The extreme jeopardy is facing the industry, while there is no simple, standardized playbook for coming times, instead, companies must tailor their strategies to fit their individual priorities, market exposure, and capabilities. In other words, a “silver linings strategy” takes advantage of bright spots in the proverbial storm. The key principles for managing change will be flexibility and agility, alongside operational resilience — a critical capability in an uncertain environment. To inform decision making, we expect data and analytics to play an increasingly important role, helping companies to track shifts in demand across geographies, categories, channels, and value segments.
The accelerated trends that were in motion prior to the crisis, as shopping shifts to digital and consumers continue to champion fairness and social justice. Consumer behavior has undoubtedly shifted over the past year, as people sheltered from the virus in their homes, travel was restricted and stores were closed around the world. However, as digital consumption continues its dominance and growth in 2021, companies must develop more engaging and social experiences to encourage consumers to connect. At the same time, we anticipate executive teams to increasingly focus on ensuring that digital channels add measurable value to the bottom line, given tight budgets and the need for productivity and efficiency. With tourism in the doldrums for some time to come, brands need to unlock new pockets of demand and tailor assortments to attract more local customers. As they become more conscious of worker welfare issues and the human impact of factory closures, company leaders must uphold the highest ethical business practices and overhaul business models that are exploitative to people and the planet. Looking forward, the industry should set its sights higher, aiming for a “better normal” across stores, partnerships, and assortments.
In a disrupted environment, decision-makers must be bold. They must develop novel strategies for their assortments or product offering, focused on profitability, value, simplicity, and downsized collections, rather than discounting and volumes. They also should create a more nuanced assessment of store ROI to manage the crisis in physical retail while implementing a truly omnichannel perspective on store operations. The pandemic will continue to put supply chains under pressure and executives should be prepared for further shocks in 2021. Brands should secure high-quality and reliable production capacity and make the long-overdue shift to a demand-focused model to operate in this fluid environment. Leveraging volume commitments and strategic alignment with key suppliers will help some suppliers’ financial stability and, in the process, improve the credibility of brands’ ethical commitments. While there is little doubt that the year ahead will be an arduous one for some business industry players, it will also be a year of opportunity for others. Market valuations, a forward-looking measure of expected company success, show that a brighter future lies ahead for companies that are heavily indexed in digital channels and the Asia-Pacific region.
We believe 2021 will bring continuing opportunities in both the value and luxury segments, where the former benefits from consumers trading down in uncertain times, and the latter benefits from a strong recovery in markets like China. Whatever their positioning, stronger players will have an opportunity to seize market share from their peers and, in some cases, acquire their rivals at a bargain price. In this highly tempestuous and increasingly competitive market environment, players across the board will need to reflect carefully (but swiftly) on their next moves. Not every silver lining that emerged from the crisis will lead to a business opportunity and those that do will certainly not last forever.
Navigating Road to Recovery
The past year will go down in history as one of the most challenging for the business industry on record, marked by declining sales, shifting customer behavior, and disrupted supply chains. On top of a humanitarian crisis affecting the lives of billions of people, Covid-19 is the catalyst for a deepening economic crisis. Like many other sectors, the business industry finds itself in the midst of unprecedented adversity, with revenues and margins under pressure. Yet the shifting landscape is also creating pockets of momentum and, despite the ongoing, widespread impact of the pandemic, some business companies are developing new ways to compete.
The pandemic has compounded the demand for all things digital, which in turn has enabled innovation, efficiency, and new ways for businesses to scale up. The shift is permanent and will continue to create opportunities to build slicker, smarter operating models and differentiated customer propositions that are more personalized to each customer. Equally, the crisis has emphasized the need to move to more sustainable and responsible ways of working in all areas of the value chain. As the number of business players responding to this need continues to grow, it will prove to be a long-term boon to companies, workers, customers, and the planet. Although more than half of business leaders also expressed concerns about things other than the Covid-19 health and economic crisis for the year ahead, the pandemic recovery timeline did weigh heavily on their minds. We should acknowledge that the mood of business leaders may have evolved in the weeks that transpired since the survey, especially as the pandemic worsens again in the fourth quarter of 2020 — with government responses including more severe social distancing measures in Europe, the threat of new lockdowns across numerous regions and mass-testing in some Chinese provinces.
Nevertheless, the collective sentiment of business executives gleaned from our survey does constitute a compelling yardstick against which to measure business leaders’ predictions and expectations for the year ahead. Naturally, business leaders across the board hope for the effects of Covid-19 to dissipate and for the global economy to recover as quickly as possible. Scenarios analysis for the industry over the next year anticipates that, in an Earlier Recovery scenario, the virus will be effectively controlled, thanks to a strong public health response. In this scenario, government interventions will partially offset economic impact and global travel will pick up along with the possibility of larger social gatherings. The global growth outlook for business sales in this scenario determines that recovery would be achieved by the third quarter of 2022, with China leading the way with 5 to 10 percent sales growth in 2021 compared to 2019. Europe, on the other hand, would expect to continue to see lower sales in 2021 as international tourists stay at home, with sales down 2 to 7 percent compared to 2019. With footfall remaining low, pre-Covid levels of activity in Europe are unlikely to return before the third quarter of 2022. This scenario includes a similar trajectory for the US, with sales down 7 to 12 percent in 2021 compared to 2019, and a recovery to pre-Covid sales only expected by the first quarter of 2023. The primary driver of growth in the coming year will continue to be digital channels, reflecting the fact that people in many countries remain reluctant to gather in crowded environments. The Earlier Recovery scenario anticipates dynamic digital growth across geographies in 2021 compared to 2019, with more than 30 percent online growth in Europe and the US and over 20 percent growth in the already highly digitized Chinese market.
The primary driver of growth in the coming year will continue to be digital channels, reflecting the fact that people in many countries remain reluctant to gather in crowded environments. However, less favorable recovery scenarios must also be considered if there is a delay to a widely available vaccine. In this case, the virus would persist in some regions and new waves of lockdowns could take hold, accompanied by only partially effective government responses and ongoing travel restrictions, further embedding the consumer behavior developed during the pandemic. If this more pessimistic Later Recovery scenario were to materialize, a deeper dip in sales in 2021 and slower global economic recovery would be anticipated.
In this case, the US would see sales decline by 22 to 27 percent in 2021 compared to 2019, and pre-Covid performance in the country would not return until after 2025. Although significantly impacted, Europe would fare slightly better than the US overall in this scenario, with sales down 14 to 19 percent compared to 2019. However, the European luxury segment would suffer a considerable hit. If new lockdowns were to be implemented and travel restrictions persist, luxury sales in Europe could drop up to 40 percent and only recover to their pre-crisis level by the third quarter of 2023.
There are, of course, a multitude of intermediate scenarios in between the two ends of the spectrum, each containing a combination of positive and negative effects set against the backdrop of an industry striving to recover its equilibrium. However, in all cases, we anticipate significant variation between geographies, with as much as a two- to the four-year lag between fast-and slow-recovering markets. On top of subdued sales, we expect industry players will see deep and long-lasting changes to both consumer demand and ways of working. Among potential short-term challenges, brands will need to manage a category shift towards casual wear and the continuing pressure on luxury, as well as shorter production cycles and cash constraints that lead to a slowdown in investments. Set against this backdrop, the strategic outlook among business leaders is uneven, reflecting the diverse trends the industry faced even before the pandemic. Across all value segments, a larger proportion of executives in the Survey are pessimistic rather than optimistic about the year ahead, but 32 percent of respondents still expect the industry to evolve positively next year.
In line with pre-crisis attitudes, 31 percent of executives in the luxury segment and 36 percent in the value segment have a positive outlook for 2021, while only 22 percent of executives in the mid-market believe things will get better. In the luxury segment specifically, business executives express more confidence than the Earlier Recovery scenario, which forecasts a decline of global luxury sales by 12 to 17 percent in 2021 compared to 2019, and up to a 28 percent decline in Europe. The highest confidence is around the value segment, with 36 percent of executives projecting an improvement and another 23 percent predicting little change. This reflects the impact of the pandemic on consumers across different income brackets, as well as the more established appetite for cheaper business, now partially offset by rising demand for quality and durability.
In line with regional recovery rates so far, executives from Asia are the most confident about the upcoming year, with almost half sharing a positive outlook. The vision for 2021 is less optimistic in the west, with only around a third of European executives and a quarter of US executives expecting the state of the business industry next year to improve. The sentiment of European executives is the bleakest, with almost half saying conditions will get worse, compared to 41 percent of executives in the US.
The extent to which these concerns are weighing on executives is shown in their choice of the top three words to describe the conditions we can expect for the business industry in 2021: “uncertain,” “challenging” and “disruptive.”Given the clouds that shroud the economic outlook this year, digital is seen by a third of executives as a silver lining that presents the biggest opportunity in 2021. Indeed, almost all businesses anticipate their online revenues to rise next year, with 26 percent of executives projecting a gain of 50 percent or more and nearly half of executives projecting growth of 30 percent or more. The digital opportunity in e-commerce as well as in the digitization of business processes and operations is the most cited opportunity by far. Sustainability follows in second place, with 1 out of 10 executives citing it as an area of growth, underscoring the mindset shift towards sustainability that has begun to take place over the last few years. Optimism about digital and sustainability chimes with the widely held view that, despite the disruption of the pandemic, these trends will accelerate and, in turn, lead to a reset of the business industry.