After making a strong recovery from the pandemic, Europe’s luxury goods industry must now contend with the challenges brought by much higher than anticipated inflation, particularly around energy prices.
Almost 30 per cent of the European luxury goods industry's revenues are derived from abroad, with travel a key driver of income. The industry, which is at the very top of the consumption pyramid, managed to exit the pandemic in a stronger position than many others by significantly improving e-commerce coverage, especially with regards to the all-important Asian customers, who were affected by strict travel restrictions.The pandemic also helped the industry to bring in efficiency measures that allowed better shaping of inventories and the broader supply chain.Marketing campaigns were also enhanced.
Post-pandemic, customers are travelling once again and the price gap differential in Europe allows Asian customers to enjoy buying goods at better prices, while exploring the continent.
The Italian and French landscapes and distinct styles have spawned a sophisticated following, with a focus on premium products and materials, and both countries attract significant numbers of fashion tourists every year.However, in the first part of 2022, the industry saw a significant derating attributable to the Russian/Ukraine conflict and concerns over continued inflationary cost pressures and the energy crisis, which dominate the current economic environment.There is growing concern around what this winter will bring, particularly if governments in Europe are faced with making tough decisions around keeping heat and power on for their populations.
The fashion industry’s major worry is that non-essential industries could face periods of rationing, shutdown or furlough in order to conserve energy for essential power and service needs.Currently under discussion at EU-wide level is the prospect of mandatory energy demand cuts during the peak hours of the day. To mitigate this, some fashion companies have been able to move from natural gas to renewable sources of electricity, such as wind and solar power, to ensure a more predictable energy cost and supply.
Further disruption comes in the form of transport issues, with products that once took 25 days to arrive, now taking over 60 days to make journeys from far-flung factories to retail warehouses. Transport costs are also much more expensive than before.
Despite the additional concerns surrounding the consumer's disposable income, luxury goods purchases have so far continued to remain strong, especially in the highest-end companies where the relationship between price increases and demand is highly inelastic. In the luxury watches' space, for example, demand is even outpacing supply with waiting lists several years long.Top European brands have adapted their sourcing cycles for raw materials, such as yarns (namely cashmere), woollen fabrics, cotton and feathers, in such a way as to make the best of the pricing volatility.
By Fashionating World