To receive the Vogue Business newsletter, sign up here.
The European luxury retail market is bracing itself for a long and difficult return to pre-pandemic levels.
Analyst and expert forecasts agree that a prolonged lack of international travellers is going to dampen growth, with the likelihood of disappointing returns lasting until at least late 2022. Although there are some signs that American travellers will return to Europe in reasonable numbers this summer, the Chinese are unlikely to return until next year.
The European market prognosis looks bleak in the latest Altagamma consensus, which estimates luxury goods consumption trends and was recently updated to include higher year-on-year performances across markets. While the North American market is now expected to grow 20 per cent over 2020, gaining 6 percentage points over previous estimates, the European market is gaining only 2 percentage points on its November forecast. “Europe is obviously suffering a bit more,” says Stefania Lazzaroni, general manager of Fondazione Altagamma.
According to Euromonitor data, Europe’s personal luxury market will not reach pre-pandemic levels until 2023. Achim Berg, leader of McKinsey’s global apparel, fashion and luxury group, is a little more optimistic than three months ago because European customers are willing to spend more and have accumulated savings. However, the absence of international travellers, as well as a fourth wave of Covid-19 driven by the new Delta variant, needs to be factored in. Full recovery is not likely to be in sight until the end of 2022, he says.
The European market relies heavily on international spenders. European governments have also avoided putting extra cash straight into consumers’ hands, leading to a slower recovery compared to the US. By contrast, McKinsey expects America’s luxury market in 2021 to be at the same level, or only 5 per cent smaller, than in 2019. “We see this effect after every recession, the US typically gets a harder hit but also has a faster recovery,” says Achim Berg.
American consumers have benefited from a £1.9 trillion economic stimulus bill. That has no real counterpart in Europe: its Next Generation EU recovery fund will feed through to benefit consumers on a more mid to long-term trajectory. “The EU recovery plan will indirectly improve the growth profile of a country, facilitate the recovery and therefore bring a return to optimism,” says Francesca Di Pasquantonio, head of luxury goods, equity research at Deutsche Bank. “There will be a boost to spending and to confidence but it will be indirect, as opposed to the US, where they have put cash in consumers’ pockets.”
Data from the Vogue Business Index shows that the willingness of European consumers, excluding British nationals, to spend on luxury fashion in the next six months remains below the global average.
While international travel bans remain in place, European luxury is once again relying on its own European shoppers. International travellers usually make up 40 to 50 per cent of luxury spending on the European continent, compared to only 20 to 25 per cent of luxury spending in the US. The categories of goods favoured also vary from region to region, says Frédéric Chevalier, chief operating officer for Europe of Lagardere Travel Retail. While Asian shoppers in Europe invest in fashion apparel and handbags, Europeans prefer perfumes and makeup. “Luxury goods are suffering and will continue to suffer during the summer,” he says.
An uncertain European summer
Safety is uppermost in the minds of travellers. “If we are really talking about recovery back to pre-pandemic levels, there has to be a coming back of international tourists and this will really be a matter of when people will feel safe to travel,” says Ling Xie, equity research luxury goods at Credit Suisse.
Individuals considering travel are less prone to throw caution to the wind after the experience of returning waves of the virus. “Last summer people thought that it was the end of the pandemic, but this summer people could be more cautious in terms of long-distance travelling,” says Xie.
European governments are certainly more cautious this summer. Constraints to inter-European movement remain in place, with most countries still requiring proof of PCR tests on arrival. From 1 July, the EU is introducing a digital Covid certificate to ease free movement: it applies to fully vaccinated individuals, those with a Covid-19 negative test and who have recovered from the virus. UK tourists who were more or less free to travel in Europe last summer, currently have easy access to only 11 “green list” destinations. According to data from ForwardKeys, which analyses air ticket bookings, travellers from Europe are currently at 29 per cent of 2019 levels.
“As an industry, we have both confidence and an unavoidable question mark on the return of European passengers during the summer,” says Chevalier. “What we know is that there is a super strong appetite for travelling — the question is more on the feasibility than the desire.”
Chevalier thinks that if processes are simplified, Europe will enjoy what he calls “huge revenge travel”. Altagamma’s Lazzaroni is also positive about revenge spending by European travellers. Revenge spending on luxury has already driven a partial recovery in luxury sales to European local consumers since the third quarter of 2020.
Alex Bentley, head of product for luxury travel company Audley Travel, expects Europe will still have a busy travel season, although destinations are not nearly as crowded as in 2019. Travellers are also investing in longer, more expensive trips: the average booking value has increased by 12 per cent over the last year, with Iceland, Italy, Greece and France as top European destinations.
Encouraging back US travellers
Following the European Council’s advice to member states to ease some of the restrictions in place for US travellers in May, countries such as France, Italy and Greece have reopened their borders. However, a lack of European coordination has led to each country introducing different entry requirements. The UK is currently negotiating a travel corridor for US travellers while the US remains on the “amber list”, requiring a 10-day quarantine and a minimum of three PCR tests.
Americans are still keen to visit Europe. Audley Travel’s Bentley says the number of Americans planning a trip within North America has increased 58 per cent on 2020 levels. Travel data company ForwardKeys says tickets issued to US travellers are currently at 24 per cent of 2019 levels.
In the long term, Europe remains a preferred region for Americans, with over 41 per cent of consumers surveyed by Audley Travel planning a trip within the next 18 months. “There is definitely pent-up demand for European travel within the US market,” says Bentley. Audley Travel bookings for the US to Europe increased by 124 per cent in April and May, compared to the first two months of the year.
If those incoming American tourists materialise, they could provide an unexpected boost to the European luxury market, says Deutsche Bank’s Di Pasquantonio. Americans are the world’s second biggest spenders after Chinese travellers. Together with Chinese, Japanese and Middle Eastern tourists, they are hugely important luxury spenders in Europe, says McKinsey’s Berg. “If you think about areas like Italy’s Lake Como, it is the Americans that make the big ticket purchases,” he says.
Luxury travel operator Scott Dunn is seeing both a rise in domestic US travel and in bookings for European destinations such as Iceland, Italy, Greece and Portugal. “The softening of the restraint on travelling goes in the right direction,” Frédéric Chevalier says, encouraging an open-doors approach. “Travel is possible, but the risk is that the difficulty is going to be perceived as excessive.”
Comments, questions or feedback? Email us at feedback@voguebusiness.com.
More from this author:
Paris: The hidden opportunities in luxury retail