The age of globalization has been an enviable growth engine for the luxury industry spearheaded by Western luxury giants like LVMH, Richemont and Kering. The last 20 years have been a story of steady growth with low risk and few obstacles to global expansion. But what are luxury’s prospects in the face of a shifting economic, social and political landscape? In particular, what do we make of the new geopolitics of luxury? My forecast is that the next 20 years of growth for luxury will pose novel geopolitical challenges that were almost entirely absent in the last 20 years of luxury growth.
The last 20 years of globalization – a ‘safe space’ for luxury
Since the 1990s, premium and luxury brands were among the first ambassadors of the latest wave of globalization linking China to the G7 countries. In 1991 Ermenegildo Zegna became the first Western luxury brand to open a shop in China. Just a few years later in 1996 Hermes followed suit and opened a shop as well. Today nearly every Western luxury and premium brand has established a sizable footprint of stores in China’s first-tier cities or has plans for such a presence.
Despite the current pandemic, the future of luxury continues to shine brightly in the geopolitical and economic space once known as the Middle Kingdom. In their latest study, Bain and Altagamma still expect Chinese consumers to make up nearly half of the luxury market by 2025 (Bain & Company Luxury Study 2020 Spring Update).
The good news appears to hold true as we look at the rest of the global economy. In the last 20 years, other luxury hotspots have emerged such as Dubai and increasingly Southeast Asia. In the meantime, the “old guard” luxury markets – US, Europe and Japan – remain important sources of brand reinforcement, revenue and profitability.
But 2020 marks a potential turning point in which the emerging geopolitics of luxury threaten to become an emerging pain point for luxury brands.. Simultaneously, the advent of COVID-19 has dramatically halted what had been an almost effortless growth phase for luxury brands.
The future seems far less certain and riskier. Hence, now is a crucial time for luxury brands to reflect upon the last 20 years of growth and prepare for the next 20 years.
The last 20 years in luxury is a familiar story of a simple but effective playbook called “follow the money”. Brands realized that emerging high-net worth (HNW) individuals were traveling overseas to the West to shop and therefore shifted retail and distribution to those travelers. The next step was simply following them back to their home country and expanding retail presence overseas.
As a growth strategy, it is no exaggeration to say that this is child’s play, at least compared to the entrepreneurial challenges of creating multi-billion dollar companies from scratch. Think about the myriad setbacks and challenges of designing and launching a commercially viable electric vehicle brand like Tesla. No small wonder that established, storied luxury brands like Hermes and Chanel have done well in China for their investors.
Safe to say those days of easy money and growth seem to be over. Luxury brand managers and owners find themselves in a moment of peak uncertainty deep in the summer of 2020.
Business as usual for luxury?
Imagine you are the CEO of a luxury brand. Given what you know now, where do you see luxury heading in the next 20 years? Business as usual?
If you manage strictly on a quarterly or annual planning cycle, the future in China looks plausibly bright. LVMH’s fashion and leather goods business was down 37 percent but posted a 65 percent jump in China (Joelle Diderich, “LVMH Sees China Leading Recovery, WWD, 07/28/20, p. 8)
Optimists would even say that LVMH’s latest quarterly results reflect a V-shaped rebound. Reviewing the results, LVMH CFO Jean-Jacques Guiony commented, “Our top brands have not disappointed – all profitable; less revenue drops than peers, outstanding margins; market share gains; well positioned to become stronger in the crisis, which is exactly what leaders should do.” (ibid.)
However, let’s look beyond the calendar year, beyond standard business metrics, and beyond the HQ perspective of luxury. Even a brief glance at the world around us suggests that we are teetering on a geopolitical and cultural inflection point.
In particular, three macro-trends have emerged that threaten the easy, globalized growth of luxury:
- Emerging Sino-American cold war
- Decoupling of global supply chains
- Decline of the Middle Eastern petrostate
All of these potentially depress both supply and demand of luxury goods across borders. The COVID-19 pandemic has only exacerbated these trends, depressing demand in “old guard” markets like the US and Europe.
The Sino-American cold war & decoupling of global markets
Let’s dig deeper on the emerging Sino-American cold war. Many analysts are now pointing to this emerging cold war as the new driver in foreign affairs. Perhaps the most alarming analysis comes from Clive Hamilton and Mareike Ohlberg, the authors of Hidden Hand: Exposing How the Chinese Communist Party is Reshaping the World (forthcoming September 2020).
In a recent interview, Ohlberg argues that the “Chinese Communist Party has determined that it needs to reshape the world in order to feel safer and make it safer for its long-term regime security at home.” In particular, the CCP wants to reshape the existing global order to “accord more with its own rules at home [and] wants to see a world where Chinese taboos are enforced not only in China but internationally.”
Interestingly, the CCP is not pursuing this policy out of a position of strength but out of perceived necessity to combat signs of weakness. It is “about shoring up domestic legitimacy by making other countries fall in line and by making other countries praise what the party is doing.”
Think about that for a minute. Even if Thompson and Ohlberg’s interpretation of the CCP’s intentions is only partially correct, it has disconcerting implications and risks.
Certainly a growing majority of the G7 is responding as if such a reshaping is already happening. Recent events reflect this increasingly adversarial reaction: US trade sanctions against China, UK’s recent banning of Huawei, ByteDance’s contortions over the operating integrity of TikTok, and the ongoing fallout from the new security law governing Hong Kong.
Note also the growing disenchantment with China as a trading partner and de facto world’s factory in the global supply chain. Of particular note, the European Union now designates China as a “systemic rival” which raises a host of awkward questions.
- If China is no longer a trusted trading partner and not an overt enemy, then what is it?
- How do you manage the ongoing risks of operating stores located in a “systemic rival” to sell to their consumers?
- Why would Chinese tourists want to shop in region that designates their home country as a systemic rival?
The crux of the dilemma of course is that global brands of any sort, luxury or not, cannot ignore the colossal Chinese market of consumers. But the backlash among the G7 has created a new consensus around decoupling the global supply chain. Germany is a particularly notable example of increasing pessimism regarding China:
“Some 5,500 German companies with production sites in China face hurdles ranging from forced technology transfer to being required to set up joint ventures. Many have lost faith in the possibility of change. ‘I would now advise any Mittelstand company to stay away from China,’ says Frank Klix, who used to represent the Panjin Economic Development Zone in Germany but became frustrated by the lack of a level playing-field.”(“Germany’s China policy: Out of date”, The Economist, July 18, 2020, pp. 40-41)
This industrial decoupling has a potential collateral impact on luxury brands selling in China. What will demand for luxury goods look like under this increasingly strained relationship between China and the rest of the world?
Neoliberalism and modern luxury
To answer this question we have to address a more fundamental question. What are the preconditions for the global luxury market to thrive? This is a macro question very few luxury brands, if any, have seriously examined. The low-risk growth of the last 20 years has lulled most into a state of business complacency.
A quick detour into history is needed. Luxury and illiberal rule are not strangers. History shows that luxury goes hand in hand with autocratic regimes and iron-fisted ruling elites who viewed luxury goods as a source of wealth and social distinction. For example, the reinvention of porcelain in Europe can be attributed to the dogged efforts of a single absolutist monarch, the Saxon elector Augustus the Strong, whose ambitions funded the rediscovery in the early 18th century.
But history also shows us that luxury does not thrive under modern autocracies and rigid political ideologies (e.g. Soviet-style communism and until recently Maoist-style communism). Instead, it has only been under the recent, neoliberal flavor of globalization in the last two decades that the luxury industry has flourished.
Brands blossomed due to the following favorable conditions: free trade, relatively free press (which enables communication and advertising by brands), rising purchasing power of aspirational, emerging overseas wealth and relatively open borders for travel.
If the Thompson-Ohlberg thesis is correct, some of these pro-luxury factors appear at risk. But perhaps the greatest risk lies in the degradation of the mystique of luxury. Luxury brands have always relied on an enduring mystique – a universal appeal attracting consumers from all cultures.
Luxury’s enduring appeal depends on a stable mix of customers roughly balanced between “aspirational” seekers (including connoisseurs) and status seekers. This high-low segmentation makes it easy for a brand to divide and conquer both segments through diffusion or complementary product lines (think fragrances for fashion houses) while maintaining a firm grip on their most desirable products. Free trade and travel simply made the mystique more accessible than ever before.
Luxury’s enduring growth engine – humanism as consumerism
But what happens when that customer segmentation is disrupted? What happens when consumers and their values become geopoliticized and hence diverge on key issues?
Take for example the issue of privacy. In Asia, especially in mainland China, privacy is not valued the same way as it is in western Europe and North America. As one Chinese journalist describes, “when Chinese people have to choose [between] convenience and privacy, they will choose convenience”.
This is a subtle, yet critical consideration for brands that prize individuality, distinction and respect for the individual. And which brand doesn’t respect the individual? It does not take much imagination to see how privacy, or lack thereof, becomes a risk.
For the CCP, privacy is secondary and subordinate to the needs of the state, especially the integrity of one-party rule. As a result, China has become one of the world’s leading surveillance states. In Xinjiang, the Uighurs, a Muslim minority, face extensive surveillance and alleged mass detention in “re-education camps” designed to combat domestic terrorism. The CCP’s treatment of the Uighurs has become a potential geopolitical flashpoint that could spark further domestic and international conflict.
For luxury brands, that potential spark ignites when “Uighur Lives Matter” suddenly emerges as the next globally recognized protest slogan, even as the recent fallout from Blacks Live Matter has begun to change fashion and apparel brands.
The correlation between human rights and luxury might seem a curious one to raise. But the connection and collateral risk of contamination to brands have been there all along.
This goes back to the cultural and humanistic core of luxury. Creating and enjoying luxury in life is perhaps one of the most basic human desires. Even the poorest day laborer or farm worker knows what luxury is or at least what it might taste like. It’s the same for human dignity. Both are inspirational forces that defy boundaries and can act as powerful levers of cultural influence.
Yet oddly enough, only the most philosophically minded founders of luxury brands (e.g. Brunello Cucinelli) seem to understand the humanism and cultural power at the root of luxury. At its finest, luxury reveals a profoundly intense and specific expression of humanism. Craftsmanship is not simply a means to produce higher quality. Instead, a founder like Cucinelli treats workers, makers and artisans with dignity and respect because they are fundamental to the power of luxury to inspire.
A geopolitical stress test for luxury may be coming soon even if Uighur Lives Matter does not become a global rallying call. Until recently, it seemed that global elites were converging in taste and consumption for Western luxury brands. But core consumer preferences appear to be bifurcating along geopolitical lines.
Put simply, the prestige of a brand can be adversely affected by the geopoliticization of consumer associations and perceptions. Luxury consumers may begin to reject brands that are too closely associated with consumption that occurs in autocratic regimes with poor human rights records. This is what might be called geopolitical brand contamination.
This rejection will be most intense for luxury connoisseurs and tastemakers. They are the ones who matter the most for a luxury brand’s reputation. If they find a brand’s global expansion or popularity in a specific hotspot to be a negative rather than a positive for the brand’s values, the slippery slope of negative sentiment and publicity will have begun.
Even worse, brand contamination works both ways. Chinese consumers may reject Western brands in favor of homegrown brands. In fact, this seems to already have begun, for example, in the case of Samsung smartphones and Toyota cars in the Chinese market.
The world outside luxury’s window
Today’s geopolitics and domestic politics show the peril of ignoring the link between our messy human world and the business and heritage of luxury. Arguably, it’s only a question of time before Western luxury brands face a geopolitical reckoning as relations worsen between the G7 and China. Well-known brands are easy targets for autocratic regimes, who enjoy greater flexibility to punish and harm brands than do G7 governments.
So what should luxury brands do?
My recommendations are simple. Start by imagining beyond the boardroom and engaging with the complexities of the world outside of the strict boundaries of running a luxury brand.
Then think through the cultural and geopolitical risks that might impact your long-term sustainability and how to mitigate them. These include but are not limited to:
- Plan and prepare for increased trade tariffs and barriers on luxury goods
- Promote a healthier balance of customers in “old guard” v. rest of world markets
- Build a more flexible overseas retail footprint with more protective options (e.g. short-term, flexible leases)
- Monitor and assess negative sentiment against Western luxury brands as trade sanctions and security tensions escalate and nationalist sentiment intensifies
- Assess the risks of non-tariff barriers and punitive measures such as forced joint ventures and “technology transfer” equivalents applied to the luxury sector (e.g. what would forced “artisanal transfers” look like?)
- Develop contingency planning for a forced corporate spin-out if you become a geopolitical target like ByteDance’s TikTok or Huawei
The skeptic might say these are improbable events not relevant to luxury. After all, Hermes is not Huawei. Very few policymakers regard luxury as a key piece in a nation’s critical infrastructure. Point taken. On the other hand, no brand, not even a luxury brand, lives in a vacuum.
Still skeptical? The Trump administration raised US tariffs on soft luxury goods from the UK to 25 percent due to a dispute over subsidies to Airbus (Samantha Conti, “Britain, EU Appeal to U.S. on Luxury Tariffs,” WWD, 07/30/20, p. 4). The result is that 150 year old bespoke tailoring firms on Savile Row – the ultimate in luxury menswear – are paying a steep price for a trade dispute that has nothing to do with tailoring or luxury goods.
Yet Savile Row is still part of the retaliatory mix levied by the US against its closest geopolitical ally, the UK. This is a doubly cruel irony because small, independent tailoring firms are some of the least subsidized businesses of any industry. They survive only because they have dedicated, passionate customers.
Geopolitics has a talent for creating a far messier world than we can imagine, especially within the boardrooms of luxury brands. Clienteling, retail excellence, and merchandising alone do not determine the fate of luxury brands in a geopoliticized world.
This is precisely the larger point. No longer is it sufficient to conveniently treat China as a black box, albeit a lucrative one, for luxury goods. No longer can CEOs and boards of directors simply delegate China as a responsibility for country-level managers.
The entangled geopolitics of our moment – not simply the Chinese market itself – deserves far greater attention, scrutiny and imagination than ever before. Without a more active, informed engagement among C-level executives, I suspect the next 20 years could prove to be a rocky one for the luxury sector.