launches hosted on Instagram, Facebook, and other social media platforms.
Madhuri Parson, who owns a luxury jewelry brand of the same name, believes this pandemic is pushing the industry toward innovation, stating: “I am optimistic that customers will shift their spending habits online more, preparing for a more robust back-end (automation) for e-commerce is likely the key to generate future sales in the luxury space.”
However, not every luxury brand wants to sustain this new model. Patek Philippe, for example, noted in the story that once the pandemic is over, the Swiss watchmaker will “return to selling things the old way: In-store.”
In terms of styles, McKinsey’s report notes that given the emotional toll shoppers have endured, preferences could shift in luxury purchases, at least for a time, toward “‘silent luxury’—paying more attention to classic elements, such as craftsmanship and heritage, and less to conspicuousness and “bling.”’
McKinsey’s report also advises that, post crisis, trends are pointing to more sustainable practices in luxury products, and the desire for more-responsible consumption—reinforcing the need for companies to provide clear, detailed information about their processes and products.
Reinvention has been a long time coming for the luxury industry, and following this current crisis, I believe that smart brands that are able to balance short-term pain with long-term gain will emerge even stronger, particularly those who have learned valuable lessons by staying connected and listening to the voice of their customers.
Source : Forbes