Longer-life luxury, casual wear and wellness in vogue
As economies begin to normalise, we expect to see a meaningful shift in consumer behaviour. Worried about recession and job uncertainty, consumers are likely to save more and spend less. Where they do shop for luxury items, they are likely to opt for established brands and classic styles that have been ethically sourced. Meanwhile, millennials, who have driven growth in luxury spending over the past few years, may be less resilient than older customers, while the trend of moving online is - as everywhere - being accelerated by the crisis.
In response to this changing consumer behaviour, fashion house Gucci recently said that its collections would have a longer life, essentially “seasonless”, as it slashed the number of fashion shows it holds each year from five to two. Meanwhile, casual wear has been boosted due to working from home and is likely to remain strong. Demand for health and wellness products, which has enjoyed a surge in the past few months, is also expected to grow.
In retail, while there has been a pick-up in demand, there are still questions around the pace of recovery. There are broader concerns around the implications of the shift to online and appetite for fashion in a socially distanced world. Inventory overhang and the expected large scale discounting will also act as headwinds for the sector in the short to medium term.
Luxury leaders may grab market share, but many retailers will struggle
Over the past 12 months, luxury has outperformed the broader sector, driven by resilient demand from China. Despite this and the very uncertain consumer outlook, we are still positive on luxury. Companies in the space typically have strong balance sheets, high margins and a better inventory position due to more flexible supply chains. The leaders in the sector have used this outperformance to further strengthen their positions by putting more emphasis into sustainability of their supply chains and operations. And this plays nicely into what consumers want today - durable, sustainable products that also have resale value. We continue to favour some of these more established brands that have proved most resilient and are recovering quickly.
For retail, while short-term data has surprised to the upside, the long-term outlook is extremely challenging given structural questions around retailers’ business models in a post-Covid world, and the threat of a second wave. Recovery is coming through reasonably quickly at present but it is clear that in the second quarter the companies will report steep sales declines and discounting will have negative impact on profitability.