Luxury has proven to be ‘a lot more resilient’ than what people thought months ago: Future Luxe Author

Erwan Rambourg, Future Luxe: What’s Ahead for the Business of Luxury author joins Yahoo Finance Live to discuss how the luxury retail industry is faring amid the pandemic and break down how China is set to become the world’s biggest luxury market by 2025.

Video Transcript

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- Welcome back to "Yahoo Finance Live." Want to spotlight shares in the parent company of Versace. Michael Kors and Jimmy Choo here. Capri Holdings catching a boost today. The company scored an upgrade at BTIG, with analysts there noting that the apparel company has a strong COVID-19 recovery plan, and has shed about $350 million in expenses as well. Digital sales for its luxury brands have also accelerated notably, and that's been one trend here that has separated the winners and losers in the retail space, as well as those who have capitalized on a boost in Chinese luxury shopping there.

So let's break down some of the trends that we are seeing play out in retail writ large here with our next guest, Erwan Rambourg, is the author of "Future Luxe-- What's Ahead For The Business of Luxury," and he joins us now. Erwan, appreciate you coming on to chat here.

I mean, we've been getting earnings reports from a lot of these retailers this week. We're getting it more next week. But what's been your take here on how luxury itself has been impacted because we've talked a lot about brands seizing the opportunity on e-commerce, but luxury seems a little bit different when we think about shopping.

ERWAN RAMBOURG: Yeah, I think luxury has proven to be a lot more resilient than what people had in mind just a few months ago at the start of this outbreak. I think if you look at the two main nationalities moving the needle, the Chinese have been back now for quite a while. Obviously, it's been a repatriation of growth, but since the months of April or May, speaking to people in Shanghai, they'll tell you that they consider COVID-19 as a vague negative souvenir. I'm based in New York, so obviously, it's not the take that I'll have. But you know, Chinese growth has been compounding nicely.

And here in the US, you know, if you're a Trump fan, you might talk about a V-shaped recovery, if you're a Biden fan, you might talk about a K-shaped recovery. The reality is similar. You know, if you're a wealthy consumer pre-COVID, you were feeling good about yourself. Now you're feeling even better.

So it's a bit counterintuitive, but I think the rebound we're seeing in the US is incredibly steep. It's a combination of things. You've had historically equity markets quite well correlated to luxury demand in this market. You've had the property market, notably for secondary homes, doing quite well. You know, I don't have the luxury of owning a place in the Hamptons, but if you do, that's gone up quite dramatically over the summer.

And then you've had the positive impacts of staycationing. You know, obviously, you can't travel to many places, even within the US right now. And so people have been staying at home.

They haven't spent much on, you know, air travel on fancy hotels, on Michelin star restaurants. And as a consequence, they've freed up quite a bit of spending that is supported for luxury. So, again, quite counterintuitive, but I think the rebound you're seeing right now in luxury in the US, it was unexpected and should actually continue into the holiday.

- And when you talk about the big box retailers, sort of the Targets and kind of the Walmarts of the world, we've been talking so much about how much digital acceleration has happened. And you could certainly extend that to the huge growth that we've seen in Amazon during this pandemic. How do you think shopping habits have shifted in the luxury sector here? I mean, I'm thinking about somebody purchasing, for example, a $3,000 bag. Are they comfortable sort of just going online and doing it, or do you think the inability to go into a store because of the restrictions could ultimately hurt some of these retailers?

ERWAN RAMBOURG: Yeah, I mean, I happen to cover sporting goods, for example, and a few cosmetics companies, and when Nike tells you eventually more than 1/2 of our business will be online, I trust them. If a premium European luxury were to tell me that, I would think, well, either they're not premium luxury, or they're taking big risks in terms of brand equity. So, you know, one example is Moncler, you know, the down jacket company, giving out a guidance recently saying, hey, listen, our sales online were about 10% of contribution in 2019. That goes to about 20% eventually over the next three years.

That seems like a reasonable ballpark. I think it's quite-- I mean, to your point, the price points are quite different. It's not exactly an everyday purchase. But more importantly, we are still in a sector, which is driven by first time purchases.

And if you're a first time purchaser, which you likely are if you're based in China, and which you might be also if you're based in the US, it's a lot about storytelling. You know, not necessarily the story that the brand tells consumers, but more the story between the consumers themselves, you know. What are you going to tell your girlfriend, what are you going to tell your buddy in terms of your first branded handbag purchase?

Unlikely you're going to tell her, I was on a website, I clicked twice, and I got shipped after 24 hours. That's not a story. That's dull. That's boring.

So give it some time. We are still in the infancy of recruitment in luxury. Most of the purchases are first time purchases. Again, going back to the example of Moncler, but it's also true for Gucci, it's true for Cartier, it's true for other brands in the space.

What moves the needle is your capacity to recruit, you know. It's great if you can make consumers loyal. It's great if they can come back, but that's not what the market is made up of right now. It's still-- we're still in the recruitment phase.

- And Erwan, I mean, you talk about that gifts for loved ones there. I mean, we've seen a lot of counterfeits in Chinatown, obviously, here in New York City, that's something you see play out. You know, I'm not sure if that was the gift that my ex got, or why she's my ex because it wasn't a true Michael Kors bag, but I mean, when we're talking about that, clearly knockoffs is a risk in the luxury space. It's why we've seen kind of that push back in selling through Amazon.

The Bain at 2020 luxury report did highlight though the growth in e-commerce sales for all these luxury brands, saying that the shares of purchases made online nearly doubled from 12% last year up to 23% in 2020. So when you're talking about a benchmark for these brands seeing that growth, is that about average that you would want to see from across these luxuries, about 20% or so coming from e-commerce sales?

ERWAN RAMBOURG: Yeah, so I think-- you know, I think 20% eventually over the next two, three-- I mean, short-term, everything was shut, right? So it's higher than that. But let's imagine that we're in a normalized environment. Let's imagine that we're allowed to travel again.

I think-- you know, I think going-- the space going from high single digit to low double digit contribution of online to 20%, 25% over the next three or four years, that's reasonable. Again, if you tell me, we're not in a recruitment phase anymore and we're gradually going to more of a repeat purchase market, then that can go higher, but I don't see that happening before the late 2020s, if I can say. So give it some time. Obviously, contribution to sales of online are going higher.

You know, everyone's talking about Amazon. I think the most interesting reaction I got from a luxury corporate on Amazon asking him the question, you know, how relevant will it be for you? His answer was to say, ask my successor, and I'm not leaving anytime soon. So, you know, he's basically implying it's going to take more than a decade to actually move the needle.

But you are seeing, you know, the deal between Farfetch and Alibaba and Richemont with an injection of cash from Artemis, the holding company of Kering. You're seeing stuff starting to get structured. A bit like in wholesale, you saw a bit of Darwinism. I think-- you know, I think online, you'll see fewer, stronger players ahead. But again, if the brand is in a recruitment phase, it's not the key priority. It will grow as a percentage of sales, but brick-and-mortar, even though it might sound counterintuitive today, has great days ahead.

- Erwan, you know, when you look at the luxury retailers, I mean, the demand out of China certainly has been a strong one. It's been a good story for these retailers, but one of the things that's created a bit of a bumpy ride for these brands has been the geopolitical element. You saw the-- you know, the pushback against a brand like Canada Goose, for example, even some of the luxury names as they sort of try to navigate these geopolitical waters anytime China sort of pushes back.

And I'm curious how you calculate that risk. Is there a risk to these retailers? Do you do you think that they're going to continue to go after the Chinese consumer because the demand is just so big? How do you think the calculation is shifted?

ERWAN RAMBOURG: I mean, historically, you've had a bit of pushback from Chinese consumers at periods of tension against Japanese brands or against Korean brands. I've actually never really seen it relative to Western brands coming from-- I mean, most of the luxury brands are basically French, Italian, British, and a few American. You know, there's never been pushback against Tiffany, for example, in China, or pushback against Nike in the sporting goods industry. We--

- But we have seen, for example, Dolce Gabbana because of a certain ad that they did, we saw people on Chinese social media posting photos of them burning their own goods.

ERWAN RAMBOURG: I'm sorry. I didn't get the gist of your question. I think the gist of your question is, can you have blow ups, and can you have brands mismanage their relationship, and basically rub some Chinese consumers the wrong way? Yes.

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And Dolce Gabbana is a phenomenal example of a blow up. And I still think they're struggling to make up for that. Such as you've had a few blow ups here in the US. You know, products coming out of Prada, or coming out of Gucci, which have been seen as cultural-- culturally insensitive relative to the African-American consumer here.

It all depends on how you-- you know, if-- luxury development includes quite a bit of risk taking. You know, it all depends how you make up for it, how you explain it, how you make amends. And I think, you know, the Dolce Gabbana example is a textbook example, in terms of how to not manage well a crisis. Whereas, you know, if you look at Prada or Gucci here in the US, they managed through very, very efficiently, very quickly, they apologized, and they managed to move on.

But honestly, the good thing, if I can say about the Chinese market, is for the time being, you don't have a lot of local substitutes. So if you're looking to fit in with some family members, with some co-workers, if you're trying to move upwards and onwards, European premium luxury brands are still the way to go. You don't have many local substitutes.

- Yeah, and as we know, I mean, that's an important market there. The Bain report showing that it's expected to be the only region to post year over year growth in terms of the luxury market. But we'll leave that there for now. Erwan Rambourg, the author of "Future Luxe-- What's Ahead For The Business of Luxury." Appreciate you coming on the chat.

ERWAN RAMBOURG: Thanks for having me.