Skip to main content
BoF Logo

The Business of Fashion

Agenda-setting intelligence, analysis and advice for the global fashion community.

To Survive, Luxury Fashion Must Hibernate

Companies should reduce their cost perimeters, keeping as many of their personnel and key assets as possible, while stopping virtually all manufacturing and sourcing, argues Luca Solca.
Non-essential stores across the world were closed after governments implemented lockdowns to curb the spread of the novel coronavirus | Source: Getty Images
By
  • Luca Solca
BoF PROFESSIONAL

GENEVA, Switzerland — As the coronavirus continues its spread, the luxury goods sector finds itself in terra incognita, or unknown territory: most of Europe and the Unites States are under lockdown forcing store closures and crushing consumer demand. In these markets, sales are near zero. And though China is slowly reopening, a global rebound in luxury sales may take a very long time, especially given the less stringent lockdown protocols Western governments have put in place.

As a result, luxury goods companies will need to do more than cut costs to get through this. They may need to act like bears in the winter: preserve all their vital organs and functions, shed the fat, and switch to resource-saving (in this cash-saving) mode. The idea is to reduce their cost perimeters while keeping as many of their personnel and key assets (mainly their stores) as possible. Virtually all manufacturing and sourcing must stop, as it makes no sense to create or produce new seasons when stores are closed, and sales are essentially at zero. This would only lead to a major excess inventory problem, heavy discounting and brand equity damage.

As stores are closed in many markets, while traffic is down to a trickle where they are open, it would only seem fair that landlords should share some of the burden. A significant "rental holiday" discount that seems to be happening in most geographies should become the norm, especially as rental costs are a significant portion of the SG&A bill incurred by luxury goods companies; probably close to one third of the total SG&A on average.

As the coronavirus continues its spread, the luxury goods sector finds itself in terra incognita, or unknown territory.

Dealing with personnel costs will be a more difficult matter. On the one hand, people and their skills are at the heart of what luxury goods stand for. Parting with talent would hardly seem the appropriate thing to do in this context. And I’d expect very few companies will resort to that. On the other hand, relying on government aid to help support salary costs won’t appear appropriate either: luxury goods companies have made significant profits over the last 20 years, and taking public resources could very likely look like poor form in the eyes of many.

ADVERTISEMENT

One option is to get their people to work differently. We see a number of companies have redeployed their retail teams to contact clients using messaging apps and the telephone, which can be a valuable complement to digital distribution and enable them to reach customers in less-affected areas, who may still be in the mood for shopping, while lockdowns persist in the West.

On manufacturing, my initial concern about sourcing bottlenecks — especially in the early days of Covid-19 erupting in Italy — has quickly turned into a worry about too many products on the market with no takers. With so many stores closed, luxury brands are struggling to sell the inventory they already have, and therefore have little need to produce more.

The opportunities on this front vary as a function of two criteria: 1) a company's liquidity position; 2) a company's dependence on seasons. If your balance sheet is strong and your products have long shelf lives, then the best option is to pause production, hold off any discounting or promotion, and just sell what you have once we go back to normal. This is the case for the jewellery and leather goods categories, by and large. To a degree, the situation is different for fashion brands, as newness and seasonality will still be important once we exit lockdown. But here too, I think, pausing all production is vital, so as to limit the amount of inventory that needs to be cleared. Any raw materials in the pipeline could be earmarked for new styles to be manufactured once we are out of the woods. Equally, it will be important to brief creative departments on very narrow and ideally "all weather" capsule collections.

It is likely that — no matter the efforts of the better-managed fashion and luxury brands to reduce the amount of inventory discounting — that we will have to live through the mother of all end-of-season clearances. This, I expect, will have the knock-on effect of leading brands to move another step away from wholesale distribution, and will accelerate the on-going demise of the channel. In parallel, the relative success of e-commerce and clienteling will likely result in a step-change in the growth of digital distribution.

All told, we expect fashion and luxury goods companies to emerge from hibernation leaner but very much alive — just like bears in the spring.

Luca Solca is head of luxury goods research at Bernstein.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

How to submit an Op-Ed: The Business of Fashion accepts opinion articles on a wide range of topics. The suggested length is 800 words, but submissions of any length will be considered. Submissions may be sent to contributors@businessoffashion.com. Please include ‘Op-Ed’ in the subject line. Given the volume of submissions we receive, we regret that we are unable to respond in the event that an article is not selected for publication.

Related Articles:

No Company Will Survive Coronavirus AloneOpens in new window ]

What China’s Economic Disruption Spells for the Global Fashion IndustryOpens in new window ]

A Guide to Protecting Your Business During CoronavirusOpens in new window ]

In This Article

© 2024 The Business of Fashion. All rights reserved. For more information read our Terms & Conditions

More from Luxury
How rapid change is reshaping the tradition-soaked luxury sector in Europe and beyond.

The Existential Threat to Independent Brands

This week, The Vampire’s Wife announced its closure and Dion Lee called in administrators, only days after Mara Hoffman said it was shutting down and Roksanda narrowly escaped administration. Many more may follow.


How Chopard Seizes the Red Carpet Spotlight in Cannes

The Swiss brand out-sparkles rivals with a strategy aimed at driving sales as well as image. This year the company dressed Greta Gerwig, Demi Moore and Bella Hadid as well as hosting clients to view (and purchase) its high jewellery range.


view more

Subscribe to the BoF Daily Digest

The essential daily round-up of fashion news, analysis, and breaking news alerts.

The Business of Fashion

Agenda-setting intelligence, analysis and advice for the global fashion community.
CONNECT WITH US ON
© 2024 The Business of Fashion. All rights reserved. For more information read our Terms & Conditions, Privacy Policy, Cookie Policy and Accessibility Statement.