The Rise and Fall of the Global Luxury Goods Market

Global demand for personal luxury goods has been steadily increasing for decades, resulting in an industry worth $308 billion in 2019.

However, the insatiable desire for consumers to own nice things was suddenly interrupted by the coming of COVID-19, and experts are predicting a brutal contraction of up to one-third of the current luxury good market size this year.

Will the industry bounce back? Or will it return as something noticeably different?

A Once Promising Trajectory

The global luxury goods market—which includes beauty, apparel, and accessories—has compounded at a 6% pace since the 1990s.

Recent years of growth in the personal luxury goods market can be mostly attributed to Chinese consumers. This geographic market accounted for 90% of total sales growth in 2019, followed by the Europe and the Americas.

Analysts suggest that China’s younger luxury goods consumers in particular have significant spending power, with an average spend of $6,000 (¥41,000) per person in pre-COVID times.

An Industry Now in Distress

The lethal combination of reduced foot traffic and decreased consumer spending in the first quarter of 2020 has brought the retail industry to its knees.

In fact, more than 80% of fashion and luxury players will experience financial distress as a result of extended store closures.

With iconic luxury retailers such as Neiman Marcus filing for bankruptcy, the pressure on the luxury industry is clear. It should be noted however, that companies who were experiencing distress before the COVID-19 outbreak will be the hardest hit.

Predicting the Collapse

In a recent report, Bain & Company estimated a 25% to 30% global luxury market contraction for the first quarter of 2020 based on several economic variables. They have also modeled three scenarios to predict the performance for the remainder of 2020.

• Optimistic scenario: A limited market contraction of 15% to 18%, assuming increased consumer demand for the second and third quarter of the year, roughly equating to a sales decline of $46 billion to $56 billion.
• Intermediate scenario: A moderate market contraction of between 22% and 25%, or $68 to $77 billion.
• Worst-case scenario: A steep contraction of between 30% and 35%, equating to $92 billion to $108 billion. This assumes a longer period of sales decline.

Although there are signs of recovery in China, the industry is not expected to fully return to 2019 levels until 2022 at the earliest. By that stage, the industry could have transformed entirely.

Changing Consumer Mindsets

Since the beginning of the pandemic, one-quarter of of consumers have delayed purchasing luxury items. In fact, a portion of those who have delayed purchasing luxury goods are now considering entirely new avenues, such as seeking out cheaper alternatives.

However, most people surveyed claim that they will postpone buying luxury items until they can get a better deal on price.

This frugal mindset could spark an interesting behavioral shift, and set the stage for a new category to emerge from the ashes—the second-hand luxury market.

Numerous sources claim that pre-owned luxury could in fact overtake the traditional luxury market, and the pandemic economy could very well be a tipping point.

The Future of Luxury

Medium-term market growth could be driven by a number of factors, from a global growing middle class and their demand for luxury products, as well as retailers’ sudden shift to e-commerce.

While analysts can only rely on predictions to determine the future of personal luxury, it is clear that the industry is at a crossroads.

In 2019, nearly 70% of U.S. GDP was driven by personal consumption.

However, in the first quarter of 2020, the COVID-19 pandemic has initiated a transformation of consumer spending trends as we know them.

Consumer Spending in Charts

By leveraging new data from analytics platform 1010Data, today’s infographic dives into the credit and debit card spending of five million U.S. consumers over the past few months.

Let’s see how their spending habits have evolved over that short timeframe:

The above data on consumer spending, which comes from 1010Data and powered by AI platform Exabel, is broken into 18 different categories:

• General Merchandise & Grocery: Big Box, Pharmacy, Wholesale Club, Grocery
• Retail: Apparel, Office Supplies, Pet Supplies
• Restaurant: Casual dining, Fast casual, Fast food, Fine dining
• Food Delivery: Food delivery, Grocery Delivery, Meal/Snack kit
• Travel: Airline, Car rental, Cruise, Hotel

It’s no surprise that COVID-19 has consumers cutting back on most of their purchases, but that doesn’t mean that specific categories don’t benefit from changes in consumer habits.

Consumer Spending Changes By Category

The onset of changing consumer behavior can be observed from February 25, 2020, when compared year-over-year (YoY).

As of May 12, 2020, combined spending in all categories dropped by almost 30% YoY. Here’s how that shakes out across the different categories, across two months.

General Merchandise & Grocery

This segment saw a sharp spike in initial spending, as Americans scrambled to stockpile on non-perishable food, hand sanitizer, and toilet paper from Big Box stores like Walmart, or Wholesale Clubs like Costco.

In particular, spending on groceries reached a YoY increase of 97.1% on March 18, 2020. However, these sudden panic-buying urges leveled out by the start of April.

Pharmaceutical purchases dropped the most in this segment, possibly as individuals cut back on their healthcare expenditures during this time. In fact, in an April 2020 McKinsey survey of physicians, 80% reported a decline in patient volumes.

Retail

With less foot traffic in malls and entire stores forced to close, sales of apparel plummeted both in physical locations and over e-commerce platforms.

Interestingly, sales of office supplies rose as many pivoted to working from home. Many parents also likely required more of these resources to home-school their children.

Restaurant

The food and beverage industry has been hard-hit by COVID-19. While many businesses turned to delivery services to stay afloat, those in fine dining were less able to rely on such a shift, and spiraled by 88.2% by May 5, 2020, year-over-year.

Applebees or Olive Garden exemplify casual dining, while Panera or Chipotle characterize fast casual.

Food Delivery

Meanwhile, many consumers also shifted from eating out to home cooking. As a result, grocery delivery services jumped by over five-fold—with consumers spending a whopping 558.4% more at its April 19, 2020 peak compared to last year.

Food delivery services are also in high demand, with Doordash seeing the highest growth in U.S. users than any other food delivery app in April.

Travel

While all travel categories experienced an immense decline, cruises suffered the worst blow by far, down by 87.0% in YoY spending since near the start of the pandemic.

Airlines have also come to a halt, nosediving by 91.4% in a 10-week span. In fact, governments worldwide have pooled together nearly $85 billion in an attempt to bail the industry out.

Hope on the Horizon?

Consumer spending offers a pulse of the economy’s health. These sharp drops in consumer spending fall in line with the steep decline in consumer confidence.

In fact, consumer confidence has eroded even more intensely than the stock market’s performance this quarter, as observed when the Index of Consumer Sentiment (ICS) is compared to the S&P 500 Index.

Many investors dumped their stocks as the coronavirus hit, but consumers tightened their purse strings even more. Yet, as the chart also shows, both the stock market and consumer sentiment are slowly but surely on the mend since April.

As the stay-at-home curtain cautiously begins to lift in the U.S., there may yet be hope for economic recovery on the horizon.