What Path Do Luxury Brands Follow on the Eve of the

Economic Crisis?

Yunfei Xia

Kingston University, Kingston Hill, Kingston upon Thames, Surrey KT2 7LB London, UK

Abstract. The detrimental effects of anti-epidemic tactics have persisted since

the COVID-19 epidemic began in 2019. Furthermore, the present financial
climate has been exacerbated by the energy crisis and the ongoing conflict
between Russia and Ukraine. The current challenges encompass limitations on
corporate operations, obstacles to rejuvenating the consumer market, sluggish
economic growth, stalling in the enhancement of the consumption framework,
and a lessening of the impact of consumption on the economy [1]. The fashion
industrial chain has also taken a hit. In the aftermath of the conclusion of the
arduous anti-epidemic efforts implemented over a span of two years, the
prevailing political and social climate has reintroduced a sense of uncertainty and
complexity to the situation. The current year has witnessed an unprecedented
level of tension, posing a significant challenge for the fashion sector.
Therefore, this study focuses on how luxury brands should adapt strategically
in a volatile market characterized by uncertainty. Based on the data analysis and
literature survey, this paper find the global macroeconomics situation is
influenced by the inflation and stagflation, the Covid-19 Pandemic and
geopolitical instability. These three factors contribute to some new changes in
the luxury business, such as the change of consumer attitude and the change of
consumer group and the change of price. Then this paper will undertake an
analysis of the development of the luxury business under the uncertain economic
condition to form more targeted and valuable insight in formulating future
strategies for luxury business.

Keywords: Epidemic Economy, Luxury Business, Global Inflation.

1 Introduction

Luxury goods, also called superior goods, are products with a demand that is directly
related to consumer income exponentially. In other words, when consumer income
increases, they purchase more of these goods and vice versa [2]. Although luxury goods
are not daily necessities, which means not everyone has a demand to purchase such
commodity, they still play a very important role in the global economy development.
According to the statistics of the Investment Forecast Analysis Report, the global luxury
market sales (including luxury goods and luxury experiences) grew by 5% at constant

© The Author(s) 2023

E. Marino et al. (eds.), Proceedings of the 2023 5th International Conference on Literature, Art and Human
Development (ICLAHD 2023), Advances in Social Science, Education and Humanities Research 806,
https://doi.org/10.2991/978-2-38476-170-8_60
540 Y. Xia

exchange rates to reach 1.2 trillion euros. Such growth was positive across all segments,
with the personal luxury market performing particularly well, with sales up 6 per cent
to €260 billion. However, luxury goods are very sensitive to the fluctuation of the
market environment and the changes in the consumer income [3]. The most recent
publication of the Global Economic Prospects by the World Bank has shown a
downward revision in worldwide growth projections for the year 2023. The revised
forecast now stands at 1.7 percent, indicating a decline of 1.3 percentage points from
the previous estimate made in June 2022. This figure is the third lowest level of global
growth in nearly three decades. As to the research, there is a significant deceleration in
global economic development, reaching a critical threshold that poses a substantial risk
of recession. This deceleration can be attributed to various factors, including elevated
inflation, escalating interest rates, diminished investment, and the ongoing situation in
Ukraine. According to Malpass, the President of the World Bank, the global economy
is “facing an intensifying crisis of development” and obstacles to global prosperity
will persist in the foreseeable future [4]. Such intensive crisis will pose severe challenges
to the development of the luxury business. More than half of top executives in the
fashion business have conveyed that the expansion of the global fashion industry is
expected to slow down due to the ongoing conflict in Ukraine, elevated inflation rates,
and the challenges faced by supply chains. It is predictable that the situation will
deteriorate in the year 2023. Besides, on the day of May 23rd, 2023, a significant
disruption occurred within the global luxury goods stock market. The Luxe.co Luxury
Sector Equity Index observed a decline in the value of all 26 stocks it encompasses.
Within the realm of the European luxury market, the stocks of prominent entities such
as the French luxury powerhouse Hermes, the Italian luxury behemoth Moncler, and
the globally renowned luxury group LVMH experienced a fall above 5 percent within
a singular day [4]. All of these phenomena can be viewed as signals to inspire the luxury
business to adjust its development path on the eve of the economic crisis Thus, the
primary objective of this paper is to examine how the luxury goods business will
formulate strategies in the future, given the challenging economic conditions. It aims
to conduct a comparative analysis of the macroeconomic conditions across several
global locations. Additionally, it will analyse the impact of the macroeconomic
conditions on the development of the luxury business. Then it will attempt to propose
prospective development plans for fashion brands based on the aforementioned
findings.

2 Analysis of Global Macroeconomic Situation

Inflation and Stagflation. The latest edition of the World Economic Outlook by the
International Monetary Fund, released on April 11th, 2023, indicates that the global
economic forecast remains uncertain due to different factors such as instability in the
financial sector, elevated levels of inflation, the ongoing repercussions of the Russo-
Ukrainian War, and the prolonged duration of the COVID-19 pandemic ((shown in Fig.
1)) [5]. In light of the foregoing factors, the anticipated trajectory of global production
growth is expected to slow down from an estimated 3.0 percent in 2022 to 1.9 percent
 What Path Do Luxury Brands Follow on the Eve 541

in 2023, as indicated by the World Economic Situation and Prospects 2023 report
published by the United Nations Department of Economic and Social Affairs
(UNDESA) [6]. This number signifies one of the lowest rates of growth observed in
recent decades. Upon examining the global economy in a comprehensive manner, it
becomes evident that three primary elements will exert an effect on the prospects of the
global economy, inflation, and investment markets in the year 2023 and beyond. These
factors also exert an influence on the economies of the United States, Europe, and
China, which are regions characterized by similar economic conditions. Collectively,
they will guide us towards a period featuring diminished economic expansion, elevated
short-term inflation accompanied by subdued medium-term inflation, and lackluster
performance in financial markets.

Fig. 1. Top three risks to fashion business

The Influence of the Covid-19 Pandemic. The underlying factor contributing to

the inflationary pressures can be attributed to the onset of the COVID-19 pandemic.
Consider the economy of the United States, as an illustrative case (see Fig. 2). During
the initial months of 2020, the United States experienced a significant downturn in its
economy as a consequence of the COVID-19 pandemic, and this downturn was
characterized by a substantial increase in the unemployment rate, reaching its highest
point at 14.7 percent in May 2020. Before the COVID-19 outbreak, in February 2020,
the unemployment rate in the United States was 3.5 per cent, the lowest it had been in
the previous nearly four decades. However, after the outbreak led to massive social
restrictions, the unemployment rate rose to 4.4 per cent in March. It then rose to 14.7
per cent in April, the highest level since the Second World War.
542 Y. Xia

Fig. 2. Bureau of Labor Statistics

Against the background of a recovery in consumption, inflation in the United States

(the CPI YoY) continued to rise and peaked in June 2022 at 9.1 per cent. Since then,
this index has fallen back. But as of March 2023, it was still as high as 6.0 per cent. In
2022, the CPI in the United States rose by 6.2 per cent year-on-year, a significant
increase of 2.6 percentage points from the previous year and a record high in almost
four decades. Since 2022, high inflation has become the top economic concern for the
Federal Reserve, the Biden administration, and the American public. It also forced the
Federal Reserve to raise interest rates sharply and consecutively from March 2022,
despite the economic downturn, which triggered the crisis of small and medium-sized
banks in the United States in March 2023, represented by the failure of Silicon Valley
Bank[7].
Geopolitical Instability. The conflicts between Russia and Ukraine have also
received much attention over the past few years. These conflicts are a major blow to
the global economy, hurting economic growth and driving up prices [8].
Ukraine is an important grain producer for European countries (See Fig. 3). It is also
a major global exporter of food products. As of July 2022, due to the war, Ukraine had
about 20 million tonnes of food destined for export trapped in the country. Ukrainian
President Zelensky said: “After this year’s grain harvest, the figure could rise to 75
million tonnes.” The war also meant that Ukraine's grain harvest in 2022 would be
smaller. Such situation also led to a spike in global wheat prices. Till January 2022,
wheat prices increased by about 62 per cent, from USD 6.93 per bushel in 2021 to more
than USD 11 per bushel. In early March, the Food and Agriculture Organization of the
United Nations released its global food price index for February, in which global food
prices rose by 20.7 per cent year-on-year, reaching a record high (See Fig. 4). The
United Nations also estimated that the number of people facing food insecurity had
reached its highest level in the past 15 years. The outbreak of the Russo-Ukrainian War,
disruptions in the wheat supply chain, and rising prices further exacerbated the
situation.
 What Path Do Luxury Brands Follow on the Eve 543

Fig. 3. Ukraine’s wheat exporting

Fig. 4. Food price in the EU

3 Luxury Business under the Volatile Macroeconomic Situation

Generally speaking, the cost of luxury goods is closely related to people’s income. If
the consumers don’t have enough income to afford the luxury goods, they will choose
to buy the substitute at the low price. That is to say, the macroeconomic situation has
an evident and direct influence to the development of luxury business [9].
The Change of Consumer Attitude. In general, the motivations of luxury
consumption mainly include self-affirmation, flaunting wealth, following conformity
and seeking uniqueness. Today’s luxury consumer goods have become a symbol of
value, and also a kind of consumer culture and a sense of personal identification of the
same class of people. The social nature of luxury consumption makes it perform much
544 Y. Xia

worse than other industries during the economic downturn. During economic recession,
people’s real income decreases. When some consumers reduce or stop the consumption
of luxury goods, the social nature of luxury consumption will lead some consumers
reduce to follow the consumption behavior, thus resulting in a sharp decline in the
market. This is particularly evident during the COVID-19 pandemic, as the global
luxury market shrank by about a quarter in 2020 compared with the same period last
year. According to data provided by the company, the S&P 500 luxury goods index
(.SPGLGUP) plunged 40.74% from February to March 2020, to 1780.63 points, while
the S&P 500 index (.SPX) fell 33.62% during the same period. This indicates that the
impact of COVID-19 on the luxury industry is significantly higher than the average for
other industries over the same period (See Fig. 5). In 2023, American consumers remain
cautious about consumption. Inflation is still a concern for them. While consumers are
still spending, they are looking for value. Of the respondents, 80 per cent said they were
changing their shopping behavior by buying cheaper goods. In addition, the University
of Michigan released its preliminary findings on the U.S. Consumer Confidence Index
for May, which stood at 57.7, dropping to a six-month low, a big distance from 63.5 in
April [5].

Fig. 5. Comparison of domestic and foreign luxury brands affected by the epidemic

The Change of Consumer Group. Due to the “one child” policy initiated from
1980 to 2015, a large number of “Generation Z” young people grew up in middle-class
families, which means that they have more disposable income and do not have the
pressure to support their families. Thus, they can have more opportunities and strength
to enjoy life than the previous generation. Despite the rise in inflation over the past few
years, 40 per cent of consumers still express their eagerness to spend in the coming
year. Younger and higher-income consumers, who also are the most optimistic about
the economy, are more willing to open their wallets than other age or income groups.
While 88 per cent of Gen Z respondents are trading down, 64 per cent are splurging.
 What Path Do Luxury Brands Follow on the Eve 545

Gen Zers and millennials show a particular willingness to splurge on fashion, with 61
per cent of both age groups saying they intend to treat themselves by buying apparel,
footwear, and accessories (See Fig 6). Groceries and restaurants are popular splurge
categories across all age groups.

Fig. 6. Younger consumers still plan to splurge this year.

Price Hikes for Luxury Brands are No Longer Sustainable. The turbulent times
also bring the possibility of change in the fashion chain. Since the COVID-19
pandemic, luxury brands have used constant price hikes to secure revenue while
inspiring consumer buying behavior. Price hikes for luxury brands typically occur
about once or twice a year. However, since the beginning of 2020, many luxury brands
have increased the frequency of price increases. According to incomplete statistics,
since 2020, Chanel has carried out nine price hikes. Louis Vuitton has carried out ten
price increases, an average of more than two per year. As for the reasons for the price
hike, luxury brands often cite rising costs as the main reason. An LVMH spokesman
once said the price hike was due to increased manufacturing and transport costs. Chanel
previously announced that the reasons for the brand’s increase in the prices of its
jewelry and watches were considerations of changes in raw materials and production
costs and the constant growth in market demand. However, if looking at the gross
margins and cost structures of the luxury groups, we see that luxury goods have higher
gross margins and are less affected by rising costs. According to the financial reports,
the gross margins of Kering and LVMH were 74.7 per cent and 68 per cent,
respectively, in 2022. Obviously, in the age of data transparency, luxury brands are no
longer trusted by consumers when justifying price increases by citing “rising costs”.
Take Chinese consumers, for example. Of consumers surveyed, 54 per cent believe that
brands should be responsible for rising costs. In a previous earnings meeting, LVMH
Chief Financial Officer Jean-Jacques Guiony said the group would move more
cautiously on its pricing strategy this year, focusing on strategic price increases in the
face of inflationary pressures. Its brands might not raise prices as sharply and
universally around the world as they did last year, sparking widespread concern.
546 Y. Xia

4 Suggestions for the Luxury Business

E-commerce Marketing. Due to the low turnover rate of luxury goods inventory,
company has a backlog of products, which can slow down the recovery of funds, thus
limiting the company’s free cash flow and constraining its growth. Therefore,
improving inventory turnover and reducing physical store costs are the tasks that luxury
brands should complete. The improvement of online shopping platforms has provided
a huge market for luxury goods with greater brand added value. In China, for example,
“live streaming e-commerce” has become an increasingly important marketing tool for
the luxury goods industry. During the epidemic, offline fashion shows and brand
displays in Europe have been suspended, while online promotion has been carried out
on Chinese social media, such as Saint Laurent’s live show in Tiktok Fashion Week.
What’s more, brands can also tailor their social media channels to better connect with
their target consumers authentically and effectively. At the same time, they can reflect
local consumer tastes and trends through localized product development and packaging.
Exploit the Potential Market. While consumer confidence has improved in Europe
and the U.S., most remain cautious. However, the good news is that consumers of
Generation Z are far more optimistic than those of other age groups. In the future, the
luxury market will still be dominated by the Asian market. At the same time, the
potential of the Southeast Asian market cannot be ignored. Vietnam has a growing
middle class. They are widely spread across the country and are increasingly diverse.
In addition to increasing in numbers, Vietnamese consumers are becoming more
demanding and selective. It is estimated that by 2035, more than half of Vietnam’s
population will be part of the world’s middle class, generating more disposable income
and stimulating consumption. Luxury brands can turn some of their attention to the
Southeast Asian markets, especially Thailand and Singapore. The brands can interact
with consumers through offline activities to enhance consumers’ direct experience of
the brand, strengthen the connection between consumers and the brand and increase
their brand loyalty. These attempts will help luxury brands to develop in the Southeast
Asian market in the long run. At the same time, the consumer power of the Middle East
cannot be ignored. According to a new research report released on July 5th by Boston
Consulting Group and Altagamma, the Italian trade association for luxury goods
manufacturers, the Middle East luxury goods market is expected to reach nearly EUR
15 billion in 2023 and double to EUR 30 to 35 billion by 2030, driven by the United
Arab Emirates and Saudi Arabia. [10] The Middle East has unique history and culture
and a heritage of ancient craftsmanship. When targeting consumers in this region,
luxury brands can pay more attention to their emotional needs. Through events such as
branded art exhibitions, brands can connect culturally with Middle Eastern consumers,
giving them a sense of identification with the brand. Meanwhile, in addition to apparel
and accessories, brands can reach out to consumers by partnering with luxury hotels
and developing premium furniture and home furnishings to strengthen the link between
consumers and the brand and enhance consumer perceptions of the brand.
Focus on the Consumer Demand of Young People. Western consumers of luxury
business are older and have a higher identity. While Eastern consumers of luxury
business are younger, with lower social status. The majority consumers of luxury
 What Path Do Luxury Brands Follow on the Eve 547

products are college graduates, most of them do not have detailed and careful planning
for money, and some even blindly compare with each other in order to pursue trends.
Due to the young generation will become the main customers of the luxury business,
such products need to be changed. The surveyed college students were further classified
into five categories: jewelry luxury goods, luggage luxury goods, watch luxury goods,
cosmetics luxury goods and clothing luxury goods. Among them, luxury products in
the cosmetics category are the most popular among college students, accounting for
46.67%.(See Fig 7) However, only 10% of college students choose to buy luxury goods
such as bags and watches due to their high cost [11].

Fig. 7. Younger consumers’ consumption preference.

5 Conclusion

Based on this paper, the factors contribute to global economic instability continue to
exist. Inflation, geopolitical instability and the influence of Covid-19 remain the three
main factors that weakens consumer confidence to spend. In a poll released on July 7th,
2023, McKinsey & Company noted that geopolitical instability and inflation remain
the main risks to national and global economic growth [12]. In such an environment, new
changes have emerged in the distribution of consumer spending among consumers of
luxury products. Consumers have become more rational and look for more cost-
effectiveness of products. Thus, the luxury brands should use a variety of channels to
stimulate consumer to buy luxury goods and also need to look for more potential
markets, such as Middle Eastern consumers. What’s more, Z generation become the
consumer of luxury products, which means the luxury brands should pay attentions to
the demands of young generation and Invest more money and energy into researching
products that meet the needs of young people, such as cosmetics and clothes.
548 Y. Xia

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