In the first nine months of 2020, the luxury industry worldwide lost €13 billion, its revenue down 31% from 2019. This decline hit businesses unevenly. For example, 40% of companies recorded a slump in sales of more than 35%. In the luxury personal goods sector, the decline in demand ranged between 20% and 25%. Now that the recovery has started, the very high-end segment is destined to make up for lost ground more vigorously and quickly than the premium segment.The study’s author, Luca Bettale, a partner at Long Term Partners, the Italian office of strategic consultancy firm OC&C, pointed out that the recovery is only partial, with European and Japanese markets still far from their pre-pandemic levels, and tourism flows still weak. Meanwhile, new critical factors are coming to light and piling uncertainty on uncertainty, such as soaring energy and commodity prices. Added to these are the main underlying trends that have accelerated during the pandemic: the boom in localised purchasing; the rising influence of the younger generations, whose fashion tastes are geared towards a more comfortable style at the expense of formal wear; the ever-increasing demand for customised products and services; the rise in digital sales, whose share of fashion and luxury labels’ revenue has grown from 5% to 20%; sustainability, now a prerequisite in most luxury purchases; and finally, the importance of technology.

“With Covid-19, market players have become aware of how vulnerable their business model is to demand discontinuity. They must also take into account new parameters, such as the growing presence in every market of a very strong focus on ecological themes, increasingly a determinant of luxury goods purchases, especially for young people. The latter demand circularity, and are drawn to the brands that offer it,” said Bettale.In this context, the luxury industry needs to adopt a faster decision-making process, and do so urgently. Above all, it needs to revise its operational model, starting with its internal organisation, the relationship with suppliers and with logistics flows, both upstream and downstream. The goal is to better protect companies from risk situations, for example by not stockpiling products in warehouses and shops early in the season, but by holding them in a central location from which they can be distributed as needed. According to Bettale, labels must incorporate two new fundamental elements into their business model: the value of time, which has become much more important, and sustainability. 

Optimising the number of suppliers

Bettale believes that such a radical restructuring will lead labels to optimise their supplier portfolio, identifying deficiencies in their supply chain and ways of addressing them. “Companies are evaluating changes to their suppliers, selecting the most responsive ones and those capable of adapting to the constraints of sustainable production. A very strong selection process is under way, and there will inevitably be winners and losers. On this, Italy is in pole position, and must stay there. The relationship with suppliers will therefore become much tighter, and labels will begin sharing with them initiatives linked to sustainability and social responsibility,” he added.

“Technology and large-scale operations are essential to kickstart this kind of overhaul. This means that technology must assume a central role in the whole production process, and that a strong connection must be forged between all stakeholders. Major investment is needed, as well as a large-scale approach, which can be deployed horizontally, for example with regards to the manufacturing of the same type of product, or vertically, by offering a full service,” said Bettale.

Vision and flexibility

In practical terms, this new vision means that suppliers need to provide an endless stream of creative solutions, and have the ability to develop prototypes quickly, and also to be able to continually give new ideas to labels that are in high demand. Suppliers must plan and manage demand by producing smaller economic batches, to be delivered in more frequent instalments. Delivery should no longer be considered a deadline, but a convergence point.Introducing flexibility throughout the process by adopting these new manufacturing models also means sharing costs with clients. Similarly, suppliers will have to share objectives and costs with labels in terms of multi-year investments for sustainable development. This evolution will push the sector towards greater aggregation. This will translate, on the one hand, into greater verticalisation, with more and more labels and luxury groups buying up their suppliers and, on the other, by consolidation operations engineered by investment funds. “In summary, [the industry] needs to rely on proximity production. [Sourcing from] China, Vietnam, Bangladesh and India is out, in favour of European suppliers and more sourcing from Turkey. The industry needs to focus on higher-efficiency models in order to establish a more flexible relationship with more responsive suppliers, while still paying a great deal of attention to the environment,” concluded Bettale.