Discover more from Fashion Strategy Weekly
Slowing Luxury Earnings Growth Means It Is Time to Rethink Your Content Strategy
FSW explores why luxury brands should strategize their content as a hedge against uncertainty.
Now that we are mostly out of the Q3 earnings season, it is fair to say that reports of the death of the post-pandemic luxury supercycle have turned out to be mostly true. Beginning with LVMH’s earnings release on October 1 we have seen pretty comprehensive evidence that spending on luxury goods is slowing globally and growth is returning to something resembling a steady-state. There are some exceptions, as we will discuss, but they are outliers and we are still waiting for Richemont and Burberry’s Q2/H1 2024 results later in November.
It has been a party for the luxury industry over the past few years. The market has grown by about 25 percent since 2019. A successful industry-wide shift into more and better digital distribution combined with an evolution of aspirational consumer preferences (about 40 percent of the market) towards luxury (“revenge buying”) and eventually strong economic growth in most countries to drive robust sales. Though the benefits were not symmetrically distributed across luxury organizations and bigger brands tended to benefit more (apart from Kering) global social and economic trends lifted most boats.
In this bull market of strong demand for luxury products, brands did not have to invest too much or too effectively in strategy to attract customers. This is not to say that we have not seen a lot of innovative ways to generate engagement. Louis Vuitton’s meticulously executed collaboration with Yayoi Kusama comes to mind as does Jacquemus’s summer Mediterranean pop-ups and of course Gucci’s continued investments in its Roblox instance. And who might have guessed that luxury would lean so enthusiastically forward into video games, NFTs, and the metaverse (or is it spatial computing now)? Yet, it is easier to churn out these sorts of efforts when revenue growth is in the mid-teens for many quarters in a row and the outlook is upbeat. Strategy is less important than execution when the going is good.
With the tide going out on the supercycle, questions about ROI become more pointed. Investment of time and treasure across all customer touchpoints (whether digital, IRL+, or somewhere in the web3-like orbit) need to be effectively coordinated or dropped unless they are tagged as truly standalone experiments in advance. In short, as growth rates return to the single digits for most brands across most product verticals, the wild ride of tactical actions needs to evolve into the steadier tiller of strategy. Getting a content strategy in place is where to begin. Apart from addressing the challenges from a short-term cyclical slowdown, content strategy is part of a toolkit to help prepare brands to meet structural challenges such as meeting sustainability regulations, facing rising geopolitical uncertainty, and appealing to a range of consumers across demographics and geographies.
Q1:2021-Q2:2023 - The Age of Tactics in Luxury
The post-pandemic luxury boom was driven by all three terms of the revenue equation: price, volume, and mix. The ability of most major luxury organizations to control pricing power while maintaining strong unit volume growth with a revenue-enhancing mix of products over the past few years has delivered strong sales and stable margins. Looking at just revenues, the post-pandemic period from Q1 2021 up until Q2 2023 is associated with large double digital quarterly growth rates across the board at major European organizations. (Do note that the data in Table 1 can look a bit wild at times for 2021 (e.g. >100%), as these are annual growth rates and the base year of 2020 was significantly repressed by the impact of the pandemic. One solution is to look at a 3- or 4-year rather than year-over-year growth, but those numbers have their interpretation problems.)
Table 1. Organic Revenue Growth (y/y, %), Q1:2021 to Forecasted Q4:2023
This explosion in revenue growth translated into explosive growth in shareholder value that dwarfed other sectors of the economy. From January 1, 2020 share price appreciation for the industry’s giant LVMH (which became the first European-based economy ever to achieve a $500 market capitalization in April 2023) was over 60 percent, pure luxury play Hermes was 165 percent, and W&J specialist Richemont was 59 percent. Among the giants only Kering (which has been undergoing numerous transitions simultaneously) had a bad result with a -35 percent. This is in comparison with a much more meager 11 percent gain for the Eurostoxx 50 index over the same period. Growth in luxury was broad-based including for those luxury firms big (e.g., Rolex, Chanel) and small where we do not have as much granular balance sheet data.
In this period of heady growth, luxury brands leaned into an amazing array of innovative tactics to connect with customers across a range of demographics. We saw an explosion in major luxury brands experimenting with what had previously been deemed edgier technologies like NFTs, the metaverse, gaming, and AI, partially to attract younger Gen Z and Gen Alpha consumers. This included the launch of Metaverse Fashion Week in 2022 and a wide array of individual activations from a range of brands from Gucci to Tommy Hilfiger across platforms like Roblox, the Sandbox, and Decentraland. This led to brands jumping into NFTs, the metaverse, or gaming without a real plan for building longer-term customer engagement or loyalty.
While the practical use cases for XR technologies continue to grow, mainstream interest in fashion and luxury innovation was at best short-lived, at least from the metaverse and NFT side of things. During the upswing of these technologies in 2022, the luxury buzz across web 2.0 and web 3.0 platforms was significant but began to decline in early 2023 as the aftermath of the crypto bubble began to shift brand priorities away from innovation.
2024 Needs to Be the Age of Strategy for Luxury
The post-pandemic supercycle is over, but this represents an opportunity to turn quick and easy growth and tactics back into durable growth and strategy.
Looking first at the cycle, analysts expected Q3 to reflect a slowdown in luxury earnings growth and it was worse than expected. Annual organic sales growth (which excludes the impact of changes in foreign exchange rates) in Q3 slumped from, in some cases, 10 quarters of growth in the range of 20-30+ percent to low teens or even single digits. LVMH’s rate of growth was down 5 percentage points from Q2, Richemont was down 12 points, Hermes down 13 points, and Kering saw an absolute decline of 7 percent with Gucci down 5 percent and Saint Laurent down 13 percent for the quarter. As the JP Morgan forecasts in Table 1 exhibit, there are expectations for a small bounce back for many brands in Q4 but at levels that are much more in line with historical growth rates than those of the past couple of years.
The sales equation is adjusting in a way that suggests that this H2 2023 foreshadows a weaker 2024. An assessment from RBC Capital Markets found that LVMH’s sales equation during 2019-22 was 11 percent price, 3 percent volume, and 3 percent mix. This is adjusting down to a forecast of 2-3 percent price, 0 percent volume, and 5-6 percent mix over the next fiscal year. This is a pretty broad-based slowdown in the drivers of margins and points to a sharp slowdown in buying by aspirational customers and an increasing reliance on the higher income and net worth customer base (about 225 million or 60 percent of luxury customers). Concerningly, this is probably cutting out a lot the Gen-Z and even some Gen-Y customers who collectively powered all of the industry’s growth in 2023 according to Bain & Co.
Luxury firms should not allow this period of slower growth to go to waste. JP Morgan estimates that luxury downturns have occurred three times since 2010 and lasted, on average. There are reasons to think this time may be worse given slowing economic growth, high interest rates, and just general unease owing to the lurch of world economic and political affairs from one crisis to another over the past few years. Then again, forecasting is never easy and is more difficult now and not many expected luxury to have been as resilient as it has for the past year or so. However, it does seem reasonable to expect that the industry is slowing down from a period of rapid growth. This is a good time to begin evolving from the actions grounded in tactics to those resulting from strategy.
In particular, brands can use this opportunity to begin introducing or refining their content strategies. Periods of rapid growth, both in terms of sales and market reach but also experimentation with new technologies and customer touchpoints, do not tend to be well correlated with good content strategy. They may be the result of good strategy, but rapid growth leads to an unrolling of events that often occur outside of previously considered strategies. A slowing down provides an opportunity to recalibrate to a new and evolving commercial landscape. The accelerated expansion of tactics adopted by luxury brands during this period of rapid growth, with new adventures into digital and metaverse and games and blockchain-based applications, seems to be no exception.
Content Strategy Can Be A Hedge Against Uncertainty
Like all strategies, creating a content strategy begins with being mindful of the way that you use your internal resources to engage with customers. Content strategy is unique from other forms of strategy in that it must involve integrating high-level strategy with marketing, UX, and CX functions, and even finance. At least at the start, you need to bring together corporate strategy functions with tactical functions and ensure that the strategy encompasses both front-end areas of client engagement with the back-end technical departments that support the various channels by which your audience is reached. This is especially important if you reach your audience through multiple channels as having separate strategies for IRL engagement, web2 digital engagement (e.g., social media), and even web2.5 to web3 outreach (e.g., immersive digital experiences or various co-creating platforms) will waste resources at best and likely result in the splintering of corporate strategy into ways that are diluting.
Content strategies can be as diverse as the organizations using them, but there are seven steps that are essential:
Step 1: Define Your Objectives. Before creating a content strategy, it's essential to determine the goals you want to achieve.
Step 2: Understand Your Target Audience. It is crucial to understand their needs, interests, pain points, and the type of content they prefer. You can gather this information through surveys, interviews, or social media listening. Once you have a clear understanding of your audience, you can tailor your content to meet their needs.
Step 3: Conduct a Content Audit. A content audit is an analysis of your existing content. It helps you identify the content that performs well, the gaps, and the opportunities.
Step 4: Develop a Content Plan. A content plan is a roadmap that outlines the types of content you will create, when and where you will publish it, and how you will promote it. Your content plan should align with your objectives, target audience, and content audit.
Step 5: Create and Publish Your Content. Once you have a content plan, you can start creating your content. Your content should be relevant, valuable, and engaging to your target audience. It should also align with your brand values and tone of voice.
Step 6: Measure Your Results. Measuring the results of your content strategy is crucial to understanding its impact and making improvements. You can track metrics such as website traffic, engagement, leads generated, and conversions. By analyzing your results, you can identify what works and what doesn't and adjust your content plan accordingly.
Step 7. Create a Content Governance Plan. A content strategy governance plan is a framework that provides guidelines and processes for managing content creation, distribution, and governance across an organization. It includes defining roles and responsibilities, creating standards for content quality and consistency, establishing workflows for content creation and review, and ensuring compliance with legal, regulatory, and ethical requirements.
Following the actions in these steps, and refreshing them as needed, permits an organization to be flexible and adapt quickly to a changing environment. If different parts of an organization draft their own content without an enterprise-wide strategy then reactions to changing external events become piecemeal and generate risk as messaging may vary from touchpoint to touchpoint and all may deviate from the broader values and goals of a brand.
These risks are especially acute for the luxury industry. The pricing power and exclusivity that drive luxury sales results from well-crafted and consistent storytelling that is appropriately applied in physical (permanent or pop-up physical locations), digital (social media such as TikTok or Instagram), and other (games, metaverse) touchpoints. These stories are more important to luxury than other types of consumer discretionary sectors.
Getting content strategy on track also helps brands prepare for future challenges whose impact is hard to measure in present value terms. In particular, we do not exactly how regulations will fully be enforced for moving the industry towards a more sustainable path. We know that they are coming, albeit slowly. Content strategy will need to play a key role in communicating data to regulators and internal stakeholders and accurately marketing green credentials to customers.
For another example, in terms of marketing products and messages to younger demographics, content strategy can also help brands ensure that they get the right messages that are tailored to specific demographic groups in the right touchpoint at the right time. These messages need to be encapsulated and executed with a broader strategy so that the brand’s values are communicated either equally or equivalently to customers in a way that resonates over a video game as much as a storefront. Even if the content is user-generated, content strategy is essential to put that content in the broader strategy that luxury brands need to manage.
If content is a product, then the future of luxury brands and the luxury experience depend on determining the right strategy to bring consumers the content they need and want when and where they want it. We are no longer in the age of broadcast brand marketing. Luxury brands must build tailored strategies that can flex and scale over time as technologies, platforms, and consumer tastes evolve. The future of content and, in turn, luxury is experience-driven and participatory.
Thanks for reading Fashion Strategy Weekly. Subscribe for free to receive new posts and support our work.