27 May 2020
Swetha Ramachandran and Vincent Latour believe luxury brands are uniquely positioned to make their Covid-19 response efforts a cornerstone of their growing commitment to sustainability. Consumer trust in and recall of these brands is being shaped, in real time, by whether the companies are viewed as doing the right thing by their employees, their suppliers and even society at large. Rarely have the interests of multiple stakeholders converged so evenly around the social obligations of brands. Luxury brands, therefore, need to shape their value proposition holistically in a post-Covid-19 world, as investors pay closer attention to the long-term correlation of environmental, social and governance (ESG) factors in action with shareholder value creation.
“Your brand is what other people say about you when you’ve left the room”.
Widely credited to Jeff Bezos, this definition feels especially pertinent at a time when many consumer brands have, in effect, been forced to leave the room – to shut down stores, cancel scheduled product launches and marketing programmes, and fundamentally rethink how they engage with their employees, suppliers and customers in this unprecedented climate. The chairman of the World Economic Forum recently wrote that “the Covid-19 crisis is a litmus test that shows who has been ‘swimming naked’ while endorsing stakeholder capitalism”.
The sizeable environmental footprint of the fashion industry has consistently received significant public attention, and the industry’s high concentration of family-controlled businesses has also put its governance in the spotlight. And yet, the social responsibility of luxury brands has been an afterthought – until now, that is. We were either confronted with brand-specific controversies, such as poorly received product design (Gucci, Prada) and advertising campaigns (Dolce & Gabbana), or PR-driven initiatives, like feel-good support for arts organisations and charities. In one fell swoop, Covid-19 has upended the traditional order and placed the social element of ESG in prime position, with growing scrutiny by consumers and investors alike on how brands are walking the talk with regards to employees, suppliers and their broader role in society.
Brands touch the daily lives of consumers and elicit reactions in ways that a semiconductor chip or a barrel of oil typically do not. Luxury brands, in particular, carry a “badge value” where consumers do not just buy products on the basis of function, but specifically because of the perception of shared aspirations and values between the consumer and the brand. Consumers, led by the rise of millennials and Gen Z, are increasingly expressing a clear preference for “purpose-led” brands, with a Havas study in 2019 showing that 77% of surveyed consumers prefer to purchase from brands that share their values. As Covid-19 proves reliably to be a dramatic accelerant for pre-existing consumer trends, more recent surveys are showing that consumers also expect brands to play their part in this crisis.
The recently published 2020 Edelman Trust Barometer, a survey of consumers across 12 countries, suggests more than half (55%) of those surveyed believe that brands and companies are responding to the crisis more quickly and effectively than the government. A third of consumers are already punishing brands for responding poorly to the crisis by no longer buying from them. As wide-ranging behavioural changes continue to be shaped by the current crisis, brands are meeting consumers by stepping up to their growing expectations. As early as March, the CEO of Nike recognised that “this is a moment in society where the private sector has a major role to play, and companies like Nike need to do our part”.
Despite being among the hardest hit sectors during the crisis, luxury brands have demonstrated a strong commitment to ensuring they meet their social obligations vis-à-vis their employees, suppliers, customers and local community.
With large scale shutdowns of luxury stores and mandated factory closures, many employees face the threat of losing their livelihoods. The large French luxury groups such as LVMH, L’Oréal, Hermès and Chanel have committed to keep all their staff employed and not to use government support while maintaining normal salary levels. Other companies, such as Puma and Moncler, are topping up state income support to make their employees “whole” from furloughing schemes.
Another interesting example of employee support is Ferrari, which, upon resuming production, announced it would offer free Covid-19 antibody testing to all employees and family members that want it. The company hopes, in time, to be able to extend its testing capability to the wider community in its home town of Maranello in order to be able to gauge the true spread of the disease, a feat that eludes even state-supported testing authorities.
While cash donations have been a common feat across most widely listed companies, luxury companies are uniquely positioned to directly support local communities through donations in-kind or through the production and/or donation of personal protective and medical equipment. Many of the cosmetics and alcohol companies, such as LVMH, L’Oréal, Estée Lauder and Pernod Ricard, have donated alcohol or alcohol-based hand sanitiser, or repurposed their factories to produce the product. Canada Goose factories in Canada are producing medical scrubs and patient gowns, while Ferrari is making respirator valves and fittings for protective masks at its Maranello plant in support of health workers treating Covid-19 patients. LVMH, Kering, Prada, Nike and Burberry are reconfiguring production lines to make protective personal equipment.
During this public health crisis, the sporting goods companies are playing a specialised role – Nike and adidas have made their running and training apps free for use to encourage people to stay active, while Lululemon continues to engage with its loyal community through online fitness classes.
Protecting supply chains
adidas notes that 85% of the company’s supplier relationships are those that have lasted for more than 10 years, and that the company has a “deep responsibility for the extended supply chain”. L’Oréal has committed to supporting over 70,000 salons around the world by extending working capital support while they remain closed for business.
Similarly, Puma is adjusting its production in co-ordination with suppliers, rather than unilaterally, to lighten financial stress through the system. These actions place the luxury and premium brands industry in direct contrast to less scrupulous “fast fashion” operators, who have cancelled orders at little to no notice, leaving suppliers (in Asia particularly) at risk of financial destitution.
This list is not meant to be exhaustive, and many other leading luxury brands have also actively contributed to the fight against this pandemic.
Fashion passes, reputation endures
There is often a tendency during a crisis to over-emphasise the lasting nature of the changes it causes, when all too often things revert to the status quo soon after. However, this crisis could genuinely be different in terms of lasting impact, as Covid-19 has brought to the boil underlying changes that were already simmering at the surface. Consumers, led by the charge of millennials and Gen Z, have been seeking sustainability-oriented leadership from brands for some time, while investors have increasingly been shifting assets towards funds investing in ESG-orientated companies. According to Global Sustainable Investment Alliance (GSIA), sustainable investing assets in the five major markets (Europe, US, Canada, Japan, Australian/New Zealand) stood at USD 30.7 trillion in 2018, with Europe representing almost half the investments at USD 14.1 trillion. Furthermore, estimates from Bank of America suggest that the upcoming intergenerational wealth transfer in Europe (the most advanced ESG investor market today), combined with the dominance of millennial investors by 2030, could lead to a total ownership shift of EUR 2.75 trillion of assets, boosting inflows to ESG-orientated funds.
We believe the luxury industry intrinsically lends itself well to sustainable consumption, with its ethos of “buy less, buy better”. The emergence of a more sustainably-minded shopper post-Covid-19 is likely to be supportive of brands with enduring, rather than disposable, appeal, which will further grow in their share of consumer mindshare and wallet.
The current crisis also offers evidence that the three planks E, S and G are intricately connected and should not be considered in isolation. Clearly, brands’ social commitments to their artisans and craftsmen – the core of luxury – are also related to their decision to extend seasons and product lifecycles, which, in turn, has a positive environmental impact. In addition, the governance structures often seen as problematic for the industry (family-controlled) may have helped these companies be more agile in their social response to the crisis, in particular when standing firm on employee support, at the expense of short-term shareholder interest.
Conclusion: move fast and make things
This is a pivotal moment in time, when the decisions made by luxury brands about what they stand for will shape their business models and potential future success. They will either benefit from higher customer trust and engagement, greater employee loyalty and more supply chain security in a world where just-in-time manufacturing looks set to be relegated to the past – or not. Luxury brands need to be vigilant for the potential for reputational damage that could be harder to rectify now than in “normal” times. Investors in luxury brands stand to benefit from swift actions taken by companies to commit to the “us” in ESG – the social dimension. These actions have served to highlight the sector’s intrinsic sustainability credentials at a time when multi-stakeholder interests are closely aligning. Indeed, the aftermath of this crisis could show us which brands have earned the right to re-enter the room, in order to hear what might be said of how they stepped up to play their part at this unprecedented time.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a security is not a recommendation to buy or sell that security.