Consumers and COVID-19: What brands need to know to survive, and thrive
For the last few months, the guest room at my house has been overwhelmed by my wife’s clothes. She’s embarked on a project to go through her clothes and get rid of those she no longer wears or wants with plans to either donate them or post them on a site like Poshmark. What are these clothes you ask? Generally, they’re clothes she bought (at a mall, of course) a decade or so ago from when she was in her early 20s and buying cheap but trendy clothes from fast fashion retailers and buying the occasional, no longer chic nowadays, item from an affordable luxury brand. If you have interest in them, great, but what’s in those bags and covering our guest room bed highlight two of the many interesting parts of who consumers were before Covid-19 and who they might be during and after this crisis.
Who was the consumer before Covid-19? It helps to think of the consumer, country-agnostic, in one of four buckets: aspirational luxury consumers, those to whom price is no object, affordable luxury consumers, those who cannot afford the highest-end brands but can afford the often or occasional purchase of higher-end goods, mid-tier customers, those who generally purchase from fast fashion retailers, and discount consumers, those who are financially challenged in the best of economic times. Within these buckets purchasing patterns differ by geography but largely western consumers tend to have similar purchasing patterns.
To begin our before and after discussion, let’s start at the bottom of the apparel purchasing food chain and work our way up – it helps to end on a high note, after all. Discount consumers globally are those most at-risk of total financial calamity whenever any sort of crisis hits. Indeed, per McKinsey’s consumer sentiment report, 34% of consumers are already unable to make ends meet due to the Covid-19 crisis. Governments throughout the world are making attempts to support their populations through direct payments, but these payments are likely going to be used on essentials such as food and bills and not discretionary purchases like apparel. For those consumers with whom making ends meet was already a challenge and who were shopping at discount retailers, apparel will simply be a non-factor until the crisis has passed and employment returns to near-normal levels.
The middle class of apparel consumers is the most affected class of consumer during this crisis. But who was this consumer before? Much analysis has been done on this consumer. This consumer states they care about sustainability and are driving the still nascent sharing economy of clothes, yet, this consumer also buys countless items from H&M and Zara because they can’t be seen twice in the same outfit on Instagram. Statistics continuously show that Gen Z, especially, cares about sustainability and transparency when it comes to clothing. Yet, as was evidenced in a New York Times interview with 3 different Gen Z women across the world, two critical items arose: lack of money and that incapability to be seen in the same outfit more than once on social media. A 16 year old British girl was quoted in the article as saying “I wouldn’t really want someone seeing me in a dress more than once. People might think I didn’t have style if I wore the same thing over and over.” A 20 year old Australian college student said “I want to support sustainable brands. But if it doesn’t work for me and what I’m doing in my lifestyle, I’m going to go with something else instead.” An 18 year old college student from outside of New York City said she thinks the right amount of money to spend on clothes is $10 to $15 on tops, and $20-$40 on bottoms. None said they spend the majority of their time shopping in stores, but rather online.
So if the above represents more of the true pragmatism of Gen Z and the fast fashion consumer, who will that consumer become, post Covid-19? Teens alone represent $830b in retail spending per Piper Sandler analysis, so this is a demographic whose spending matters. There are no more events to dress up for now, and the only trending outfit on social media is sweatpants. These students generally were buying their clothes based on money earned in part-time jobs, the kinds of jobs at risk of loss. Numbers, thus far, back up that apparel purchases are not happening. Per GlobalData, apparel and footwear sales in the UK are predicted to be down 26.1%, and even online sales will be down 7.9% in 2020. US retail sales dropped over 50% between February and March and even worse figures can be expected for April given the beginning of March the US was not under mass lockdown. For this mass market, fast fashion market, even China’s reopening does not seem to offer too much hope in the near term, with H&M reporting that even with 89% of its stores open, sales were down 79%, see below:
Source: H&M, GlobalData
Affordable luxury will be in for challenging times, especially those companies who do not have a significant online channel or presence. As McKinsey noted in their State of Fashion 2020 update, consumers will rightly be expecting significant discounts on clothing purchases, with 56% of consumers who have recently purchased apparel only doing so because of the deep discounts offered. Consumers know that apparel companies are sitting on significant amounts of inventory they cannot sell in-store and may be out of season when stores are allowed to re-open. Of course, even with these discounts, what is the point of apparel purchases? Will businesswear cease to be necessary on the other side of Covid-19 given workers around the globe have become accustomed to holding virtual meetings and seeing colleagues and clients in casual clothing with kids and animals screaming behind them? Assuming bars and restaurants continue to lag other business openings, to say nothing of concerts and sporting events, what social occasions will cause consumers to need to purchase new clothing? These are not easy questions to answer in the short term and will likely cause continued inventory distress to companies catering to the consumer between aspirational luxury and fast fashion.
Aspirational luxury is a different beast altogether. This is a consumer who should be least impacted by economic crisis – except in one critical way: travel. High-end luxury brands see ~30% of sales occur due to largely Chinese citizen travel, with goods purchased in Europe and the US. With international travel completely curtailed, those sales will be lost, which is in part why McKinsey predicts a 35-39% YoY drop in luxury sales versus “only” a 27-30% drop for apparel generally. LVMH reported a 17% YoY decrease in sales for the 1st quarter of 2020, but that period also included a largely open Europe and USA for the majority of the time. BCG predicts a loss of $120b in revenues for the sector in 2020 and Bain expects a loss of 35% in the sector, similar to the McKinsey predictions.
But there is hope already for this sector. In their quarterly report, LVMH noted that as China re-opened, sales for brands such as Louis Vuitton and Christian Dior increased over 50% YoY, and some analysts predict that as countries lift their lockdowns, there will be a surge in “feel-good” spending, a type of spending this consumer is most apt to be able to do given their likely lack of total financial deterioration.
Having reviewed the types of consumers that exist in the market pre, during and post-Covid-19, what can brands do to survive and thrive with consumers? Besides the painful short-term survival instincts they need to employ, there are some steps they can take. Firstly is building up an online presence and shop to serve the way consumers will now purchase. Over and over, consumers have stated that even after the crisis passes, they are more likely to shop online for everything from apparel to groceries. Additionally as McKinsey notes, brands who were less affected in China while the country was in lockdown were those that engaged with their customers online through new mechanisms like online fashion shows and re-deploying in-store employees as online helpers. Additionally brands should offer some sort of digital connection directly to their customers. Nike has benefitted as much as any brand possibly can during this crisis by having users engage with its activity apps. Lululemon, as well, has been able to engage its consumers via online fitness classes. Lululemon and PVH have also been able to endure by supply chain mechanics such as inventory redeployment and utilizing unused stores as distribution centers to provide the right goods to customers as accessibly and accurately as possible. Other possibilities can be found in this insightful article. It isn’t easy, but with the right kind of customer engagement, it is possible for brands to build bonds with their customers during and after this crisis.
Now, what of those clothes in my guest room? Well, I think it is safe to say that even as we exit out of this crisis, whenever that may be, neither my wife or I will be buying many clothes, except perhaps for some replacement sweatpants. I also don’t quite know where she will be able to sell the rest of them – will consumers be scared away from the circular clothing economy because of risk of disease in pre-worn clothes from someone else and the likely persistent discounts on new clothes? But I do know one thing, and that is, once we come out of the crisis and things like sporting events are allowed to occur again but wearing masks remain a social norm, I certainly will be wearing one of these when I’m finally out of my house. Perhaps there is the greatest opportunity for brands across all segments as the crisis finally abates.