02 April 2020
Swetha Ramachandran discusses the psychological triggers behind consumer demand in face of a crisis.
No sector has been immune to Covid-19. Luxury, in particular, is liable to be affected due to its reliance on the crucial Chinese consumer; the cohort currently makes up 35% of industry demand and drives over 80% of growth in recent years. That said, we believe Covid-19 will be more of a short-term demand disruption in China, amid widespread store closures and restrictions on population mobility. The underlying consumer demand in China remains healthy, however, indicating that consumers would buy if only they were permitted to go to the store.
Case in point, L’Oreal reported that its online sales had accelerated significantly in China in February. Similarly, Nike has seen peak demand for its online shopping offering. With lockdown measures slowly reversing in China, we can anticipate a surge of interest in domestic brick-and-mortar shopping as consumers are released from their homes. As Chinese tourism abroad is likely to fall significantly in 2020, there will likely be a repatriation of spend to the mainland.
We believe this phenomenon is similar to the ‘revenge spending’ (a phrase originally coined to describe the first wave of Chinese luxury spending in the 90s as the country emerged from decades of Cultural Revolution-led insularity and poverty) seen in Japan after the 2011 Tohoku earthquake and tsunami In the face of uncertainty, people chose to live in the moment and spend freely on desirable items. Covid-19 is a unique disaster in that it is forcing healthy individuals to remain indoors, resulting in a pent-up desire to consume. When people are able to live their lives again, we may see a surge in luxury spending as celebratory purchases are made.
We have begun to receive consistent indications from companies that China is recovering, lending credibility to our view that China will be FIFO (first in, first out) from the crisis. The trend we are seeing from these early indications is that brands with pre-existing strong momentum are the ones able to navigate this crisis most deftly. In some cases, we believe they can emerge on the other side even stronger than before.
While we have no edge on predicting the trajectory of the Covid-19 outbreak, we do anticipate that for a sustained equity market recovery, we will need to see a peak in new infections globally. Following the peak, we would hope to see steps taken towards the resumption of normal life, in addition to further policy responses to limit the economic fallout from a public health crisis. From a luxury perspective, we will continue to monitor the Chinese recovery in order to develop a base case of consumer appetite for revenge spending.
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