Nov 20, 2020

Bain: Luxury Sales See Sharpest Fall Since 2009; Plunge 23% to €217 billion

After being heavily impacted by the Covid-19 crisis in 2020, the core personal luxury goods market contracted for the first time since 2009, falling by 23% at current exchange rates to hit €217 billion, according to the findings of the Bain & Company Luxury Study.

The drop is the largest recorded since Bain & Co. has been tracking the industry. The overall luxury market – encompassing both luxury goods and experiences – shrunk at a similar pace and now is estimated at approximately €1 trillion.

It has been a year of profound global change in the way we live, the way we shop and what we value. Tourists have remained at home, changing how, when and why they purchase luxury products. Online shopping for luxury goods has soared, doubling its share of the market to 23% in 2020 from 12% in 2019. The turmoil of Covid-19 has been the catalyst for change for the luxury industry, which is on a path to recovery by 2022-2023. Consumer demand for action with purpose and social impact is growing and luxury brands are expected to demonstrate real and sustained commitment to diversity, inclusion and sustainability.

“We have all experienced a difficult year of rapid, unexpected changes and luxury has not emerged unscathed,” said Claudia D’Arpizio, a Bain & Company partner and lead author of the study. “While the industry has suffered from a pause in global travel and ongoing lockdowns, we believe it has the necessary resilience to manage through the crisis. We have faith in its ability to transform its operations and redefine its purpose to meet new customer demands and retain its relevance, especially for younger generations.”

Uncertainty will hover over the industry for some months to come. Following on the second quarter, which was the worst the sector has ever experienced, there were signs of recovery in the third quarter. The most likely outcome is a -10% year-over-year drop in the fourth quarter, which is heavily dependent on the future evolution of Covid-19 and the additional restrictions that national governments could put in place.

Scenarios for 2021 are varied and Bain forecasts growth that ranges from +10/12% to +17/19% depending on macroeconomic conditions, the evolution of Covid-19 and the speed of return to travel globally as well as the resilience and confidence of local customers.

The decline in revenue is taking a disproportionate toll on profitability – Bain expects operating profit to decline by 60% in 2020 vs. 2019 level (i.e. from an average of 21% margin to 12% margin). According to the study, in 2021 the market is expected to recover 50% of the profit loss of 2020 – still below 2019 levels. This is driven by the requirement to continue spending, and sometimes even accelerate investment, on most cost items (marketing, online channels, store costs) despite the drop in sales.

Bain expects the recovery to gather pace over the next three years, with the market returning to 2019 levels by the end of 2022/early 2023.

Mainland China has been the only region globally to end the year on a positive note, growing by 45% at current exchange rates to reach €44 billion. Local consumption has roared ahead across all channels, categories, generations and price points.

Europe however has borne the brunt of a collapse in global tourism. While local consumption remains, regional consumption fell by 36% at current exchange rates to €57 billion.

The Americas experienced less impact and the market fell by 27% at current exchange rates to €62 billion. In the US, department stores face an uncertain future and the map of luxury consumption has been redrawn to move away from city centres.

Japan has seen a polarised performance among brands with higher resilience of those deemed timeless and seen as long-term investments. The region shrunk by 24% at current exchange rates to €18 billion in 2020.

The rest of Asia also struggled, with Hong Kong and Macau among the worst performers globally. The region contracted by 35% at current exchange rates to reach €27 billion.

The impact in the Middle East was mitigated by shorter lockdowns and repatriation of spending previously made abroad, though with different nuances among countries within the region. In Australia, a slowdown from the wildfires was amplified by the halt of tourism. Overall, the rest of the world contracted by 21% at current exchange rates to €9 billion.

The regional shifts mark an acceleration of a rebalancing of where luxury purchases are made as tourists shift to buy in their home markets. The share of purchases made locally reached 80-85% this year and going forward we expect it to represent between 65-70% as domestic purchases regain relevance especially in China and the broader Asian region.

The changes brought by Covid-19 increased the presence of online in every aspect of life. In the luxury market, online sales made up €49 billion in 2020, up from €33 billion in 2019. The share of purchases made online nearly doubled from 12% in 2019 to 23% in 2020.

Online is set to become the leading channel for luxury purchases by 2025, fuelling the omnichannel transformation.

This dramatic increase comes at the expense of bricks-and-mortar. Bain expects no growth in the number of stores operated directly by brands in 2020 and possible decline in store networks in 2021. Brands will need to adjust their footprints to the new map of luxury buying, evolve the store role and its ergonomics, and maximize the customer experience. The wave of transformation will not leave the wholesale distribution untouched: perimeter contraction, polarized performance and entry of new players will lead luxury brands to increase their control on the channel.

All personal luxury goods categories have seen declines in 2020, with the exception of high jewellery and iconic entry priced items that have led the recovery. Jewellery saw sustained demand in Asia and benefited from online sales. In contrast, watches and apparel both declined by 30%.