- Several luxury retailers have posted earnings in recent weeks
- Fashion houses have invested in multi-brand platforms as they target online customers
In early March last year, Louis Vuitton closed Paris Fashion Week with a dramatic show at the Louvre museum. Flanked by photographers and members of the sartorial press, models sashayed down the catwalk to the dulcet tones of 200 backing singers. Each chorister was clad in historical costumes from different centuries. “I wanted to imagine what could happen if the past could look at us,” creative director Nicolas Ghesquière explained.
Yet few then could imagine the scale of the crisis that would develop in the ensuing months. At the time of Louis Vuitton’s event, roughly 91,000 cases of Covid-19 had been confirmed worldwide. Since then, a further 100m people have been infected, translating into almost 2.5m deaths. In turn, the coronavirus outbreak has devastated swathes of the global economy, shutting stores and grounding flights via repeated rounds of lockdown restrictions.
Along with travel and hospitality, luxury retail was one of the sectors worst hit in the early stages of the pandemic – having thrived on tourism and, in particular, wealthy Chinese shoppers jetting to Europe’s capital cities. Covid-19 precipitated a significant drop in sales activity, wiping €65bn (£56bn) or 23 per cent off the value of the core luxury goods market during 2020, a report from management consulting firm Bain & Company found. This represented the industry’s first contraction in over a decade.
Changing market dynamics
The new year has brought fresh chaos in the form of virus mutations and surging case numbers. While several countries are now debuting effective Covid-19 jabs, with the UK alone vaccinating almost 18m people already, uncertainty prevails. For high-end couturiers, that has meant adapting to the reality of a very different trading environment.
“The turmoil of Covid-19 has been a catalyst for change for the luxury industry,” Bain’s study observed. The pandemic has accelerated pre-existing trends – namely the rise of China as a high-growth target market for fashion houses and an intensifying focus on digital sales as the shops of Bond Street and Fifth Avenue stand empty.
Lending weight to those priorities, mainland China was the only region to enjoy an uptick in luxury sales last year – posting growth of 45 per cent, Bain found. Meanwhile, online sales constituted €49bn of global luxury revenues in 2020, up almost a half compared with 2019. The proportion of sales made online nearly doubled to 23 per cent and Bain believes that digital will become the main channel for luxury purchases by 2025.
Trends evident in quarterly filings
The latest flurry of earnings releases quantified the blow dealt to the luxury sector by Covid-19, but also the shifting currents that have benefited some companies more than others.
Louis Vuitton’s parent company LVMH (FR:MC), Swiss group Richemont (SWX:CFR) and leather goods group Hermés (FR:RMS) offered signs of improvement in their recent filings. Admittedly, LVMH, which also owns brands such as Christian Dior, posted a 17 per cent decline in full-year sales to €44.7bn when it reported in late January. Yet it pointed to resilience in challenging circumstances, with organic revenues slipping just 3 per cent in the final quarter as trading picked up. The geographical path of the virus meant that China recorded a strong sales recovery starting in April.
At the same time, LVMH enjoyed a “sharp acceleration in online sales”. Fuelling shareholder confidence, management proposed a dividend of €6 a share, up from last April’s reduced €4.80 payout.
Richemont also cited robust sales in the Asia-Pacific region for its third quarter ending December – up more than a fifth to €1.7bn. The group, whose portfolio ranges from clothing label Chloé to jewellery brand Cartier, posted overall revenue growth of 1 per cent to €4.2bn. Like LVMH, it highlighted a “double-digit increase in online retail sales”.
Meanwhile, Hermés’ annual figures topped analysts’ estimates on 19 February, with fourth-quarter sales rising 16 per cent to €2.1bn – higher than a consensus analyst projection of €2bn. Echoing its peers, the group pointed to a strong rise in digital sales as well as a loyal local customer base.
Shares in all three companies slipped as Covid-19 took hold last spring, but investors have since reclaimed their handbags and gladrags. The market values of LVMH and Hermés are up more than a third over the past 12 months, while Richemont is up by around a quarter. Notably, Hermés, LVMH and Richemont are all family-led companies, a trait that has been linked in the past to coping well in times of market stress.
Shares in London-quoted Burberry (BRBY) are also sitting prettier than they were a year ago, up a tenth. The group has actively reduced sales of marked-down items to protect its margins, prompting a 9 per cent decline in like-for-like store sales. Yet, echoing the trends cited by other companies, digital full-price sales rose more than a half, with mainland China in triple digits.
Meanwhile, Kering (FR:KER) missed consensus expectations last week, raising questions about the path ahead for its top brand Gucci, as it posted a like-for-like fourth-quarter sales decline of 4.8 per cent to €3.9bn. Still, bosses proposed an €8 a share dividend. Like rivals, the group cited a “further sharp acceleration” online, up more than two-thirds during 2020. Moreover, it said it would ramp up online and offline Gucci events in China in 2021.
Investing in China and online platforms
A redoubling of efforts to expand in China and lift e-commerce sales has played out in the investment activity of the world’s biggest luxury companies. Indeed, in 2018, long before the outbreak of Covid-19, Richemont took full control of Yoox Net-a-Porter – a multi-label website allowing customers to shop for several designers in one place.
That move has since been mirrored by other cash injections into the e-tailer space. Last November, Richemont partnered with Chinese tech giant Alibaba (HKG:9988) to acquire a $1.1bn (£0.78bn) stake in Net-a-Porter rival Farfetch (US:FTCH) and its Chinese subsidiary. At the same time, Artemis, the investment company of Kering boss François-Henri Pinault, said it would lift its existing stake in Farfetch by $50m.
Meanwhile, MyTheresa (MYTE) – a German luxury brand aggregator – raised $407m in an IPO in New York last month. Both it and Farfetch will report quarterly figures on 25 February.
As ever, where digital transformation goes, US big tech is not far behind. Amazon (US:AMZN) joined the club in September with its new Amazon Luxury Stores offering. It remains to be seen whether one multi-brand platform will win out – but in an increasingly digital world, luxury houses must balance the desire to maintain premium status with the need to shift stock.