A Study on the Performance of the Brands

industry during the Financial Crisis

_____________________________________________
Abstract :
It is often asserted that luxury brands are relatively immune to economic downturns
but this has received little empirical investigation. This paper tests a number of
hypotheses concerning the relative performance of luxury brands in a recession. It
examine the relative quarterly growth in revenue and profitability of luxury,
premium, and mass-market segments and different luxury product categories over
the period 2008 to the start of 2020. It finds that luxury brands do not appear to be
immune as asserted, that both the mass and the luxury segments outperform the
premium segment and that this varies by luxury product category. Management
implications are derived for managing luxury brands over the economic cycle

Keywords :
Luxury Market, Financial Crisis, Financial Performance, Resilience, Brands, luxury
brands, brands and finance, brands in recession,

 Introduction :
Luxury brands have been at the center of interest for scholars and economists for a
long time due to their specific and exceptional performance in times of economic
hardships. In 2007-2011 the last severe and global financial crisis hit almost all areas
of the world economy and trade. The COVID-19 pandemic seems to deteriorate the
national economies, especially their GDP growth, and decrease the volumes of
international trade and revenues. The economic crisis of 2007-2011 showed that the
majority of retailers were adversely affected and their further recovery took
significant effort and time (Som & Blanckaert, 2015). However, the luxury companies
tend to follow contrast scenarios to the rest of the world, as they usually manage not
only to mitigate crisis effects but also to continue their growth in terms of profit and
expansion.
The purpose of the research paper is to present and explore economic and
managerial factors that may have influenced the development of luxury brands in
times of crisis. Despite the long period of 2008-2020, the study will cover only two
major economic downfalls: the Global Economic Crisis of 2007-2008 and the ongoing
stock market crash caused by the novel coronavirus pandemic. The paper will also
seek an explanation as to why giant retailers of luxury goods are capable of
preserving stability in terms of growth and profit.
The current upheaval will play the role of the next tester of luxury brands being
crisis-proof. Another aim of the study is to find out effective strategic initiatives that
helped to contain the 2007-2008 recession in order to forecast its utility for the
aftermath of COVID-19. LVMH’s strategy, which is a luxury giant conglomerate,
will be analyzed to determine measures that were taken to mitigate adverse
economic influence (Solca & Wing, 2009). This problem is of high importance to be
addressed because the final insights of the research paper will help to design clear
and valid recommendations on how to recover following the upheaval.
The effects of the 2007-2008 crisis on the luxury industry have already been studied
and analyzed. Nevertheless, there is a lack of research targeting the strategic
responses of its leading players. According to Olorenshaw (2011), LVMH had
strengthened its position with the help of the Chinese market and expanded globally
by purchasing weaker brands during the financial crisis. That crisis caused an 8%
overall decline in the industry, shifted major consumer behavior and forced multi-
brand companies to revise their strategies (Worrell, 2018). In its turn, coronavirus
saw the French tycoon facing up to 20% of a revenue drop in the first quarter due to
preventive lockdowns (Bhasin, 2020). The conglomerate’s brands currently support
COVID-19 relief initiatives by manufacturing free equipment for doctors and
donating money (Tan-Gillies, 2020). Those initiatives may help to preserve the
brands’ status and customer loyalty, but the economic influence of the pandemic is
not evident at the moment.
Luxury brands are capable of attaining stable performance levels and be resilient in
times of crisis due to specific commodities, their global presence, appropriate
strategy response, and effective value creation. In order to confirm or negate this
hypothesis, a systematic review of the most relevant publications will be conducted,
and a meta-analysis will be applied to compare the findings. The work will start
with the general character of the industry and LVMH in particular. Then the effects
of the crisis will be highlighted together with strategies applied to deal with them.
Different articles that used both quantitative and qualitative research methods
considering luxury fashion brands’ strategies in times of economic downturn will be
compared to find out the most appropriate strategy.

2. Literature Review :
One reason why luxury brands are able to sustain a crisis is that its products perform
different tasks than daily commodities do. According to Langer (2020), markets of
luxury products are less crisis-prone than non-luxury markets due to appropriate
value creation, which becomes even more important during a crisis. According to
him, some major brands managed to become stronger in 2008 because they
prioritised the brand’s values, offered redefined product lines, and provided
personalized services.
A similar situation can be seen now when popular brands try to help combat the
coronavirus outbreak (Tan-Gillies, 2020). The survey showed that 90% of
respondents admit that fashion brands should be involved in protecting the
community's wellbeing in emergencies (Arnold, 2020). Moreover, this survey proves
that luxury brands’ responses to the COVID-19 pandemic will influence future
purchasing decisions and consumer trust. Nevertheless, the study conducted by
Kapferer and Michaut (2015) reveals that actual luxury customers are not considered
sustainable but still have high latent expectations of brands. This study claims that
sustainability and corporate responsibility becomes an element of quality.
During an economic downturn, every luxury brand will be better off from
maintaining its image. According to Hassan et al. (2015), customer segments of
luxury markets have homogeneous needs and motivations, so the global dimension
of some brands helps them to be highly resilient during economic hardships. The
size of conglomerate LVMH, which controls such popular fashion brands as Bulgari,
Givenchy and Louis Vuitton, and its global presence means that some loss of
revenue in one region may be compensated by the surplus in another (Corominas &
Armengol, 2013). According to Solca and Wing (2009), LVMH is the only luxury
manufacturer that enjoys strength in two major categories (Wines & Spirits and
Leather Goods) which is its main advantage in comparison to niche luxury brands.
Various sources claim that the luxury market shrank as well during the last recession
but showed a better overall performance. According to Arnett (2020), high-end
stores’ sales decreased by 25% in 2009, while heritage luxury brands, such as LVMH,
had a flatlined revenue. The recession created an opportunity to target the Chinese
market, which contributed to the fast recovery of the industry by substituting the
European one. Currently, the situation is different with China being affected by the
novel coronavirus and with the worldwide lockdown. For instance, Roggeveen and
Sethuraman (2020), state that retailers will be forced to reconsider their inventory,
supply chain and delivery systems. Consumers may accustomed to online purchases
and care more about their health safety. D’Arpizio et al. (2020) forecasted three
scenarios for the luxury industry following the pandemic, and all of them predict a
market decline between 15% and 35%. Nevertheless, the authors expect a speedy
recovery of China (overall Asian market), while the US and Europe may feel
repercussions for a longer period. It is possible that LVMH will repeat its strategy of
more intensive China targeting.
Luxury companies are not immune to the downturns but usually perform better.
Salakari (2013) found that luxury goods manufacturers outperformed premium
brands, while their overall performance was positive during the crisis. The sales
growth, financial flexibility, and size of the company determine its operational
performance. Worrell (2018) enlisted strategic management responses that were
implemented during the Global Financial Crisis. The list includes re-allocation of
capital, horizontal expansion, and global expansion. LVMH's activity was focused on
cost reduction to free capabilities needed to maintain profit and promote growth.
According to Olorenshaw (2011), LVMH's broad portfolio and expansion to BRIC
countries played a decisive role during the financial crisis. Similar strategies can be
applied following the COVID-19 pandemic.

3. Methodology :
To gain an understanding of the performance of luxury brands during the recession
various forms of statistical analysis were utilized to gain an overall perspective on
the performance of these brands. A group of seven brands that produce luxury
products was chosen to represent the luxury industry. These brands were selected
due to their large overall presence within the industry, their varying product lines,
and their ability to represent the overall luxury industry. The brands chosen to
represent the industry consist of Wynn Resorts, Ralph Lauren, Tiffany & Co., Coach,
Nordstrom, Estée Lauder, and Movado.
The income statement was used to compare the performance of each brand during
the recession. Specifically, the Form 10-Q, a quarterly performance report filed with
the Securities and Exchange Commission, was utilized to find each brand’s revenue
and net income over the past 15 years. The revenue of each brand indicated the pure
performance of the brand during the period without consideration of management
quality. Net income also revealed the performance of the brand, but inherently takes
into account management’s ability to steer the performance of a brand in varying
economic conditions. By taking into account, both, the top and the bottom lines a
more accurate conclusion can be reached regarding the performance of each brand.
Additionally, Wal-Mart was used as a pure-play comparable in the non-luxury
category. Walmart's performance provided a solid basis for comparison within the
luxury industry. To understand each brand’s performance during the recession
quarterly Gross Domestic Product (GDP) data was used to gauge the brands within
the industry. RStudio, a language, and environment for statistical computing and
graphics,
as well as Microsoft Excel was used to perform statistical analysis to reach a
conclusion regarding the performance of the luxury industry during the recession.

4.Data Analysis :
The central issue concerns the relative vulnerability of luxury brands to a recession -
do luxury brands perform better than premium or mass brands within comparable
industry sectors?; are different product categories affected differently within the
same luxury companies? The first objective, therefore, was to determine the impact
of the 2008 financial crisis on the performance of the fashion mass market, the
premium market, and the luxury markets. The second objective was to test whether
the impact of the financial crisis has been the same for different product categories.
A data sample of twelve luxury brands and four non-luxury companies was created,
The sample of non-luxury companies contains mass market and premium market
companies and functions as a control sample. The luxury brands are from four
different product categories: fashion & leather, perfumes & cosmetics, watches &
jewelry, and wines & spirits. For each category, data for at least three companies
were utilized. The data analysis comprised quarterly revenues and biannual profits
from 2005 to the start of 2010 and was collected from the quarterly and annual
reports of the respective companies.

Table 1 Analysis of Market Segments - Sample of Companies

The year 2008 started with a global downturn that originated in 2007 and arguably
with earlier roots. What started as a financial crisis, soon expanded into the larger
real economy, affecting both mature and emerging markets alike (World Wealth
Report 2009). World equity markets lost a decade of gains and volatility of
individual stocks reached record levels. The world gross product (WGDP) fell by 2.6
percent in 2009, compared with positive growth of 2.1 percent in 2008 and an
average annual growth of almost 4 percent per year prior to the crisis during 2004-
2007 (United Nations, 2009). The years 2006 and 2007 represented two robust years
of growth of the High Net Worth Individual (HNWI) population. At the end of 2008,
however, the world’s population of HNWIs was down by 14.9 percent from the year
before, while their wealth had dropped by 19.5 percent (World Wealth Report 2009).
The ultra-HNWI’s suffered more extensive losses in their financial wealth than the
HNWI population as a whole. The ultraHNWIs population decreased by 24.6
percent, as the sub-group’s wealth dropped by 23.9 percent, pushing many down
into the “mid-tier millionaire” pool

Figure 1 Growth in Revenue by luxury brands categories

(Base 2005 - 2009)

Similarly, two of the product categories, Wines & Spirits and Watches & Jewellery,
showed a decline in profit margins during the recessionary period as compared to
the other two categories,

Figure 2 Biannual profit margins by category – 2005-2009

In summary, Luxury brands was affected by the financial crisis 2008/09. Revenues
and profitability of wines & spirits and watches & jewellery decreased more than for
fashion & leather and perfumes & cosmetics. In particular, the category of wines &
spirits was subject to fluctuations. Although the luxury product category performed
better than the premium category, both of these in fact were more negatively
affected than the mass market category, within the chosen apparel sector. This is
evidenced in the correlation matrix in Table 2.

Table 2 – Correlation matrix – Luxury market categories

Considering the correlation coefficients, it can be confirmed that the companies are
highly correlated within the three samples. The average correlation coefficient
within the mass market was 0.91. Polo Ralph Lauren and Phillips-van-Heusen,
included in the premium market sample, have a correlation of 0.84 and the luxury
market sample’s average correlation was 0.78. Therefore, it can be concluded that
one determinant factor of the performance of a company is the market segment it
belongs to. Furthermore, it can be noted that the mass market sample is also highly
correlated with luxury companies, specifically with LVMH and Hermès. The
correlations coefficients are around 0.90, which suggests that the mass market and
the luxury market are highly interdependent. The premium market, however,
distinguishes itself from both the luxury market and the mass market.

Figure 3 Illustrative Development of Market Segments

Figure 4 Comparative growth in revenue by product category

2005-2009
Fashion & Leather was barely affected with revenues growing across all quarters,
albeit at a historically lower rates. The most negatively affected category was
Watches & Jewellery as these possibly may be more discretionary items whose
purchase decision could be postponed. Perfumes & Cosmetics were only marginally
affected in the downturn period, with designer perfumes more vulnerable and
LVMH and L’Oreal more stable possibly due to their broader portfolio. The Wines &
Spirits category also experienced little impact except for champagne where it is
possible that the hedonic effect may be weaker in a recession (Vigneron and Johnson,
1999).

5.Conclusion :
Overall, it is evident that there is significant data to support the notion that luxury
brandss were greatly affected by the most recent recession. Analysis supported the
idea that brandss producing luxury products were not immune to the most recent
recession. The correlation between each brand and the overall economy indicated
that as GDP decreased so did a luxury brand’s performance. In other words, as the
economy entered the recession luxury brands were unable to perform at pre-
recession levels. From this, it can be concluded that the luxury industry typically
performs in general unison with the overall economy. Like the majority of brands,
luxury brands are unable to maintain revenues and profitability during a recession.
Lessened sales and profitability support the conclusion that the luxury industry was
not immune to the most recent recession.
In the end, the luxury brands was not immune to the recession even though some
believed that wealthy consumers, who many thought did not feel the effects of the
recession, kept their operations flourishing. Like most industries, the luxury
industry is reliant on a strong economy to support healthy operational performance.

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 Arnold, V. (2020). Brand responses to coronavirus are having
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 Corominas, M. N., & Armengol, R. M. (2013). Qualitative and
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