The coronavirus is hitting us hard. Several parts of Europe have gone into quarantine and stocks are dropping heavy. While watching the news and seeing people plunder supermarkets, we thought about what Sir Winston Churchill once said: “never waste a good crisis”. As this wisdom is very relevant today, we are using this crisis as an opportunity to see what we can do to make the best out of the given situation.

Most of us tend to have similar reactions when we hear about the coronavirus. Companies tighten their belts vastly around their financial wastes and immediately start cutting into the budget wherever possible. Stockbrokers start sweating uncontrollably thinking about all the phonecalls they are going to face when their investors start hearing about the possible consequences the coronavirus brings. Trust in the economy and the solving of this situation goes downhill in a matter of mere seconds. While those reactions are understandable, we suggest going about the situation differently.

Don’t only cut costs 

As mentioned above its a logical reaction that companies want to reduce costs in hopes of coming out of this situation as well as possible. Yet the opposite will happen. According to Harvard Business Review, companies that go heavy on budget-saving have a 21% chance of not passing the competition by when the tides start turning. That means the ones that invest during a recession are coming out on top, right? Not always. Even the ones that just invest more than their rivals have only 5% more probability to do better than the competition.

So what do you have to do? The key lies in finding a balance between saving and investing. This is not simple nor is there a solution applicable to every situation. But, generally speaking, it is advised to simultaneously cut operational costs while investing more in R&D, marketing, assets, and machinery. This way you can start to develop new markets. It doesn’t suffice to cut a percentage of your workforce if you don’t work on lowering costs in other areas as well. An example of this is when Office Depot laid off several workers but didn’t work on reducing their operational costs. The result was that their sales went down from 19% to 8%. Staples, on the other hand, mostly closed underperforming facilities and invested instead in an upgrade of their workforce and R&D. This enabled them to introduce new high-end products that doubled their sales numbers.

Luxury surviving

Though there are exceptions to this, the luxury market in some cases is resilient in times of crisis. In 2011, the market value of the industry was reported to grow up to € 173 billion which was 13% more than in 2009 when the crisis was at its peak. 

Bain & Co attributed this to the fact that people switch from investing/saving their money into banks/stocks to buying luxury items and selling them when their value reaches a peak. In India, for example, the population invests in jewelry because of the sudden rise in prices of gold.

Another important thing to note is that people, in general, will sometimes continue to buy expensive luxury products. Between 2008 to 2009, Gucci had an increase in sales in both Europe and in the USA with 14.5%. In the same period, Louis Vuitton had an increase in sales in Europe while its sales remained stable overseas. Both brands did this while introducing even more expensive handbags on the market. 

Explanation

How is this possible? In the cases above the natural competitiveness between women contributes to them spending more on bags to intimidate their ‘competitors’ on a romantic level. Besides that, American women spend quite high numbers on their bags with prices easily exceeding $ 200. Another 10% of respondents even admits to spending over $ 400. This explains how some brands are still reasonably able to produce good numbers. Another reason is that in some cases, people who are planning on buying luxury goods are not held back by a bad economic climate. Generation Y is a good example of this because they place their views towards the brand above the functional, social, and financial values that are often factors when deciding to buy luxury items. 

Of course, this is not to say luxury will always thrive in recessions. Exceptions happen such as in 2016 when wealthy people didn’t buy as many luxury goods. This was due to the lower income which was amongst other things a result of the top tax rate that came into play as of 2013. 

Moving forward

Going into the future with the coronavirus, the luxury market won’t come out unharmed but it might do reasonably well. Vogue business e.g. claims that luxury brands aren’t as dependent on wholesalers as they used to be. This is thanks to the popularity of e-commerce despite only contributing 12% of sales. 

The upcoming luxury markets such, as China, will play a key role in how hard the industry will be hit. In 2018 the luxury market had a boost of 5% thanks to the growing popularity of luxury goods in China. Unfortunately, this trend won’t repeat itself today because of the blow the Chinese luxury market took. This will have painful consequences for the rest of the industry with numbers predicting losses in sales between € 30 to 40 billion.

This crisis is an opportunity to strengthen the customer experience and general customer loyalty. A good way to do this is by implementing customer loyalty and or retention campaigns. Attracting new customers is hard and more expensive, meaning you better try to keep the clients you have and strengthen those relations. Luxury brands need to personalize their customer experiences further where possible. This simple detail can be decisive when customers are contemplating shopping with you or with one of your competitors. Finally, brands need to see if their Added Luxury Value is clear. Often brands can not easily communicate this and as a result, will be hit harder than other luxury competitors.

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