Gianni Serazzi Interview - GATE Magazine
Mr. Gianni Serazzi, how has Covid affected the choices of companies in the world of luxury for the next few years?
Gianni Serzazzi: Great question. Perhaps it is useful to first remember what happened in chronological order. Obviously it is a generalization, but quite an accurate one as it was experienced by most of the luxury companies. The first 2 months of COVID were a shock, and companies were thinking about survival and how to save cash; They weren’t prepared for a global pandemic, but at the same time most industries weren’t. The financial departments of all of the fashion / luxury companies brainstormed daily scenarios with cash projections, and many approached owners and banks to understand how much capital would have been available to get through the “storm”. On the other hand, however, the stakeholders were even more unprepared and scared than the companies themselves. These companies, which created hundreds of millions of profits a year, found themselves losing cash in a few days, and it was a considerable shock.
Almost all brands create products with a very high margin (about 80% of the final sale price), using the strong brands at their disposal. In order to capture as much value, and to increase “customer intimacy”, they have therefore vertically integrated over the years, building their distribution structures aiming directly towards the consumer. In this way, resorting less and less to wholesalers, they have actually replaced a variable cost structure (wholesalers distribution partners paid at %), with a fixed one (costs for direct shops with rents, personnel costs and others of a fixed nature). When a rigid structure (with high fixed costs) is abruptly stopped (shops closed due to covid), the impact on the bottom line and on the checkout is immediate and heavy.
After the first few weeks some positive trends were already starting to emerge. We helped several brands to understand the gravity of the situation, but also to plan a quick release within 12-18 months. The relationships we had with vaccine companies and medical organizations enabled us to uncover important data to our customers. Once the duration of the emergency was limited, we helped companies create aggressive growth plans by exploiting the few positive aspects of the pandemic. In particular, there were a couple of trends that were clearly visible as early as April 2020:
– The growth of online sales
– The increased availability of time of the consumer to inform themselves in depth about brands and products
Both were an acceleration of already existing phenomena. Online luxury sales were already growing 12-15% per year and with covid they have exploded to + 30 / + 80% for many brands. The global consumer had been becoming much more sophisticated and educated for years, and with the pandemic, the site traffic of blogs and “educational” portions of fashion websites (for example the pages where the stories of the brand that each institutional website presents), saw an increase in traffic of 300-400% more than the previous year.
In this situation, brands that had invested in creating ecommerce platforms and strong online communication components before the pandemic, were able to take advantage of these trends. For example, some of our customers have seen online sales go from 15% of total sales to 80% + due to the decrease in sales in the traditional bricks and mortar channel. To demonstrate this trend, online multi-brand players (those who have not closed due to covid) have also announced record sales (MyTheresa, Farfetch, …).
On the other hand, brands that had weak ecommerce platforms before, (whose online sales represented less than 5% of the total), tried instead (with little success) to increase their online strength. Unfortunately expanding warehouses, improving service levels, or other online channel strengthening components, is very difficult to implement during a pandemic, and almost impossible when online partners (who also help other brands), already have to respond to a natural increase in very strong volumes.
In the following months (summer 2020) the companies saw the arrival of financial resources guaranteed by states around the world (directly or indirectly facilitated by a significant injection of global liquidity), and a rapid growth in consumption when economies began to reopen. China was the first to close but also the first to reopen, and the response from consumers (who are now the most important for many brands compared to the European or American consumer), was excellent.
This brings us to the heart of the question: what has changed for luxury companies and how will their decisions change in the coming years? What we see on the one hand is a natural resistance to investments that are not very modular or flexible. Brands are afraid that other shocks will change the scenarios and want flexibility. ‘ It is the typical human reaction that can also be observed on the financial markets: people are only looking for safety after such a shock. On the other hand, the rapid injection of liquidity and the rapid rebound in consumption made the brands optimistic about their possibility of having resources in times of difficulty. In essence, brands nowadays want to invest a lot in their business but in a modular and flexible way.
Have the habits of the luxury consumer changed? And if so, how?
G.S: At the beginning of the pandemic, for months, journalists and “experts” talked about a radical change in luxury consumption, how nature (responsible for covid) should be respected more, and how the world’s elites that could buy luxury should have changed their habits. There was talk of how the consumer, for example, would no longer easily accept luxury cruises (where distances are limited) or travel in private planes (with a strong impact on emissions into the atmosphere).
We have always been skeptical about these predictions. Certainly, there would have been changes, but even in this case we were thinking more along the lines of an incremental perspective, and also in line with already existing pre-covid trends. For example, we have known for many years that the new generations are more attentive to the environment; obviously with the natural growth of their weight on the total sales of the luxury world, the importance of this factor also grows, but it is an evolution accelerated by covid, not a revolution.
In recent weeks, with Europe and the United States reopening, we are witnessing sold out luxury cruises and private flights with increased costs due to the high demand, and we are only at the beginning of the reopening.
The luxury consumer has therefore taken a few more steps towards long-term evolution. He is younger, he uses an informal style more, he is more attentive to sustainability and the environment, he buys more online; All pre-existing factors which have only been accelerated by covid .
What are some tips you could give companies in this sector in order for them to meet the new needs of their typical consumer?
G.S: The main mistakes of brands are long-term ones. There have been brands that spent millions every year on market research and didn’t understand the importance of the growth of the online world for years!; Convinced of their ideas, (or those of their administrators / owners) they resisted change instead of accepting it, and only after 5-7 years of continuous errors, were they forced by the market to change their mind. Today there are brands that have not yet been able to embrace the wave of casual / streetwear or the specific needs of the Chinese consumer for example. The main advice is therefore to ask yourself: “how is it possible to embrace the trends we see in the market today, and mould our brand whilst also preserving its DNA? This is what I advise companies to start thinking about more often.
How important is airport Travel Retail for the world of luxury?
G.S: The growth of consumption with the reopening economies is driving tourism spending, and most likely in the coming months, we will see a rapid expansion in demand. The Chinese consumer now accounts for 40-45% of global luxury sales, and as long as taxes on luxury goods remain in China, there will also remain a strong component of sales to Chinese tourists in Europe and, less importantly, in the United States and Japan. It is the Chinese consumer who today drives travel retail and therefore airport travel retail. The fundamentals have not changed, chinese local taxes have not changed, the disposable income of the Chinese population continues to grow, the desire to travel has grown during the months of lock-down, and the processes for obtaining tourist visas (except in time of covid limits) continue to be simplified.
What could be a new way to make the most of the potential of this channel?
G.S: Travel retail has historically not been very innovative. Lack of innovation is a pity for retail and luxury capital. For example, some malls in Asia have invested and changed their value proposition by becoming entertainment centers with the possibility of shopping, while in the US innovation and investment have been at very low levels for years, and now the American malls (even pre-covid) are in a deep crisis. We believe that the winning idea lies in the adaptation of some of the already existing trends (online, mobile, virtual interactive, entertainment, rapidly accelerating post-covid), in the specific world of travel retail. Working with some innovative brands (often medium-sized and peculiarly not the largest that tend to be too conservative), and with some retail players in the travel world, we have finally seen some truly innovative ideas emerge in recent months, and which will arrive on the market in the next 12 -24 months. Some of these will surely bring more dynamism to this channel, that has not shone in the pre-covid world, and that has suffered the covid impact more than others, but whose high potential remains unchanged.
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