Coronavirus spells big trouble for luxury goods market, say Bain and BCG

31 March 2020 3 min. read

Alongside the aviation industry and many segments of the food & beverage and entertainment sectors, the global fashion and luxury goods industry is facing an extreme threat from the coronavirus pandemic; the sector predicted to contract by around one third this year.

With half the world’s population currently confined to the house, looking fashionable or even just presentable probably isn’t high up on the list of concerns. More broadly though, a number of the world’s leading strategy and management consulting firms have been sounding the warning for the global luxury goods industry, with the coronavirus fall-out expected to cost the sector up to $120 billion in revenues, or more than one third of its $350 billion worth as assessed by BCG.

“There is no sugar coating it,” states Javier Seara, Boston Consulting Group’s global leader for Fashion & Luxury. “Living through the COVID-19 pandemic is going to challenge fashion and luxury brands to the extreme.” With China – previously predicted to account for half of the global luxury goods market in just five years from now – the first to be hit by the outbreak, BCG had already revised down its annual forecast by more than $40 billion. But that was six weeks ago.

Sales will hit botton in Q2, Then begin to bounce back

Now, with Italy, another pivotal fashion and luxury centre, among the countries next to succumb to the pandemic (and with the rest of the world looking increasingly likely to follow), BCG has updated its initial gloomy forecast to predict doomsday sales declines for luxury goods brands of between $85 and $120 billion this year. When taken together, the predicted impact for the fashion and luxury goods sector as a whole are in the region of $450 and $600 billion in losses.

Analysis shows the extent that global luxury brands rely on the Asian/Asia Pacific market. LVMH (Moët Hennessy-Louis Vuitton, the world’s leading luxury brand), for example last year derived 37% of its ~€54 billion in revenues from Asia. Other big brands are exposed to the same or greater degree, such as Bottega Veneta with 53% of its revenues coming from in the region, along with Hermès (49%), Gucci (46%), Burberry (41%), Ferragamo (38%) and Versace (36%).

Any luxury brands turning to alternative consulting firms in the hope of some brighter forecasts are in for the same bad news. BCG’s big-league competitor Bain & Company has suggested a potential year-on-year fall of up to 35 percent for luxury sales, with a more moderate model pegging the decline at between 22 and 25 percent – a loss of around $66 billion to $75 billion according to its assessment framework. But there may be some light at the end of the tunnel.

2020 scenario for quaterly evolution of global retail-equivalent sales

According to Bain, the Chinese market already appears to be on its way to recovery, with consumers returning faster than expected to the luxury stores that have now reopened. Broadly, the firm expects that the Asian region bar Japan will bounce back more quickly than, with slower recoveries expected Japan, Europe and the Americas – markets which will feel the extra pinch from an expected decline in Chinese tourists. This is roughly the assessment from BCG too.

Based in part on the country’s solid pre-coronavirus economy, and with it having by the looks of it already passed the COVID-19 crisis-point, BCG’s analysis points to players in China clawing back their losses in the back half of the year, such that the overall market may only end up down by around only 5 to 10 percent on 2019 numbers. This will unlikely be the case in other regions, with Seara concluding; “Many companies in the industry will default in the next 12 weeks.”