Topline: Luxury retailers have been hit by a double-whammy of falling demand from Chinese buyers, and lockdowns across major manufacturing regions in Italy that have now spread nationwide.
- Suppliers of textiles and leather goods told Reuters that demand had been slashed from the likes of Gucci, Prada and Salvatore Ferragamo.
- “We were producing 880 to 1,000 bags a month for Gucci. In February we made 450 and we have no orders for March,” one owner of a supplier to the Kering-owned luxury brand told Reuters.
- Italy has the largest cluster of Covid-19 cases outside China, and on Monday, a lockdown imposed on the worst hit regions and cities in the north, including financial and fashion capital Milan, was extended to the entire nation.
- The tail-end of fashion month was hit by mounting concerns about the spread of the virus in Europe, with some editors leaving Paris fashion week early, while Giorgio Armani’s fashion show was displayed to an empty room and streamed online.
- Like many other industries, the $320 billion luxury goods sector is wracked with uncertainty as to how long the effects of Covid-19 will last, with many retailers saying that they are monitoring the situation closely.
- “The outbreak of COVID-19 has already negatively impacted the luxury industry,” Fflur Roberts, head of Luxury at Euromonitor International, told Forbes. “Luxury companies such as Burberry, Tapestry and Capri, have already adjusted their sales forecasts for 2020 down.”
Tangent: Italy is the 5th largest market globally for personal luxury goods, with leather goods dominating sales, Roberts said. Meanwhile, in 2018, Chinese shoppers accounted for one-third of luxury goods purchases, according to Bain & Company.
Crucial comment: Honor Strachan, retail analyst at GlobalData, told Forbes that while brands might be insulated in the immediate term, if the public health crisis continues, it could have adverse effects on stock levels as far as the Autumn and festive seasons.
- Short term impact on supply chains: The immediate impact on Italy-dependent supply chains should be small, given long lead times and how much they rely on “continuity and core lines, which they will have a higher stock of.”
- Impact on brands: “Brands sourcing materials from Italy but manufacturing elsewhere will be exploring opportunities with new suppliers, but this is challenging given the quality control and reliance on trusted suppliers to maintain product standards – especially if brand credentials lean on Italian heritage and craftsmanship,” Strachan said.
- “However, we think brands should have built sufficient stock levels into their supply chain to offset short term disruptions.”
Which brands will feel the biggest impact? Some of the biggest Italian names of the moment. Strachan told Forbes: “Domestic brands will feel the biggest hit, given tourist appeal of purchasing Italian brands while visiting Italy, so Prada SPA, Giorgio Armani, Valentino and the Kering group which owns Italian heritage brands such as Gucci, Bottega Veneta & Pomellato will suffer weaker sales in H1 2020.
“LVMH is also exposed with brands such as Fendi & Pucci likely to experience weaker footfall.”
But if the epidemic can be contained by the end of the month, “travel and luxury shopping demands will rebound” and drive luxury sales for the rest of 2020, Roberts said.
What to watch for: Financial results from Italian luxury goods firms Prada and Salvatore Ferragamo later this month.
News peg: The spread of Covid-19 has raised questions about how supply chains—of companies from Apple to Tesla—can better insulate themselves against widespread disruption. Meanwhile, luxury executives are bracing for a decline of up to $40 billion in sales this year, Vogue Business reports.
In numbers: Italy’s economy is expected to shrink at least 0.3% this quarter, AP reports, as key industries—tourism, leisure, luxury—face weakened demand, while more people work from home. Several U.S. and European airlines have cancelled flights to Italy, which the lockdown of its entire 60 million-strong population includes a ban on non-essential travel within the country. Italy’s Prime Minister Giuseppe Conte earlier this mnt pledged $8.5 billion to offset the economic impact of Covid-19, but on Monday hinted that the stimulus could be much larger.