1. What was the impact of Covid-19 on the luxury sector?

For almost two years, many of the usual triggers for high discretionary spending such as travel and social occasions were limited. With this in mind, one would expect the luxury sector to have suffered considerably. Yet the luxury sector endured the pandemic with less lasting damage than expected (Chart 1), with sales figures of luxury goods quickly rebounding to pre-pandemic levels.

Chart 1 - Total Returns of the luxury sector

Supported by low interest rates and government-issued stimulus packages, consumers reallocated their discretionary spending from services to goods, driving that rebound. For example: as the pandemic rebound continued, supported by strong sales in the US and Asia, LVMH recorded revenues of 64.2 billion euros in 2021, up 44% compared to 2020 and up 20% compared to 2019. The first half of 2022 has seen a number of new factors impact both luxury and the wider market including supply chain dislocations from the war in Ukraine and demand curbs from renewed Covid-19 lockdowns in China. However, strong US market growth is expected to counterbalance a fall in Asian demand in the first half of this year with a rebound expected to follow.

2. What about China and the luxury sector?

Despite global social and economic challenges, China’s luxury goods market finished 2021 with strong double-digit growth overall, with some brands exceeding a 70% increase. Given limited international travel options, Chinese consumers continued to shop mostly in the mainland (Chart 2), leading to a 48% increase in China’s domestic sales of personal luxury goods in 2020, and another 36% in 2021 totalling nearly RMB 471 billion, a near doubling in just 2 years.1 The lack of flights, however, was not the only reason for the geographical shopping shift: The narrowing of the price differential between Europe and Asia also contributed. Traditionally, some products have been far more expensive in Asia (up to 80%) due to pricing strategies of luxury brands, taxes, and logistics. This price gap has narrowed to around 30% since the pandemic started, leading to Chinese consumers spending more on luxury goods at home.

Chart 2 - Proportions of Chinese luxury goods spending

3. What is the outlook?

Despite the ongoing challenges of Covid-19 and the war in Ukraine, 2022 revenues are expected to surpass pre-pandemic levels. A recent study estimates sales to increase from EUR 283bn in 2021 to over EUR 300bn in 2022.2 Many luxury goods brands have also begun to take more ownership of their supply chains since access to materials as well as manufacturers is becoming more challenging and costly. This is a trend that is likely to continue along with brands investing in e-gaming partnerships as well as NFTs to attract the next wave of shoppers from Generation Z.

What Generation Z expects from luxury brands

• Born between 1996 and 2015, Generation Z is a third of the world’s population, and lives surrounded by digital tools which is why they are called "digital natives".
• 98% of Gen-Z’s own a smartphone, which they use for many of their purchases. Before buying goods, they consult on average three sources such as influencers’ recommendations or social media likes.
• Set to account for 20% of the global personal luxury goods market by 2025, gaining a share of Gen-Z spend is becoming a critical growth lever for the luxury sector. 1

With nine out of ten Gen-Z consumers believing that brands should detail their stance on environmental and social issues, many brands are now embracing the second-hand market to serve a growing number of customers who wish to buy from this product segment.3

1 Bain, A Year of Contrasts for China’s Growing Personal Luxury Market, p. 1.

2 Bain, A Year of Contrasts for China’s Growing Personal Luxury Market, p. 4.

3 McKinsey, The State of Fashion 2022, p. 45.