Opinion: Geo-Politics Will Shift The Way Luxury Markets Are Valued. Here’s Why.


Susanna Nicoletti | October 04, 2021

Singer Beyoncé and her husband rapper Jay-Z star in Tiffany's latest campaign.Credit: Courtesy of Tiffany's.

The ever-evolving world of geo-politics will reshape luxury’s future ecosystem for the next few years to come. But brands who do not invest in understanding how to address and please luxury’s neglected markets risk putting their own future at stake, says Susanna Nicoletti, who takes Luxury Society through the first of five macro trends that she believes will impact the global fashion and luxury industry in the medium and long-term.

Luxury’s next chapter of the post-pandemic era has not yet begun. Nor has a deep recovery of the global economy. According to a new report recently by Brand Finance, the top 50 high-end and premium brands globally lost $7.6 billion in value in the past year due to the hard impact of COVID-19 pandemic.

For certain, the disruption caused by the pandemic has created huge interferences to fashion and luxury, which was finally growing at a steady pace following the 2008 fiscal crisis. And to be frank, the industry was not prepared to face such an abrupt halt to its operations, resulting in many scrambling to find short term tactics to overcome the challenges that had arisen.

Most of the actions taken by global brands were focused on leveraging opportunities around digital technology: e-commerce replacing in-person sales at physical stores, movies being streamed online instead of fashion shows, one-to-one sales assistants on WhatsApp, virtual showrooms for product campaigns and virtual reality for collection launches. It seems fashion and luxury just shifted its whole world into a parallel universe enhanced by state-of-the-art technology. Indeed, one need look no further than the current craze for Non Fungible Tokens, blockchain and crypto currencies being touted as the new frontier of the industry.

But being fully immersed in a purely digital environment today, risks losing a grip on what is happening in the most strategic domain linked to business: geo-politics. The first macro trend analysed in this column, is the ongoing global market disruption and the geographic shifts towards demand that luxury brands need to reconsider.

It is a well-known fact that before 2020, and right after as well, the key target market for business growth was, without a doubt, China. Business opportunities in China have been considered as almost unlimited and top consulting firms such as Bain highlighted that “this growth is likely to continue, putting the country on track to claim the biggest share of the global luxury market by 2025—even after the world economy returns to pre-pandemic levels.”

All the key stakeholders, from prestigious investment bank analysts and brand founders to the highly influential media invested their time, energy and efforts into conquering the Chinese market. It seemed that the distribution of power was set in stone. And China was the place to make business for a whole range of brands, groups and ventures. With almost no alternative.

China, An Evolving But Volatile Superpower

But despite the surge in spending seen from its consumers post pandemic, China is an evolving but volatile superpower that luxury brands must learn to navigate and with that comes a new shift in geographical power from other markets that have been long neglected by luxury brands, like the United States.

With the recent news that China is calling for the “reasonable adjustment of excessive incomes and encouraging high income groups and businesses to return more to society,” as well as its attempts to curb “bad trends in the industry, and clarify the culture and entertainment sector, focusing on “inappropriate” idol worship, excessive wealth and questionable tax practices, the impact from these decisions will likely be significant and devastating on those who have relied heavily on brand ambassadors to promote brands and products.

The example of Zhao Wei, one of China’s most famous movie stars, being blacklisted from China’s internet indicates just how far China is willing to go to attain its measures. Wei had her works removed from streaming sites and her fan club cut off from social media platform Weibo. The actress Zheng Shuang was ordered to pay 299 million yuan ($46 million) in overdue taxes, late fees and fines last month

Furthermore, reports that big Chinese companies such as real estate firm Evergrande and textile and clothing group Shandong Ruyi (owner of French company SMCP) are severely indebted and in financial trouble could have a very negative impact on the global economy, as they could easily ignite a domino effect.

The future for China, which appears to be returning to stricter rules for culture, communication and business, does not look promising to the fashion and luxury system. However it will force the whole industry to rethink its addiction to such an unpredictable country.

This does not mean that the fashion and luxury industry will be put in a dangerous situation by these decision, just more that the market will become increasingly exposed to external, political decisions and that the geo-political evolution will deeply impact on its business opportunities.

The USA, Or The Sleeping Beauty

Which brings us to the United States. The US has always been the privileged market for fashion and luxury brands. Legends such as Salvatore Ferragamo and Gucci established their brands successfully in this key market in the past century, where they created strong relationships with the key department stores like Saks 5th Avenue, Bergdorf Goodman and opened retail shops in the key cities: from Chicago to Miami, from Los Angeles to New York.

Fashion and luxury brands have been warmly welcomed in the States and have created a long-term bond with the Hollywood celebrities, super models and influencers as well as with the music stars. Business partnerships like the Charlize Theron with Dior have represented successful communication and highly profitable projects for both sides. TV series like Sex and the City helped fashion brands such as Manolo Blahnik and Fendi reach global visibility and become iconic.

In the most recent years the US market has been neglected by the fashion and luxury industry which struggled to understand the cultural evolution of such a key market. Movements like Black Lives Matter have been just superficially supported by the system before becoming a powerful culture and great innovation hubs like the Silicon Valley have not been studied deeply enough to appreciate the powerful tools and mindset that were being developed in the California.

Street style was taken into consideration only because it exploded as a phenomenon and imposed the democratisation of fashion. Only after the successful launch of their own labels, legendary artists such as Virgil Abloh and Rihanna were invited to join the creative Olympus of the establishment. Obsessed by the quick revenues China offered, the whole industry has overlooked the potential of the United States.

While GDP per capita in China is approximately $10,300 in 2019, the USA records a GDP per capita of $65,300. The number of millionaires in the US is 21,900 vs 5,300 in China in the same period.

The US is still the market with the greatest opportunities for fashion and luxury brands in terms of purchasing power and the one that is culturally more aligned to the roots and values of the fashion and luxury system. And last but not least, it is perhaps the easiest to deal with in terms of business and customer experience (the scandals linked to negative cultural approaches to the Chinese customers and relative ban and business backlash is very long).

It's not by chance that LVMH is re-focusing its strategy thanks to the titanic acquisition of US hard luxury flagship Tiffany’s and the very successful re-branding aiming at conquering new, younger clients thanks to the partnership with uber influencers and globally renown Black music royalty, Beyoncé and Jay Z.

For a luxury or a fashion brand setting up a successful global branding strategy is easier in the USA, because of the strong partnership and deep understanding that has been established with this key market many decades ago, because the social media and the digital mindset were created there and because the key trend of this chapter in fashion history: street style, casual wear and outdoor style, is deeply rooted in the USA. If we also consider that the most consistent sustainable strategy is pursued by US brands such as Patagonia, this potential unveils very clearly.

The industry will increasingly come back looking at the West of the world as a relevant opportunity for business growth, with much less boundaries, restrictions and cultural misalignment compared to the East.

It won’t be easy to wake up this sleeping beauty, so much neglected in the past years. But it will have a very positive impact on the business trends.

Marine Serre's Autumn/Winter 2021 campaign for its CORE collection.Credit: Courtesy of Marine Serre.

Europe, The Elephant in The Room

And lastly, we shift our attention to Europe, which sadly has shown its weakness versus the two global, economic and financial superpowers: China and the US.

Here, fashion and luxury brands have higher fixed costs due to a heavy presence of retail and flagships, head offices, outlets and factories, that are not properly protected by the sales coming from this region due to the fact that the system has deeply focused on the tourism of Chinese customers, whom have disappeared since the start of the pandemic and have not been replaced by the Europeans.

The prestigious streets of luxury in all the European capitals are still almost deserted and the whole retail environment is pretty worn out in terms of energy and stamina.

Most European consumers have turned their interests to niche, cool brands with a sartorial approach or a unique image such as Ganni, La Double J, Ami and Marine Serre or for outdoor, comfy brands like Birkenstock and The North Face, smaller or/and special brands that are rich in details and aimed at being more sustainable.

There is a sort of a lack of excitement today between Europeans and fashion and luxury brands, most likely because the wave of cool products coming from established brands is proving weak and a bit too much of a dejà vu.

Europeans, who are the more accustomed to fashion and luxury, are turning their interest toward nature, outdoor, freedom and casualwear and, it is very likely that this need of a different lifestyle is fuelling the purchasing attitude of the youngest and more active customers. A trend about frugality, circular fashion and vintage is certainly having an impact on the fashion and luxury business.

Another important element supporting this is that, despite the fact that Europe is one of the wealthiest regions of the world: France, Germany, Italy and Spain together have 1.5 times more millionaires than China (Statista, 2021) and their GDP per capita of the European Union is almost 4 times the one of China, fashion and luxury sales in Europe fall behind those of China.

Europe has suffered several troubles that weakened its position in the global geo-political landscape: from Brexit to being the bone of contention between China and the USA, and this region clearly is not able to stand up as a key strategic, profitable business for the whole fashion and luxury system.

And so, the next five years remain key for the development of the luxury ecosystem. And geo-politics will have as deep an impact on fashion and luxury as other trends in our global conversations. What is needed is flexibility and quick thinking, combined with a razor-sharp strategy devised by the best in class.

Brands that update and evolve their language, rethink how to refresh their products, messages and how they sit in popular culture are the ones that will succeed. Particularly when it comes the speaking to markets that have been long neglected like the US. Those who do not, risk falling behind.

Consumers | Markets