Luxury will be living la vida local for the foreseeable future.
With a rebound in long-haul tourism still way off in the distance, Europe’s biggest luxury brands have been drumming up business closer to home with regular customers and new recruits alike.
“I think local customers had been disregarded because it was so easy to make fast money from tourist flows,” said equity analyst Erwan Rambourg, managing director and global co-head of consumer and retail at HSBC in New York. “For most brands pre-COVID-19, at least 60 percent of Western Europe sales were made up by tourism spending, notably Chinese, Korean, Japanese and American.”
Yet the strongest legacy brands have been reporting sales in Europe down by only 15 to 20 percent, “which is already a feat,” Rambourg said, also giving a shoutout to Hermès International, where fourth-quarter sales in Europe dipped a mere 9.7 percent. “The good thing though is that the tourists that are lacking in Europe are actually spending quite strongly at home, partly as stay-cationing gives them greater budgets, partly linked to other supportive elements such as, in the U.S., the strength of equity and property markets.”
Overall, luxury analysts assign high grades to the sector’s largest players as they navigate a largely tourist-less new world.
“I think the industry is doing an excellent job recruiting new consumers, leveraging KOLs and social media,” said Luca Solca, senior research analyst in luxury goods at Bernstein, also noting that a “new generation of consumers is coming into the sector, primarily through the streetwear avenue, buying T-shirts, sneakers and hoodies.”
According to him, the “key is for brands to be desirable to a broad set of nationalities. We see Louis Vuitton, Hermès, Chanel and Cartier at the top of the desirability ranking across borders, for example.”
Sarah Willersdorf, managing director and partner, global head of luxury at Boston Consulting Group, said brands that relied on tourism in European capitals and big U.S. cities have doubled down on serving local clients, also ensuring that “digital sales channels are seamless, and that store associates have the tools and training to support clienteling 2.0.”
In her view, to attract more local clients, “brands must step up their value proposition, offering more merchandise that’s relevant to local shoppers, sourcing more merchandise closer to home, and spending more on local marketing across all parts of the customer journey, including inspiration.”
Also on her to-do-list: Brands must “ensure that CRM databases are optimized, and that store associates can adequately serve clientele and engage across channels. This is about better serving current clients in the markets where they live … and it’s also about attracting the next generation of luxury shopper. For example, many brands could improve upon their acquisition processes for high-potential customers, rather than focusing solely on existing high spenders.”
At the same time, brands have been grappling with a fundamental shift in what luxury means “as consumers have become more environmentally and socially aware, and digital channels become more important as sources of inspiration and sales,” she noted.
According to Rambourg, while some brands held back in 2020 as the pandemic raged, others powered on with heavy spending on clienteling, marketing and public relations, including Vuitton, Dior, Cartier “and a few others.”
Even before the pandemic, brands like Hermès, Chanel and Vuitton were already very present with local consumers. “They also proved to be very, very agile when the world suddenly shut last spring and found inventive ways — selling via Zoom or on the phone, going to consumers’ homes, privatizing stores, etc. Ironically, technology, data, and CRM efficiency proved to be a means to maintain and enhance a human, more intimate relationship between brands and consumers when the world came to a halt,” he said.
Rambourg also noted that consumers have generally rewarded the bigger brands amid a tendency to “buy less, but buy better.'” Meanwhile, first-time luxury buyers are inclined to go with the biggest brands, as these products convey status more effectively than niche labels.
“A luxury purchase is motivated by psychology, not financial means,” he explained in an interview. “Consumers want to display success, and to be recognized and accepted.”
“Female consumers are on the cusp of spending significantly more on luxury,” he said, citing rising rates of female employment pre-crisis, a narrowing wage gap, and delayed childbearing among societal and economic changes powering women’s pocketbooks.
Rambourg predicted sales to Chinese consumers “could double over the next four years as wealth creation triggers more recruitment. And finally, youth, notably in China and driven by minorities in the U.S., are bound to enter the sector.”
In the U.S., young African American, Asian American and Latine consumers in particular are leading the way and influencing the broader population in making luxury purchases more acceptable.
Bernstein’s Solca cautioned that looking at sales by geography confuses the picture.
“Most big brands saw their sales to European and American consumers rise in 2020 — so local consumers in Europe or the U.S.A. are not the problem. The problem is to fully repatriate to the Mainland the spend that Chinese consumers produced all over the world. As Chinese consumers need to pay higher prices when they buy at home, they cut their shopping lists and only buy ‘must have’ brands,” he said.
Most big brands have built grand flagships and often multiple locations in key cities worldwide, and analysts forecast only selective pruning of those networks.
“Hainan [in China] and other destinations are likely to have become a more structural substitute to Hong Kong and so stores have been shut there and it is likely that the downsizing of the luxury retail footprint is not over yet,” Rambourg said. “In Continental Europe, London and New York, there might be slight adjustments here and there to reduce rents or curb the network, but I don’t expect a drastic downsizing as brands will want to be well positioned for when travel will resume.”
Solca agreed. “For the most part, brands see stores as long-term investments, and are prepared to wait out the end of the pandemic,” he said. “Finding the right locations is difficult, and brands have significantly invested in their stores. They will trim their networks, as digital rises, but this will be a gradual process.”
