Some studies have highlighted the so-called “Lipstick Effect” - the tendency of small (and thus affordable) luxury goods to stay close to their non-recession sales volumes even during economic downturns. The effect is, sadly, not very robust or supported by scientific evidence - on the contrary, multiple studies (such as one from Princeton) found no arguments in its favour when studying perfume sales.

Following the 2008 Recession, many luxury brands managed to keep their sales figures up by breaking into new territories - the Asian market helped sustain them through difficult times - 5 years after the Recession,  LVMH was reporting annual revenues of over €28bn. Generally speaking, the top 10% earners in an economy are unlikely to be severely affected by recessions, or at least not to a degree that would drive them away from luxury spending. They may, however, become more selective of their purchases. At the other end of the spectrum, low-end fashion goods and accessories are also unlikely to perish - knock-offs, for instance, do well during and after a recession.

Where to?

At first glance, luxury goods companies have three options in this economy:

  • Go after the top 5% of earners
  • Cut costs and go low-end
  • Find a way to appeal to the middle class


Solutions for the first two options are well known - increase marketing spend on brand image for the former, cut costs and go for a brand spin-off for the latter. As for finding a way to appeal to office workers (who account for a good part of the middle class), that takes courage and entrepreneurial effort. At the same time, for many companies it might be the only possible outcome. 

But before deciding on a course of action, we suggest to look at some historical data - this report focuses on three core pillars:

  1. What the market looked like before the pandemic
  2. What luxury businesses did after the 2008 financial crisis
  3. What we discovered looking at the top performing luxury brands

We will first take a look at what recessions typically mean for society as a whole and work our way towards how companies can reinvent themselves.


Recessions 101

“Economic Recession” — this is the technical term for what happens when economies fail to grow for two consecutive quarters. Or, so it was a while ago. The way a period of economic turmoil is classified as a recession has become more subtle and nuanced over the years, but its effects have not. 

There are some that see recessions as a cyclical event — a culling of sorts, a side effect of how the world economy works. While business cycles do exist, it is difficult to predict when a recession will occur. Economics is just not quite there yet as a science.

Recessions influence almost every aspect of human civilization: work, entertainment, and politics. They reshape industries, shift the balance of power and transform technology.


Effects on the Economy

Almost all economic effects of a recession can be summed up by one word — contraction. The number of jobs falls, average employment rates go down, consumer spending diminishes, company budgets are being slashed, salaries decrease. 

But its effects are long lasting — it took the US half a decade to get back to its previous unemployment rates. 


Effects on Politics

During times of economic hardship, two trends tend to emerge:

  • The existing administration gets punished at the polls for the state of the economy
  • There is a surge in populist/ anti-elite politics


Obviously, the matters are a lot more nuanced than we are able or authoritative enough to describe.


Effects on Culture

A side effect of job cuts or even reduced working hours, coupled with decreased purchasing power, is… boredom, really. But this can have invigorating effects on culture — Alfred Mosher Butts, an unemployed architect, invented scrabble in a fit of boredom. People who have lived through recessions (or have felt their effects) are fascinated by them, moved to sing, paint or write about the troubles people went through during those trying times. “To kill a mockingbird” is set in the 30’s, for example, and Harper Lee was born just 4 years before the start of the Great Depression — in 1926.


Market status leading to the pandemic


Why “Millennials are killing the ___ industry” isn’t relevant

The years following the 2008 Recession saw a rise in headlines touting the death of various industries or companies at the hands of “Millennials”. Maybe it was ephebiphobia, the tendency to generalize and poorly characterize young people and youth culture; the phenomenon is certainly not new, otherwise “Youth is wasted on the young” would be a meme rather than a proverb.

Millennials are now anywhere between 20 to 40 years old. Young adults, sure. But few are part of “youth culture” anymore. They live on their own, they have debts, they take out loans and it would appear that they’re worse off financially than their parents by as much as 30% . Since stepping into the media spotlight, millennials have been accused of killing off:

  • The NFL
  • The Housing Market
  • Fast Food
  • Light Yogurt
  • The Diamond Industry
  • And at least another 18 industries

But even though diamonds have fallen out of favour, gemstones are still a popular choice for anything from engagement rings to earrings. In fact demand for rubies, opals, sapphires and other coloured gems has been increasing (and so has their price). It’s not that young adults do not buy luxury items - they simply prefer others than their parents.


Market Growth

To further support this, a 2019 study by Deloitte shows that sales for luxury goods has been increasing between 2015-2017 at 5.3% annual rate. The study also highlights an interesting category of luxury consumer - the “HENRY” (high-earner-not-rich-yet). From the study:


Since these ‘new’ tech savvy generations look for individualized, seamless brand relationship, brands are investing worldwide to market digitally, increasingly using social media to engage with these consumers.


As we will explore later on, there is one brand that seems to accurately represent the market, both revenue-wise and from a marketing perspective. But let’s not leave Henrys so quickly - Deloitte positions them as lavish spenders who love online shopping and have a ~$136,000 yearly income on average. 

What Deloitte found is that brands increasingly adopt a boutique-mass-market approach, allowing consumers to personalize their desired items and make them stand out with a personal touch:


In October 2018, Louis Vuitton launched its first personalization program in menswear “Now Yours,” a customizable capsule collection featuring the iconic Run Away sneaker, as well as a selection of individualized ready-to-wear items such as aviator jackets, varsity cardigans, and classic denim trousers. The strategy is not new: yet in 2016, Gucci launched a 'Do It Yourself' service, enabling customers to personalize a selection of products, starting with the Dionysus handbag. Even before, in 2011, Burberry launched its ‘Bespoke’ campaign to enable customers to choose their trench coat’s style, color, fabric and material. Later, the firm launched its customized perfume collection in New York during 2017.


Deloitte isn’t the only research/ consultancy firm to confirm that the market was on a positive trend - a late 20018 study from Interbrand found that luxury fashion grew by 42% between 2017-2018. Moreover, of their top 100 luxury brands, the top 10 were exclusively fashion/ accessories brands.


How the market typically responds to recessions

Recessions do not affect all brands equally. Big names such as LV, Prada, Chanel or Gucci fare typically well because their core demographic retains most of its buying power. After 2008, many luxury brands have focussed their attention on new markets, and it seems to have paid off - both Yves Saint Laurent and LVMH reported growing sales in the years after the housing bubble burst.

However, luxury is not recession proof, as Vogue Business puts it. The two years that marked the 2008 Recession lowered luxury brands’ revenues by as much as 25%... though not for long. 

But while recessions do not always bring companies down, they do change them or how they do business. This is especially true when it comes to design trends - during difficult times, opulent design can be seen as bad taste (or draw unnecessary attention to one’s wealth), but the drive to derive status from ownership remains constant. As a consequence, fashionable luxury brands have since adopted more minimalist trends and imagery, opting for a simplicity-is-sophistication approach.

We opened this article with a mention of the “lipstick effect”; the study cited found that while total fragrance expenditures fell in the years after 2008, had the recession not occurred, they were set for growth. Not only did the recession stop a positive trend, it reverted it. And if the fragrance market behaves similarly to the overall personal luxury industry, it took 5 years to recover from a 2 year slump.

What is truly interesting is the following:


Prior to the recession, high-income households consume a larger average share of premium fragrances than low-income households. Both income groups decrease their average shares of premium fragrance expenditures from 2006-2007, although low-income households increase their average share from 2008-2010.

The study concludes that regardless of buying power, all households navigate away from mass-market products, albeit for different reasons.


Post-2008 strategies

Faced with stagnating or decreasing demand, luxury brands took several measures to insulate themselves from the perils of the recession. Generally, though, their efforts fall along clean-cut lines :

  1. Reduce costs
  2. Incentivise staff
  3. Protect the brand’s image
  4. Innovate
  5. Enter a new market
  6. Shake up the marketing strategy

We won’t go into too much detail regarding their post-recession strategies, as these tend to mirror those in other markets covered in our “WHAT COMPANIES DID TO SURVIVE THE GREAT DEPRESSION” report. 

It is worth noting that Jewelry brands such as Tiffany’s opted to offer incentives and performance bonuses to their staff and at the same time scale back their advertising spend; this helped the brand maintain or even increase sales at a smaller cost-per-item.

Another interesting approach comes from a small boutique that chose to source more affordable materials for their jewelry in a way that does not affect their appearance, but decreases production costs.

Many luxury brands chose to launch new lines, innovate with new products/ services or rely on their heritage to drive purchases; some, like Chanel, embraced new mediums and carved a spot all of their own in consumers’ minds.


Spotlight - Chanel

When conducting research for this report, we wanted to compare how online user interest in luxury brands changed over time. The results were not impressive or unexpected: using data from Google Trends to look at the top personal luxury brands of 2019, we found that most were on a positive trend. However, what struck us as interesting was how closely Chanel mirrored the average brand in the top:

This prompted us to look into what the company did, and to what end. We found that its estimated brand value jumped from $20bn in 2018 to $37bn in 2019.

The brand is one of the biggest innovators in the space; building on its legacy and the rise of social influencers, it positioned itself as THE Social Brand and went after a younger, more hip demographic than its competitors and met the newer generations where they already gathered - on Instagram and YouTube; to our knowledge, the brand doesn’t experiment with seemingly evanescent platforms (or those dominated by pre-teens, such as Snapchat & TikTok). The strategy is a call back to more than 20 years ago, when Chanel opened itself to younger audiences, when it successfully leveraged Uma Thurman’s appeal to drive a 3-month waiting list for its nail varnish. For a generation that buys with “individual value” in mind and for which fashion has to send a message (the right one), Chanel straddles the fine line between authenticity and luxury.


Closing words

Customers rarely trade down when it comes to luxury purchases; Burt Tansky, Neiman Marcus’ then-president and CEO, probably put it best:


“Remember, when our customer tightens their belt, it’s generally ostrich or alligator.”


We believe that the companies that successfully market themselves as anything but mass-market, those that manage to help their customers express themselves or establish a trend through their unique style are the ones that will set the bar for the coming years. And we are committed to enable them to make that happen.