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Nearly two years ago I wrote about the increasing likelihood of a geopolitical shift disrupting the upward growth curve of the luxury industry. At the time, I believed the geopolitics of luxury was closer to becoming a top of mind issue than ever before. The carnage and bloodshed in Ukraine has sadly proven this to be an accurate prediction. Geopolitics has indeed reared its head again and made manifest the brittleness of globalization.

What I missed was the initial theater of conflict. Russia – not China – has jolted the world out of its geopolitical slumber. But recent events also make clear that Russia and China are active partners in reordering the geopolitical system in their favor, a system which has been led by the US since World War II.

History suggests this will lead to more instability. Although trade has continued to flow throughout the pandemic and the Russian invasion, we are in geopolitical transition – somewhere between globalization of the recent past and deglobalization. Low-risk globalization, which started in the 1990s, is now effectively over. That initial phase of globalization contained an uneasy bargain between autocratic regimes allowing access to their markets and Western brands seeking growth and profits.

Previously in Western boardrooms, the benefits of doing business in Russia had outweighed any perceived business or political risk. This has suddenly become an unacceptable burden. As a result, more than 600 companies have withdrawn from Russia further reducing the overall luxury market.

Some argue that this portends a fundamental paradigm shift toward deglobalization.

“So, absent any decisive action by the West, geopolitics is definitively moving against globalization — toward a world dominated by two or three great trading blocs: an Asian one with China at its heart and perhaps Russia as its energy supplier; an American-led bloc; and perhaps a third centered on the European Union…”

John Micklethwait and Adrian Wooldridge, Putin and Xi Exposed the Great Illusion of Capitalism (March 24, 2022)

In other words, we appear to be entering a phase of culturally-driven geopolitical conflict or “global culture wars” driven by historical resentments which are then amplified and channeled by autocratic regimes.

Luxury brand owners and managers should be concerned. If luxury brands are emanations of cultural power, prestige and heritage, then the emergence of global culture wars becomes a material risk for incumbent Western luxury brands. Geopolitics flowing from cultural strife and resentment could easily shrink and shift current patterns of luxury consumption and production.

This would be a reversal of the last 25 years of globalization which greatly benefited luxury brands due to the convergence of buying patterns and the consolidation of production within Western luxury brands. In an age of deglobalization, Western luxury brands will likely face more competition and instability rather than a clear, easy path to growth.

On the other hand, some argue that the Russian invasion has only laid bare the geopolitical risk of doing business under one autocratic regime. China, they argue, is not the same as Russia.

However, this betrays a decisionmaking flaw, namely, not updating prior assumptions when new facts present themselves. This is a failure to recognize a new emergent reality that has become more explicit and clearer as events unfold.

The first newly salient fact is the eruption of an active land war in Europe, the largest and most significant one since World War II. This is clearly a geopolitical disruption of the existing international system.

The second is that Russia and China are virtually inseparable in geopolitical terms. What was once simply overlapping anti-Western sentiment is now an explicitly anti-Western partnership. In February 2022, China and Russia declared a “friendship without limits” based on a deep mutual interest in challenging the West’s dominance. This is why business as usual with respect to China seems to be wishful thinking.

I would suggest two anchoring ideas as a way to re-evaluate the long-term strategy and footprint of luxury and premium brands in Greater China.

The first idea is resilience, which I borrow from the realm of cybersecurity. That is, understand your assets and reduce the “attack surface” of potential vulnerabilities for business and brand disruption. This notion can be applied to brand and corporate assets in China and other geopolitically risky markets.

The second idea is managing the potential fragmentation, compartmentalization and segmentation of customers in a deglobalizing world. The luxury market is especially vulnerable to changes in consumer behavior and perception driven by cultural conflict. Among today’s cultural elites (e.g. influencers), this is already happening.

Combined, these two ideas yield what I call a strategy of “hardened flexibility”. The goal is reshaping the brand and asset risk profile in country. This will likely entail reducing stock and inventory while striving for a higher average selling price and rethinking the delivery experience to the customer.

Specific actions could include:

  • Fewer directly operated stores redistributed according to a geopolitically attuned risk/reward framework
  • Risk-balanced portfolio of on-demand showroom and traditional retail formats
  • Greater virtualization and/or customization of products, services and experiences (special events and limited run products)
  • Development of complementary, hybrid distribution and delivery channels

It is a well-known truism that if you do not know history, you are condemned to repeat it. The same is true of geopolitics. Corporate executives are by nature creatures of established habits, routines and assumptions. That becomes a risk factor when the geopolitical ground shifts underneath.

As I wrote in 2020, it no longer makes sense to assume a low-risk growth trajectory for the luxury industry. Relying on the same growth playbook of the last 20 years looks like an increasingly poor bet for the next 20 years.

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