MILAN, Italy — In the last nine months, Europe — still the heartland of the luxury fashion industry — has been rocked by major terror attacks in both Paris and Brussels. The impact has been profound, dramatically slowing tourist arrivals to the French capital, putting security forces on high alert and contributing to the pervasive sense of political and economic insecurity and uncertainty now increasingly felt in a world where shockwaves from crises on one side of the world can spread swiftly to the other.

For fashion and luxury brands, which rely on discretionary spending for purchases that are largely emotionally-driven, growing global uncertainty can have a dramatic effect on consumer psychology, limiting the desire to spend money on what are aspirational products. Many of the same factors also impact international tourism — worrying for an industry where 50 percent of purchases are made by travellers, according to estimates by Exane BNP Paribas.

LVMH, Burberry, Versace and Prada partly attributed disappointing financial results in recent months to the events in Paris and Brussels. In April, Jean-Jacques Guiony, chief financial officer of LVMH, said that sales at Louis Vuitton in Paris were down by more than 10 percent.

But the threats to global travel and tourism don’t end with terrorism. Last week's 'Brexit' vote in the United Kingdom has plunged Europe into a new era of uncertainty. This, combined with the effects of an ongoing refugee crisis, as people flee war and poverty in the Middle East, continue to weigh on European governments and mass migration to the continent could further depress tourism (and travel retail) in major fashion hubs if the crisis continues to create instability and unrest. The spread of infectious diseases like Ebola or the Zika virus could also make people reluctant to travel to affected geographies for fear of contagion.

And then there are the erratic emerging markets — whose flourishing economies fashion has relied on so heavily for growth — which have been rocked by political and economic crises in Russia and Brazil and a dramatic economic slowdown in China. Luxury goods spending by Chinese tourists was down 24 percent overall (and 35 percent in Europe) in March, according to Global Blue, a tax-free shopping company, the first time it had fallen since the company’s records began in 2010.

BoF’s Imran Amed spoke to Claudia D’Arpizio, a senior partner at Bain & Company in Milan, about our age of uncertainty and what luxury brands can do to mitigate the risk.

BoF: As you look at the global macro-economic, geo-political, environmental landscape, there are all sorts of challenges that the world is facing. What risks pose the biggest threat to the fashion and luxury and apparel industry globally?

Claudia D'Arpizio: External instability is an element that is common to all industries now. Fashion is not immune to these external elements. It's always been the case actually — so this industry, in a way, is very volatile to some of these events, because it's people buying things for themselves that they do not need. So, it is clear that every event that has an impact on consumer confidence, the happiness of people and their trust in the future, may impact the willingness of people to buy these products.

This has always been the case for the fashion industry, but a few years ago, this was more local — so less global. We had SARS, we had some terrorist attacks in the past, we had some economic crises, but never has the globalisation been so definitive. So now there is a different meaning for globalisation and this is due to the fact that there is a complete transparency in what is happening in the globe, across the globe. This is due to the Internet and to the fact that people are travelling more than ever, and so whatever happens even in China has an echo in the US and in Europe.

So I think your analysis is correct. I would also add that the instability of currencies and exchange rates, which are moving masses of consumers to get the best prices across the globe, creates another element of instability and this is something that the brands also cannot control.

So the risks are many, but in my opinion the ones that are more important are the ones that are linked to the top line — the willingness of people to buy and really pay a premium for products that are not considered necessary during a moment of instability. Fashion has always been a top line industry — an industry where growth is important, where growth is even mandatory, where you need always to fuel the desire of people and to be relevant for people in order to grow and to create a positive impact internally and to reinvest in the brand and the retail cycle.

BoF: If the risks remain out of our control, what can be done to mitigate them?

CD: There are only two ways. Companies have been very European in a way, still quite monocultural. They've never been closed — because the industry has always been international, always opening in new markets — but, they probably need to become more able to deeply understand their customers and how they are impacted by these events, and also their changing demographics and habits. This is not a mitigant, per se, but it's a way to react more quickly. You cannot really anticipate any of this — you can react and adjust your value proposition.

The other element, I think, is strengthening the relationship with consumers in local markets, and being less dependent on tourists. This means working on loyalty and strengthening the relationship beyond the product, beyond the transaction, beyond just the creation of the desire — and trying to have a relationship that is more broad. Brands that are able to do this are also reacting better to this turbulence. They are the ones that are more rooted in the community and are more able to call back customers on any occasion and have a reason to talk to them, beyond just the new collection and the product.

And I would even add being more ethical, philanthropic and sustainable — all of these elements can be another topic of conversation, another touch point to strengthen this relationship. Caring for the same passions and the same issues and the same problems that the consumers are feeling, I think, is important. So that means using this transparency and this globalisation in order to get to know more customers, more deeply.

You need to nurture your local customers that live there, who can spread the message with their friends, who can spread the message with the second and third generation of their families, so you can become really more relevant in the local community.

BoF: You mentioned top line risks in particular — which of these things that we've just been discussing and mentioning do you consider to be top line risks and why?

CD: All the risks that impact tourist flows. Tourists are volatile by definition because they change where they go, but also because they can cancel flights and change their minds. I think Hong Kong is emblematic of that.

BoF: Why is Hong Kong emblematic of this?

CD: Shopping in Hong Kong was not in the hands of local customers, it was mainly mainland Chinese customers, buying in Hong Kong because of the price differentials. The reduction in price differentials, plus all the turbulence that led to political instability, created a big drop in tourist flows.

For a couple of years now, Hong Kong has been posting double digit percentage decreases in sales, and many of the stores will probably have to be closed by the brands who opened too many stores to accommodate the big flows of Chinese that actually were not local customers. The local customers have also felt really betrayed by the brands, because they were not caring about them.

Now, in Tokyo, something very similar is happening. Local customers are starting to suffer from the fact that there is not a precise value proposition for them. The focus is on the Chinese who are coming for the price differentials. Already, they were not buying as they were 10 years ago, but now they feel that these brands are not caring enough about them.

So I think the brands understand that they need really to get back to the local customers with a precise strategy. I always say a store should, in theory, break even with its local customer. You can have the tourist flows on top, for your top line, as a cherry on the cake, but if you don’t break even with the local customers, this store is very, very at risk, because this can change.

The risks are many, but the ones that are more important are the ones that are linked to the top line — the willingness of people to buy and really pay a premium for products that are not considered necessary during a moment of instability.

BoF: As we look to some of the other markets that have become shopping destinations like Dubai, do you think that these are also at risk?

CD: I think Tokyo and Dubai are very different, because in Tokyo you have local customers that are wealthy or that are fashion oriented. There is a business, there is a market, there is a local community that is for fashion and luxury. And on top you have tourists now because of the price differential.

Dubai is a touristic destination per se, so the GDP of Dubai is centred around the tourism business. I see this as less volatile than Hong Kong or Tokyo, because people go there not because of the price differentials, but for holidays. And there is a government and a whole system that is working around making Dubai a touristic destination to attract millions of people, so there is someone else that is taking care of the inbound flows and has this purpose.

So in theory it’s less volatile, and in reality also, because Dubai has very diverse tourist flows. The Chinese are becoming important in Dubai, before it was Russians. You have people from Africa, you have a lot of people from India, you even have Europeans that are now travelling to Dubai because it’s just a five-hour flight from Milan and it’s good weather and you can go there for a weekend.

BoF: Right now, in Europe, we have a phenomenon that is dominating the headlines with the migrant crisis, which has created a real sense of instability across the continent.

CD: But this creates actually a lot of wealth. We call it, "Everything but better." So everyone wants the same thing but better. And it's also giving a big impulse to all the industries to really think in a creative way, to get the same products in a better way. If you also think about furniture, if you think about Ikea, or if you think about food — everything is cheaper now, but it's better in terms of quality, in terms of packaging, in terms of delivery model, in terms of service.

That’s the lens that I would try to suggest to fashion brands to use. You have a big challenge and a big opportunity to really use the best of what you can do — your creativity — to really do things better for a larger audience. I think inclusivity is the new word after a period where fashion was really exclusive — not only because of the price, but also because of the intellectual message that was being sent. Now it’s a time to be inclusive. That doesn’t mean being simple, but it means being relevant for a wider audience, delivering the best of what you can do. Fashion is a little bit behind many other segments and sectors that have already come to understand this.

BoF: I also wanted to chat about the issue of climate change and sustainability and ethics. To what extent are these issues becoming really important to luxury and fashion consumers when they make decisions? Or is it still the old adage that the product comes first and then, if it's ethical and sustainably made, that's better?

CD: Unfortunately, yes, that is still true. But it is changing rapidly — so we have some data that we can share with you. We recently did consumer research on this topic and only 9 percent of consumers say they are shifting their choices from a brand to another because of these issues. Nine percent is not a huge percentage. But, actually, the percentage of people that say that they care about this is quite high, nearer to 70 or 80 percent.

But I expect that Chinese consumers will probably embrace this in a more strong way, because pollution is a real problem for them — the relevance for them is higher. But yes, I don’t see up to now, so this is really a question on the new generation and preparing let’s say the next generation of consumers, more than here and now. So, here and now, this is not changing the reality.

Is this important for the millennials? More than for the baby boomers. Is this important for the next generation? Even more. Again I think it’s important when it’s authentic, when it’s considered. Transparency is everything, so consumers are very, very able to understand if you are really serious. You have to stand for something that you think is relevant for you. This industry, like every industry, cannot be 100 percent sustainable on every topic — environment, human rights, animals, forests, everything. So you really need to pick what is relevant and what is consistent to the brand DNA, and don’t be shy about using it as an opportunity for conversation.

So maybe it doesn’t shift sales, but it makes more people talk about you, spreading your message and creating positivity and advocacy for the brand.

BoF: As someone who's advising the chief executives of big luxury, fashion, retail and apparel brands around the world, as you look ahead, what is it that is keeping people up at night?

CD: The next 12 months are very critical. What is really difficult is when you don't understand the root causes of what's happening. Again this is linked to your first question about turbulence and exogenous events. I think, of course, a terrorist attack is clear — so it's the root cause — but now there is a softness in the market and amongst consumers that is not totally explained by external and exogenous events.

There is something happening in the way consumers and people just are changing their habits — they’re changing their relationships with products and they’re changing their relationship with how they live their lives everyday — that is not totally readable and there is not a consumer survey or a market research or a focus group that really gives you the answers.

We’re a bit blind in some markets as to what is happening in the mind of the consumer. There was China that created a big buzz, so everyone was distracted by the fact that there was this big growth coming from China, but actually the big change in the consumers was already there in the mature markets. Now something is happening, but it’s not clear how to react. For instance, in the United States, it’s a market that in theory, if we exclude the elections and if we exclude the fact that the dollar is so strong, in reality there is not any real reason for consumers not to buy. But they are not buying.

No one has a clear answer — so this is really difficult, because this is really rooted in some sociological elements or psychological elements this industry probably didn’t tackle enough in advance. And so, this is for me the biggest problem, because I think you can react to many of these elements — you can redo your pricing strategy, you can do better products, you can do very good CRM, you can do a lot of things — but if you don’t understand why consumers are not just buying anything…

So that’s a point, linked again, on how to read this — how to read this from the customers. I don’t think that these brands have enough sensitivity. They could do so because they have stores and they have a lot of people in the different markets, but they don’t have the culture of listening to the customers in the right way. And this is not something that you can learn very quickly. The real thing that is shocking me is that they don’t have — and actually we don’t have — a clear view on why consumers are changing behaviours so quickly. Or perhaps not so quickly, we’ve just realised too late.

The reality is that consumers react to brand strategies very quickly. You can of course, post-mortem, understand the root causes, but it’s very difficult to understand them in advance. The reality is that you probably have to give them a very, very good reason to shop now. And the truth is, this industry is now a little bit fatigued. It’s a little bit tired and some of the brands have to find their broader purpose again. Why they are in this business and to do what?

This interview has been edited and condensed.

This article appears in BoF's latest print issue, A Connected World, a special briefing which examines how growing global interconnectivity impacts the way we create, communicate and consume fashion. To order your copy for delivery anywhere in the world or locate a stockist, visit shop.businessoffashion.com.

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