SINGAPORE: The global market for luxury goods has flourished for decades, thanks to a handful of brands that have carefully constructed an environment that projects the dominance of wants over needs.
The 2019 global value of the sector, estimated to be around US$1.47 trillion, suggests that this strategy has worked flawlessly.
So robust has been the demand for personal luxury goods, that even the global financial crisis of 2008 to 2009 managed to shave off only 9 per cent of its value, before deep-pocketed Chinese consumers swiftly restored the market segment to its former glory.
BUSINESS WON’T BE RETURNING TO NORMAL
The return to business as usual, however, appears to be an increasingly unlikely scenario even after the COVID-19 crisis is over.
In fact, a recent study conducted by management consultancy firm Bain predicts the global sales of luxury handbags, clothing and cosmetics will decline by 20 to 35 per cent in 2020.
These statistics compound the trouble for Singapore’s luxury market, which had already witnessed a slowdown since late last year.
The findings of a 2019 study by market research company Ipsos suggest the island’s affluent population started spending less on luxury months before the pandemic struck, owing to the ripple effects of the drawn-out US-China trade war on the domestic economy.
As part of their initiatives to mitigate the situation and the accompanying uncertainties, luxury brands operating in the country have taken tepid steps to lure customers.
Bulgari has revamped its online stores and is designing personalised gifts. Louis Vuitton now offers complimentary delivery for its goods via men in suits. These measure, while creative, yield limited results. Hence, both brands have quickly resorted to their most potent course of action – price rise.
In May, news stories reported that a host of high-end brands, including Bulgari, Chanel, Dior, Louis Vuitton and Tiffany & Co, had hiked the prices of some of their goods to varying degrees.
When pressed to explain the move, their representatives attributed the rise to price harmonisation across various markets, exchange rate fluctuations and the escalating cost of raw materials.
While these reasons may appear reasonable, some might argue even favourable, under ordinary circumstances, updated sales records clearly indicate the recent decision to increase retail prices by relatively larger margins is primarily aimed at combating the unprecedented detrimental effects of the ongoing pandemic.
LVMH, the parent company of approximately 60 prestigious companies, registered a 17 per cent year-on-year drop in revenue this first quarter.
Rival conglomerate Kering SA, whose portfolio includes Balenciaga, Bottega Veneta and Gucci, also saw its first-quarter sales plummet by around 15 per cent. Likewise, Burberry recently announced that its annual pre-tax profit fell by 62 per cent year-on-year.
LUXURY GOODS ARE IN A TOUGH SPOT
A lot has already been said about the hit that the global economy has taken – and is continuing to take – on account of COVID-19. According to the International Monetary Fund, world GDP will fall by 3 per cent in 2020.
At zero per cent, Asia’s growth is expected to completely stall. Singapore, owing to its open economy model, is bound to shrink by 5.8 per cent.
Unemployment figures are rising steeply, too, with young adults bearing the brunt of the economic setback.
More than one in six young people have stopped working since the pandemic began, whereas those who retain jobs have seen their working hours cut by 23 per cent, according to the International Labour Organisation.
While the adverse effects of the crisis are felt far and wide, the luxury goods segment is in a particularly tough spot.
Last year, another Bain study found that Asia delivered the vast majority of the global luxury market growth, with young, middle class shoppers forming the steady consumer base. Now the industry’s dual engines of growth – geographic as well as demographic – have come to a halt.
In economics textbooks, luxury goods are often classified as products with high income elasticity of demand. As individuals earn more, they purchase proportionately more luxury goods. Conversely, when income falls, the demand drops more than proportionately.
Yet, most items of personal luxury can also be said to be examples of Veblen goods, which have shown to defy the basic law of demand. When their price increases, so does their demand, as consumers see the surcharge as a signal of added prestige.
In a non-crisis, stable economy, this creates a perverse incentive. However, the model breaks down in the event of a pandemic, where skyrocketing prices of luxury goods are matched by nosediving incomes.
Established brands do not lose their special status overnight, but they do risk distancing a loyal customer base in the medium to long run if they keep this up.
KEEPING THE MARKET GOING
So what should these premier fashion houses do?
First, diversification. If there was ever a time for luxury powerhouses to expand their product- and price-range, it is now.
Giving consumers a larger selection of products with incremental differentiating features at corresponding price points can be a lifesaver. Apart from charming new consumers, such a strategy could also satiate the appetite of variety-seeking buyers.
In this, the example of Louis Vuitton stands out. At the time of its inception in 1854, the company focussed solely on manufacturing lightweight luggage trunks.
But, more than a century and a half later, the French fashion giant’s Singapore website now sells luxury versions of just about everything, from handbags and time pieces, to dumbbells and earphones.\
Although studies have pointed out that most other luxury companies shy away from broadening their offerings and working on brand extensions through collaborations due to the ingrained fear of dilution, the pandemic is an inflection point for brands to rethink the notions of exclusivity and market dominance.
Second, discounts. Among other things, the health crisis has managed to push a few luxury brands to take the ordinarily unthinkable plunge into the almost sinful world of slashed prices.
In April, Bloomberg reported that Neiman Marcus was offering a 50 per cent discount on Tom Ford glasses, while Saks Fifth Avenue was selling a Derek Lam striped shirtdress at 40 per cent off the regular price.
In Singapore, luxury cosmetics company Clarins has been offering discounts and welcome gifts for first-time buyers.
Although the concept of accessible luxury has been picking up some pace in recent years, many big brands have typically refrained from significant price cuts, worrying that the move could lead to some form of status erosion.
This new approach stands in sharp contrast to brands’ recently defunct practice of setting their unsold stock of goods on fire to preserve product scarcity, and, indirectly, maintain a distinct reputation.
Another often-cited reason behind the reluctance to put luxury goods on sale is to avoid upsetting consumers who already paid the full price.
For the industry to salvage at least some production cost in the immediate future, and create a legion of new consumers in the distant future, destigmatising sensible discounts is recommended.
Third, digital engagement. Much has been said about making judicious use of the Internet during the pandemic in making the customer’s online purchase experience hassle-free.
However, given that the star treatment experience physical outlets offer plays a central role for luxury brands, these digital initiatives should broaden beyond creating an aesthetically pleasing website and using social media platforms to promote the latest collections, to foster engagement with interested buyers.
As social distancing measures (including a cap on the size of gatherings) are here to stay, firms must leverage on rapidly developing artificial intelligence solutions to pique their buyers’ interests.
Dior’s initiative to create a virtual version of its Champs-Élysées store in Paris is a case in point. Launched earlier this year, this website allows users around the world to explore the company’s signature boutique and directly place an order for the products on display.
Virtual consultations, live chats and livestreamed product launch events are other means for brands to partially replicate the in-store experience for shoppers. The expression may come across as hackneyed, but there really is no substitute for prompt and continuous innovation.
There is no denying that neither individually nor collectively will these actions be sufficient to perfectly insulate Singapore’s luxury goods industry from the hardships brought upon by COVID-19.
While the purchase decisions of local residents will be severely affected by the recession and gradual recovery, travel restrictions will keep the number of cash-rich tourists to a bare minimum.
Even though this does not bode well for the market, the strategies mentioned above could be thought of as additional measures to cushion some of the blows high-end retailers will suffer until the health crisis is brought to heel.
Pritish Bhattacharya is Research Officer in the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute.