The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
LONDON, United Kingdom — Cleo Lacey embarked last week on her first holiday since the pandemic, departing the UK through Heathrow's Terminal 5 for some much-needed time away in the south of Portugal and Ibiza. Lacey, an East Midland-based personal stylist and image consultant, prefers to buy luxury goods in stores but had resorted to shopping on Harrods.com while stuck at home this spring. The airport provided a novel opportunity.
"It was very quiet," she said. "We wanted to get a glass of champagne and we couldn't really, so we just went shopping instead." Lacey picked up Hermès sandals for herself, which she plans to wear during her trip, as well as Gucci loafers as a gift for her mother.
Any other year, Lacey's impulsive purchase wouldn't be notable. The luxury market depends on shoppers like her, who spend billions of dollars in sales annually shopping for handbags, skincare and fragrances at airports or other transportation hubs, as well as in shopping destination cities like Paris and Hong Kong.
But the coronavirus pandemic, which caused stores to close during lockdowns and implement severe social-distancing rules when reopening, has taken much of the fun out of shopping for a new handbag.
But even if they do want to shop, most consumers aren't travelling to do so. With international borders closed or reopening under limited restrictions, both leisure and business travel are going to be extremely limited for the foreseeable future.
There could be as many as 1.1 billion fewer international travellers in 2020, with the tourism industry losing up to $1.2 trillion in the sector’s worst year since 1950, according to United Nations’ World Tourism Organization projections.
The tourism industry, one of the global sectors hardest hit by the health crisis, is on life support. And so, by extension, are the fashion brands that rely on it to generate a significant portion of their annual sales. In 2019, about 40 percent of purchases of personal luxury goods were made by travelling consumers, according to Bain & Company. The overall market is expected to contract by as much as 35 percent this year.
Most of those travelling shoppers are from China, representing 35 percent of luxury purchases in 2019, only 11 percent of which took place in mainland China. But Middle Eastern, Russian and South American shoppers also splurge on trips to major American and European cities, looking for products they can’t get at home — or for better prices. In the US in particular, shopping-focused international travel is typically organised in groups tours, which Rafat Ali, founder and chief executive officer of trade travel media company Skift, said will be one of the last forms of travel to recover due to social distancing rules.
We will have a comeback of intraregional flows, but for sure not at the level of before.
“We will have a comeback of intraregional flows, but for sure not at the level of before,” said Bain & Company partner Claudia D’Arpizio.
Analysts generally agree travel will resume to pre-pandemic levels once it is considered safe to do so. The question is when.
Bain projects that international travel is unlikely to recover before 2022, but Chinese and Asian tourists will come back more quickly than American and European ones. The firm also expects that travel retail, or purchases made at airports or duty-free shops during journeys, won’t return to its 2019 level (about 6 percent of total luxury sales) until 2025.
“More than ever, we all still want to travel and discover the world,” said Bernstein analyst Luca Solca, who noted that the arrival of a cure or vaccine will be the deciding factor on how quickly travel recovers.
Skift’s Ali said a return to travel is a question of political will and whether countries can work together to set safe guidelines. “It’s less in the hands of passengers and more in the hands of politicians today,” he said. Potential virus spread won’t likely be the only concern for travellers from abroad.
“Will Chinese travellers be comfortable coming to Europe and the US knowing that they won't be discriminated against in overt and covert ways?” he asked, in reference to the increased number of recorded anti-Asian discrimination in recent months.
No matter the end result, the luxury industry will feel permanent effects of this unprecedented break in travel, and it will need to evolve in order to capture lost sales by rethinking marketing and distribution, from brick-and-mortar flagship stores to e-commerce experiences.
Meeting Grounded Travellers, Especially the Chinese, at Home
Luxury brands that count on travelling shoppers to hit their sales targets in Europe and the US are now doing their best to engage them in their home countries, especially in China where consumers have increased local shopping in recent months. For instance, American jewellery house Tiffany & Co., set to be acquired by LVMH later this year, said mainland China sales increased 90 percent in May from the same period a year earlier.
“Our decision to invest heavily in growing our domestic business in Mainland China was particularly prudent and well-timed, given the recent sharp decline in Chinese tourism abroad and the increase in local consumption,” Tiffany Chief Executive Alessandro Bogliolo said in an earnings release.
Analysts predict that, even after international travel returns, a larger percentage of Chinese shopping will take place in China, part of a "repatriation" trend — already in effect before the pandemic — that grounded high-spending travellers in 2020. Domestic luxury spending in China is growing for a multitude of reasons, including government encouragement in the form of crackdowns on "daigou," or international personal shopping services, as well as tax incentives for consumers and brands, allowing major names like Louis Vuitton and Chanel to lower prices and begin to equalise global pricing.
By 2025, Bain projects that 26 percent to 28 percent of luxury sales will take place in China, up from 11 percent in 2019. However, Chinese shoppers will still be spending, abroad, too, given that they are expected to account for almost half of all sales of personal luxury goods in five years.
While “repatriated” sales in China are unlikely to make up for all the sales generated by travelling shoppers from the region, brands can respond to travel restrictions by investing in localised social media, e-commerce and livestream video platforms, as well as participating in Chinese online and offline shopping “festivals,” or promotional events, as Kering, L'Oréal and others did in Shanghai in May and June.
After Burberry started a new channel on social e-commerce platform Little Red Book, increased livestream content and collaborated with Chinese mega-influencer Mr. Bags on a WeChat collection of Pocket Bags in recent months, sales in the region were up more than 30 percent year-over-year in June, better than its performance there in January before the pandemic. Chinese sales were a bright spot for the British brand in the three months ending June 27, 2020, during which overall sales were down almost 50 percent year over year, but mainland China grew in the "mid-teens," according to its most recent earnings report.
A strategic focus on local shoppers outside of China is key, too, said Pam Danziger, president of Unity Marketing luxury consultancy and author of “Meet the HENRYs: The Millennials that Matter Most for Luxury Brands.”
We need to look closer to home.
“We need to look closer to home,” she said. “The luxury market has placed too much focus on China at the expense of other markets where there is still strong potential, in particular the US market.”
Brands can help offset lost sales in shopping capitals by engaging locals who may also be spending more time in the area. Luxury department store Bergdorf Goodman, a popular tourist destination, is now offering same-day delivery not only in Manhattan but also the Hamptons, where many of New York’s affluent are spending the summer months.
Tackling the Online Gap
Despite the industry-wide focus on the e-commerce opportunity, online sales still account for only 12 percent of total luxury sales. While Bain predicts the channel will become the largest point of sale by 2025, in the short term brands need to get creative to appeal to shoppers with tools and personalised service perks that can make shopping online easier.
Liyia Wu, the founder of New York-based shopping app ShopShops, said she has seen an uptick in luxury shoppers from China eager to tap into department store discounts abroad. ShopShops streams live to a mostly Chinese audience from stores in New York, Tokyo, Dubai and Milan, among other regions, during which on camera hosts guide viewers through a shopping experience at stores like Century 21, Laura Mercier and outlet hub Woodbury Commons.
People are still looking to shop and see shopping as entertainment.
“People are still looking to shop and see shopping as entertainment and that part of entertainment will be replaced with live-streamed shopping, in my opinion, because they aren’t able to be physically there or don’t want to be physically there,” said Wu. ShopShops is also soft launching an English-language version of its platform to appeal to foreign and domestic English-speaking shoppers.
What does this mean for luxury store networks, carefully built and invested in over the last decade in destinations like Hong Kong and Paris? In April, Kering Chief Financial Officer Jean-Marc Duplaix said a downturn in tourism and increased domestic Chinese spend could call into question the value of fancy European and American stores.
But Solca said that while brands will invest more in appealing to Chinese shoppers at home, the tourism crisis won’t mean Paris will lose its flagships.
“I believe brands will focus on recapturing repatriated Chinese consumer spend in China,” said Solca. “But I don’t believe they will resort to drastic measures, such as materially cutting their retail networks in Europe, or increasing it materially in China.”
Courting the First Wave of Returning Travellers
As travel resumes over the next several years, young people, particularly students and affluent Gen-Zers and Millennials that luxury brands are already so eager to target, are expected to be among the first to venture back out.
Engaging them will be key to capturing the recovery, but their expectations are likely to evolve, said Danziger. “People are going to re-evaluating purchases and holding brands to a standard that they weren’t before.” This shift will be particularly notable for HENRYs (high earners not rich yet, or millennials making between $100,000 and $200,000 per year), she said, and will require brands to be even more clear about the value proposition they offer shoppers.
Chris Fair, the president of tourism and economic development firm Resonance Consultancy, expects that as travel patterns return, the industry will become much more bifurcated between exclusive luxury experiences and budget-focused, accessible travel.
For luxury brands focused on the habits of ultra-high income net worth travellers, Fair said there is an opportunity to “create closer connections between hospitality and retail to build back in a better and more differentiated way.” Much in the same way affluent travellers plan restaurant reservations with Michelin star restaurants ahead of their trips abroad, they could also be enticed to plan private shopping experiences or other exclusive luxury brand experiences. Fair said that typically, the hotel concierge has focused more on restaurants and entertainment like theatre tickets than shopping experiences.
Is there something there that I can only get in that particular city?
“The product is the end goal in terms of the sale, but it’s not necessarily going to be the hook or the driver,” said Fair. Global brands need to offer memorable local, highly exclusive shopping experiences. The handbag plays the role of a souvenir.
Duty Free & Airport Shopping
The drop off in travellers has been devastating for the global travel retail market, which generated €16.8 billion for luxury in 2019, according to Bain, though the firm expects it will return to its pre-pandemic level of market penetration by 2025.
Many operators are scaling down their overhead costs in the meantime — including LVMH's DFS Group, which cut its cost base by at least 25 percent this year — while in some regions, governments are stepping in to expand duty-free shopping opportunities as a way to spur economic growth. In the first week of July, Chinese tourists spent $450 million on imported goods on the islands of Hainan after the government increased the tax-free shopping quota per person at malls there. Meanwhile in South Korea, duty-free operators were allowed to sell some products domestically and online.
Beyond special government dispensation that expands duty-free product access, brands and retailers can prepare for a future recovery in travel retail by rethinking the customer journey inside the terminal.
“Usually in the airports, there is very little that goes on in the stores, there’s no actual store experience,” said Fflur Roberts, global luxury manager at Euromonitor International, adding that brands can rethink their customer service offerings to entice shoppers to spend time in these stores during these journeys.
Skift’s Ali recommended brands respond with social-distancing friendly services similar to the ones they have in their other stores, including contactless payments, preordering online and pickup at the airport. Fewer people are travelling, but they will likely be arriving at airports earlier to deal with increased travel regulations. “There’s a knockoff effect in terms of people spending more time at airports,” he said.
Fair recommended that global brands focus more on exclusive and localised offerings at airport shops. “Is there something there that I can only get in that particular city?” he asked, describing it as a pre-existing trend in travel retail that is likely to expand. “[Travelers] are most interested in brands and shops that feature locally made goods.”
But most important, brands need to keep abreast with the psychological impact of the lockdowns, and what that means for discretionary spending. “If the customers have been turning inward to reassess themselves, I think it’s also the brands that need to do that same inward look and reassess themselves and their value proposition,” said Danziger.