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How Covid-19 Has Accelerated the Transformation in Luxury

Bain’s Claudia D’Arpizio and Federica Levato discuss the pandemic’s effect on the luxury market in 2020 and how this massive disruption is shaping the industry’s future.

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How Covid-19 Has Accelerated the Transformation in Luxury
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Most industries were hit hard by the Covid-19 pandemic in 2020, and luxury was no exception. Bain partners Claudia D’Arpizio and Federica Levato, leaders in the firm’s Consumer Products and Retail practices, describe scenarios for recovery in the coming years and outline the trends driving a transformation in the industry, including a growing emphasis on social impact and diversity, equity and inclusion.

Read a transcript of the conversation below:

CLAUDIA D'ARPIZIO: All sectors have experienced a difficult year of rapid unexpected changes. And luxury has not emerged untouched. While the industry has suffered from a pause in global traveling and ongoing lockdowns, we believe it has the necessary resilience to manage through the crisis. In 2020, we forecast this market to decline by 23%. But uncertainty will hover over this industry for some months to come. Following on the second quarter, which was the worst the sector has ever experienced, there were signals of recovery in the third quarter that stopped again by the second big wave of the virus in Europe.

FEDERICA LEVATO: Scenarios for 2021 are varied and with forecast growth that ranges from 10%-12% to 17%-19%, depending on macroeconomics, the evolution of Covid-19, and the speed of return to travel globally, as well as the resilience and confidence of local customers. In the midterm, we expect the recovery to gather pace over the next three years, with the market returning to 2019 levels by the end of 2022, beginning of 2023. But Covid-19, despite hitting the brakes on the market, has fast-forwarded important dynamics which are reshaping this industry.

D'ARPIZIO: First of all, this market is becoming more and more local. Historically, it was driven by tourist flows that are now being repatriated and will continue to do so in the future.

LEVATO: Consumers will be younger then. This year, Gen Z emerged through distinctive traits and habits, setting their relevance as true luxury customers. And together with millennials, they will drive up to 180% of the market growth to 2025.

D'APIZIOR: Online, luxury doubled its weight in the total market in 2020, being now 22% of total luxury consumption, a skyrocketing performance worth five years of growth, clearing the road to 2025 to become the first channel in the market.

LEVATO: Old bricks-and-mortar channels were dramatically hit in 2020, leading to a distribution ecosystem transformation. And, in particular, retail networks will need to be redesigned around the customers, role of the store, global and local footprint, experiential customer experience, and store ergonomics will need to be rethought.

D'ARPIZIO: The role of luxury brands is enlarging and is questioned, per se. They were relevant as a product, then as a producer of content, but now more and more as broadcasters and amplifiers of content and interactions that are relevant for the consumers.

LEVATO: In fact, important influencers of consumer trends define this market, asking for larger and more purposeful brands. In particular, urgency for social impact is growing, with younger generations increasingly valuing diversity, equity and inclusion when choosing to buy. In general, the role of luxury brands needs to expand from that of signifier and symbol to include being friend and inspiration while ensuring excellence in the basics.

D'ARPIZIO: So luxury brands face a year of tremendous shift. But we believe that the industry will come out from the crisis with more purpose and more dynamism than ever before. By 2030, this industry will be drastically transformed. We will not talk about luxury industry anymore, but of the market for insurgent cultural and creative excellence. In this new and large space, the winning brands will be those that built on their strengths while reimagining the future with an insurgent mindset. Luxury players will need to think boldly and rewrite the rules of the game.

Infographic

Pandemic Spurs a Transformation of the Luxury Market

With sales down significantly in 2020, luxury retailers are reinventing themselves to survive.

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