While recovery in each region will depend on many factors and is unlikely to mirror any one case, we can look to crises of the recent past and the early recovery in China to draw conclusions about fashion retail after COVID-19.
Cutting losses and looking ahead
COVID-19’s is devastating for its indiscriminate societal and economic impact. Specifically in terms of fashion retail, the entire industry is affected, with the expected 25-35% decrease in global fashion and luxury sales in 2020.
But the bad news is already old news.
In the midst of all of this uncertainty, what we do know is that nothing lasts forever, not even the coronavirus crisis.
While recovery may seem further off than we’d like, at some point it will be time to get back to business as usual, though all signs point to the creation of a new normal in retail. So let’s be prepared.
A short history on post-crisis retail of the recent past
The COVID-19 crisis has both human health, social, and economic dimensions. In order to understand whether there are any lessons from the past that we can learn from, it’s helpful to study other crises of these types. How does the current crisis compare to them, and what might we expect from fashion retail after COVID-19?
Health crises of the recent past
SARS (SARS-CoV-1), MERS, COVID-19 (SARS-CoV-2), and even the common cold all come from a family of coronaviruses which can affect humans and/or animals. And, just like fashion, these illnesses tend to come in seasons, meaning that the current crisis is not a one off.
Severe Acute Respiratory Syndrome (SARS)
Emerging in 2002, the SARS epidemic caused economic growth in China to slow from 11.1% YoY in Q1 of 2003 to 9.1% for the next three months, and retail was one of the hardest hit industries: Sales growth slowed to 4.3% in May, 2003.
Non-daily necessities such as luxury, and durable goods like clothing, were more affected than other categories (e.g. food and beverages) in China during and following this outbreak. However, luxury as a whole remained less affected in other countries as the virus’s geographical reach was far less extended and China played a smaller role both in global luxury sales and production as it does now.
Post-SARS recovery was quick in China, whose strong economy in the early 2000s helped ensure a return to growth when the virus was contained. This was undoubtedly aided by the fact that SARS was much less widespread than the current COVID-19 pandemic. Activity began to pick up again just one to two months after infection rates started dropping.
The apparel sector was especially quick to see a rebound during Q3 and Q4, due to pent-up demand, while other sectors like medicine or those prone to stockpiling (e.g. home hygiene products) saw large drops.
The SARS crisis had a strong impact on retail in that it prompted retailers, especially early-adopting new entrepreneurs, to embrace e-commerce. Since the SARS crisis took place in Asian markets, it may explain why this region has remained ahead of others in terms of their establishing patterns for faster control and recovery versus regions such as Europe or the US. In the same way, it has undoubtedly better prepared for future crises such as that which we are facing today.
Middle Eastern Respiratory Syndrome (MERS)
A similar pattern occurred after the MERS epidemic that affected South Korea in 2015. The recovery period coincided with the Mid-Autumn Festival, causing sales to grow sharply at first and then to stabilize shortly after.
Perhaps the lessons learned from MERS in South Korea also prepared it for future health crises such as COVID-19, where the response is seen to have been widely effective. In the future months, we will see how quickly retail and the overall economy will rebound.
Growth patterns for both SARS and MERS seem to indicate that countries with strong economies going into health crises may be likely to see a surge in retail spending once the viruses are contained, and that experience has led to quicker action.
A financial crisis: The Great Recession
The Great Recession was similar to COVID-19 in that it caused a tidal wave of economic consequences around the globe, though duration and impact varied by country, largely depending on levels of debt.
In luxury, high-end department store sales dropped by 25%, though heritage luxury brands performed relatively well, likely due to an increased focus on long-term strategy. Recovery was also quick, thanks to a jump in Chinese consumer spending.
Looking east for signs of recovery and next steps
As viral spread has gone westward, retailers are looking east for literal and figurative vital signs. A few weeks of foresight can help identify potential consequences as well as corrective measures in order to be prepared for a possibly large and fast pickup.
While the recovery in each region will depend on many factors (e.g. existing economy size and strength, severity of Covid-19 outbreak and governmental response, international industrial dependence, etc.) and is unlikely to mirror any one case, we can certainly learn from them and look for signs of optimism and how consumer behavior may change as a result.
The current situation in China
China is the world’s largest fashion and luxury market, though sales there are estimated to have hit bottom (-75 to -85%) in February, during one of the country’s peak buying seasons, with a slight, 3% increase in online sales.
As the infection rate of COVID-19 began to drop in March, the Chinese government started easing lockdown measures. Quickly thereafter, the positive impact on retail sales has became evident as shoppers have begun to reemerge.
The Chinese government and retailers have attempted to normalize activity to stimulate the economy through digital coupons, discounts, and even strategic alliances for creating cross-retail offers.
Similar to the period following the SARS epidemic which saw a lift in retail sales due to pent up spending, luxury has begun to see “revenge spending” as optimism begins to increase, especially for luxury with particularly strong brand recognition.
While it’s true that China is currently experiencing some setbacks as it is undergoing a second wave of localized lockdowns, general recovery seems to be closer than ever. And as the resumption of activity in China continues it will likely be gradual, meaning that social distancing will likely continue to be implemented (e.g. enforced temperature taking, mask wearing), perhaps further speeding up online sale recovery first.
Possible implications for other affected regions
Different recovery timelines
Different countries are weeks or even months behind China, depending on how quickly their governments took widespread action to quell the virus. In many ways, this also relates to the general resilience and size of their economies, and to other factors such as their reliance on tourism or international manufacturing. In terms of “shock geometry”, economic recovery will take on a V curve, moving into a U or an L, depending on these factors.
While COVID-19 has caused customer confidence to drop, in some regions it is still higher than it was at the start of the 2008 financial crisis.
While estimations being constantly adjusted, BCG estimates that overall fashion and luxury sales should be bottoming out in April and will start to climb again by December to 10-15% less than what they were last year. In Europe and the US, however, recovery will take longer as measures to control the spread of the virus were enacted later.
Different impacts on different fashion verticals
Before COVID-19, BCG estimated that certain fashion verticals, like luxury, resale companies, and discount brands, would be best suited to weather another recession while mid-market brands would suffer the most. During times of crisis, people tend to move toward extremes: some drawn to value references, while others choose luxury, especially devoted customers driven by emotional purchasing.
While this general rule is likely to be the case globally, luxury brands outside of China, however, may be likely to struggle more than they did post-2008. This is especially true for countries that have weaker or smaller economies than China and the US and that are dependent on tourism for a large part of luxury sales, such as Southern Europe (facing a potential drop of 85-95% in April and May). And as Bain points out, “there is no emerging cohort of luxury customers to tap”.
Brands and retailers that continue to invest in digital seem to be at an advantage as shoppers have had to turn to e-commerce. Nike has recently made a series of strong data and digital investments which the brand credits for the 36% growth in online sales in mainland China in February at the height of the crisis.Over the next several months, we will see whether these investments in digital transformation play out similarly in Europe and the US.
It’s worth noting that luxury is slightly behind when it comes to prioritizing digital strategies and e-commerce, though this is likely to change post-COVID-19. Frech conglomerate LVMH is an example of a luxury tech leader that is prioritizing digital strategies, often looking for ways for innovators like Nextail to use advanced technology to support their maisons.
What conclusions can we draw?
This COVID-19 health and economic crisis is unlike any other that we have seen in our lifetimes. It is expected to have a more devastating human and economic toll than those that have come previously, and recovery is likely to take longer than it did after SARS, MERs, and potentially the Great Recession. But it will certainly also leave its mark on fashion retail, accelerating changes that we already saw coming.
*How can working bottom-up, basing decisions on actual data, help? Stay tuned for our next post in which we explain how to take action in your fashion merchandising processes now, especially as we prepare for retail activity to pick up again soon.
As the COVID-19 situation continues to evolve, we will be sharing updates and recommendations for our community of fashion retailers. If you have questions or need assistance, please don’t hesitate to contact us at firstname.lastname@example.org.