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The BoF Podcast: Luca Solca on ‘The Worst Year in the History of Modern Luxury’

BoF’s Imran Amed and the Bernstein analyst discuss what the sector should expect as coronavirus threatens sales and supply chains.

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LONDON, United Kingdom — As a growing list of brands temporarily close stores across the US and Europe and global supply chains hang in the balance due to the spread of Covid-19, the fashion industry is facing an unprecedented degree of uncertainty.

In this special edition of the BoF Podcast, luxury expert and BoF contributor Luca Solca provides a much-needed update on what luxury players can expect in the months (and years) ahead.

“We’ve never seen anything like this luckily, at least not in our lifetime,” the Geneva-based analyst told BoF Founder and Editor-in-Chief Imran Amed. The pandemic is a perfect storm for luxury: hot on the heels of a devastating quarter in mainland China, brands are battling store closures across Italy, France the US and UK, all while eying upcoming sales declines in the Middle East. “It’s quite clear that the first half of this year is going to be the worst first half in the history of the luxury goods industry, and by some margin.”

One of Solca’s previously outlined scenarios — a “gap year” for luxury, which would result in a “very material” impact on 2020 performance — is redundant now that Covid-19 has developed beyond China. As of March 17, there were more reported infections outside mainland China than within the country.

While Chinese consumers are slowly repatriating stores — displaying their trademark resilience as the world’s most critical demographic for luxury goods — brands will have to adapt quickly as a high-end manufacturing freeze in the mainland and Italy quickly pivots into a demand crisis. “I expect that the fact that the top line is so sharply down mitigates sourcing and logistics challenges,” Solca said.

The pandemic’s duration in western countries is also contentious and will have an outsized impact on recovery. Following Beijing’s strict nation-wide policies, European governments’ “compromised” lockdowns are more lenient and allow for citizens to go to and from work to minimise financial fallout. “We’ll see whether there’s a price to pay for that,” said Solca. “If it’ll take more time to curb the epidemic spread... the expectation is that the lockdown in the west will last approximately two months.”

Whether a vaccine is found will determine luxury’s path to recovery. In that case, the consumer response will mirror a euphoric “post-war situation,” said Solca. If health organisations cannot vanquish the threat of Covid-19 — as is the case in China — “the shape of recovery will be more subdued.”

As the lockdown continues, prospects are looking bleak. Take Burberry, which on March 19 reported that it has already seen sales drop 40 to 50 percent over the last six weeks. The group expects the decline to worsen to between 70 and 80 percent in the final period of the month, and its warning serves as a stark indicator for other players.

“We expect both quarters to be faced with a 25-to-30 percent headwind, but if the lockdown lasts longer, the decline is going to be sharper and Burberry will be reporting, like everyone else, a very difficult set of numbers.”

Some luxury players are faring better than others. Prada — in the midst of a turnaround as it shifts its focus to digital channels, upgrading its merchandising strategy and an image boost with the appointment of Raf Simons a co-creative director — on Wednesday reported a 2.7 percent rise in full-year sales, though it too warned of a negative impact from the outbreak. "Covid-19 puts a pause on [turnaround efforts], but I don't necessarily think this will [derail] the progress Prada was making," said Solca.

Speaking of progress, the outbreak’s obliteration of brick-and-mortar sales will accelerate a pre-existing distribution shift to digital channels. The pivot will provide a critical opportunity for high-end players, which will increasingly drive traffic within mono-brand e-commerce — a channel that, unlike wholesale, protects brand equity from the “contagion of deep discounting” that usually follows financial crises.

This bodes well for the likes of Louis Vuitton, Hermès and Gucci, which have built strong mono-brand foundations (notoriously e-commerce-adverse Chanel however, will need to catch up). And luxury marketplace platform Farfetch, which operates through multi-brand boutiques now dealing with order cancellations and other inventory-related issues, will gain from an abundance of lower-priced stock and surging e-commerce usage.

Meanwhile, Prada is among a cohort of luxury horses that stand to benefit as consumers seek out quieter, minimal luxury styles and the current maximalist era draws to a close — Solca and Amed tapped Bottega Veneta, Hermès and Loro Piana as other frontrunners in the quiet luxury redux.

Luxury houses, facing a post-coronavirus society, will need to adapt their designs and communications to be in step with a post-pandemic consumer: not only by making sleeker styles but also by interacting with social causes in meaningful ways. “Once we’re out of this nightmare we’ll have to deal with the aftermath,” Solca said. “When we think of the thousands and tens of thousands of casualties, we’ll be in a different zeitgeist.”

Luca Solca is an investment research analyst employed by Sanford C. Bernstein Limited. Sanford C. Bernstein publishes research for institutional investors, and is authorised and regulated by the UK a Financial Conduct Authority. Please visit www.bernsteinresearch.com for more information. Mr Solca is participating in this interview in a personal capacity.

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