Key takeaways:
- Financial markets took a hit this week amid mounting worries of a global recession.
- The economic downturn of 2008-2009 shaved 9 per cent off the value of the luxury goods market, although it recovered quickly.
- Brands are better prepared for a recession than they were a decade ago, thanks to better inventory controls and less dependence on third-party retailers.
It’s been a little over a decade since the last global economic downturn, and markets are seriously spooked into thinking another may be on its way. Global indexes took a hit on Wednesday after new data revealed that Germany’s economic output declined 0.1 per cent between April and June and factory output in China grew at its slowest rate in 17 years. Wary investors rushed to buy safe government bonds, sending the US 30-year bond yield below 2 per cent for the first time.
When the last recession hit, Burt Tansky, Neiman Marcus’s president at the time, was confident that the impact would be minimal. “Remember, when our customer tightens their belt, it’s generally ostrich or alligator,” he said at a conference in April 2008.
This confidence was ultimately misplaced. Although it held up better than many other sectors, the last global recession lopped 9 per cent off the size of the personal luxury goods market, per Bain & Co.
High-end department stores had a particularly bad time. Sales nosedived 25 per cent in 2009, according to Bain figures, leading to early markdowns of 70 per cent and an overabundance of stock. A new crop of “flash sale” retailers, such as Gilt, thrived off the excess inventory.
Heritage luxury brands fared better than most. LVMH revenues flatlined, while Richemont’s increased by 2.4 per cent. PPR, since rebranded as Kering, saw revenue decline 5.6 per cent, but Gucci sales were strong.
Recovery from the recession was rapid, thanks to the huge increase in Chinese consumer spending in the years following. By 2013, Asia-Pacific had overtaken Europe as the largest market for luxury goods.
While sales recovered quickly, the downturn’s impact on luxury fashion has been long-lasting. Designs became less ostentatious and more minimalist. More democratic styles, like streetwear, became popular. Shoppers took discounts for granted, making it difficult for brands like Coach and Michael Kors to sell at full price.
The luxury industry is better prepared for the next recession. Brands are less dependent on wholesale than they were a decade ago, and the rise of e-commerce has led to a more direct relationship with consumers and more control over their stock. Consumer confidence in China, luxury’s fastest-growing market, remains high despite the US-China trade war and a decline in currency value.
Sarah Willersdorf, managing director and partner at the Boston Consulting Group, says the companies that performed best during the last downturn focused on long-term strategy.
“Recessions damage consumer confidence, can damage retailers and suffocate brands who often struggle to make payroll and cover working capital,” she says. “However, it is important to realise that there can also be substantial opportunities. Brands and retailers that survive a recession may emerge with a more engaged and loyal set of customers, fewer competitors, and additional assets and opportunities.”
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