• These brands have been hard hit by the coronavirus outbreak from the start as their core customer base, the Chinese, was first to be impacted.
  • As the virus has spread across the world, the sector has also seen demand from other luxury consumers in key markets such as the US, Europe, and the Middle East, evaporate.
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Luxury brands should be bracing themselves for the worst year in modern history, according to a group of Bernstein analysts.

In a recent note to clients, these analysts, led by Luca Solca, warned that the world is entering "terra incognita" as it wrestles with the coronavirus pandemic.

"What we know is that 1H20E [the first half of 2020] update is likely going to be the worst in the modern luxury goods industry history, and by some margin," these analysts wrote.

Luxury brands have been hit hard from the beginning of the coronavirus outbreak as their most important customer base, the Chinese, were the first to be impacted.

Chinese consumers account for 35% of global demand in the luxury sector, making them the most valuable customer overall; Bernstein estimates that demand from these consumers will be down as much as 30% to 50% in the first half of the year.

These shoppers have not only not been able to shop in their own country as stores and malls across China closed during the lockdown but travel bans put in place by the Chinese government and other countries meant that some of these shoppers also weren't shopping elsewhere. This is especially important because research shows that the majority of luxury spending done by Chinese shoppers happens outside their own country.

But as the virus has spread across the world, luxury brands have watched on as demand from other luxury consumers in key markets such as the US, Europe, and the Middle East has also evaporated.

"Under normal circumstances, I'd expect a bounce-back for luxury brands but that too is now in doubt," Doug Stephens, a retail industry consultant, wrote in an email to Business Insider.

He continued: "Luxury is in a very precarious state at the moment. First, protests in Hong Kong disrupted both revenue and production capabilities. Now, Covid-19 not only put Chinese luxury consumers on the sidelines but has further disrupted supply chains and touched off a stock market collapse that will also give high-net-worth consumers across the globe reason for pause."

Kering, Burberry, and LVMH are among the biggest names in the industry to have issued profit warnings in recent weeks. Burberry updated investors on March 19 that same-store sales at its stores were down 40% to 50% between the end of January and mid-March.

"While trading in Mainland China has started to improve with the reopening of most of our stores, sales in EMEIA [Europe, the Middle East, and Africa] and the Americas have fallen materially in recent weeks," the company said.

And LVMH estimated that sales will be down 10% to 20% in the first half of the year.

Analysts are already noting increased levels of promotions on luxury ecommerce platforms such as Farfetch, Net-a-Porter (which recently closed its online store in the US, Europe, and the Middle East) and Moda Operandi, for example.

Some brands are resorting to discounting on their own sites to prevent inventory building up over this time. Tod's, Dolce & Gabbana, Michael Kors, and Valentino were among the designers with the highest percentage of discounted products, according to a Bernstein note sent around on Monday.

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