The fashion and luxury segments of the market are synonymous with carefully curated branding and strict reputation management, which have been tested significantly amid the onset and continued impact of the COVID-19 pandemic. Against that background, management consultancy McKinsey & Company, together with the Business of Fashion, have recently published a report titled The State of Fashion 2020 Coronavirus Update, in which they provide insights into what the future of luxury retail could look like in light of a shift in consumer focus, the timing of which has been escalated as a result of the pandemic.
The report notes that the “average market capitalization of apparel, fashion and luxury players” has been negatively impacted by COVID, with such figures dropping by “almost 40 percent between the start of January and March 24, 2020.” While the Bain has estimated that the personal luxury goods market as a whole would contract between 20 and 35 percent in 2020 as a result of COVID, there is however, a glimmer of hope, per McKinsey and BoF, as there is an expectation that consumers in the luxury segment will “return more quickly to paying full price for quality, timeless goods, as was the case after the 2008-2009 financial crisis.”
Despite such optimism, there is a considerable amount of work to be done by brands and retailers in order to respond to consumer driven changes to values. A few of the key issues are outlined as follows …
The Problem with Sustainability
One of the changes that is likely to be accelerated in a post-pandemic world, which we are already seeing, is the greater expectation of consumers for purpose-driven, sustainable action by businesses. While phrases such as “ethical” and “sustainable” have in recent times become buzzwords, many of these terms lack any objective measure or a legal definition. This creates issues for consumers and brand owners, alike.
While making unsubstantiated “sustainability” claims about fashion items has, for the most part, not been the subject of widespread legal action, proceedings were recently initiated by the Australian consumer Regulator against supermarket giant, Woolworths in relation to environmental claims made about its picnic products. The Regulator claimed that products that were labeled “biodegradable and compostable” were false and misleading representations.
Woolworths was ultimately successful in its defense, but the matter should, nonetheless, serve as a lesson for brand owners about the need to be cautious about representations and claims about the sustainable credentials or properties of their products. Claims must be accurate, able to be substantiated, and specific (not unqualified, general statements), and they not overstate benefits and consider the whole product lifecycle. We recommend that advertising claims be specific in their nature and linked to test results that can be produced in the event of a challenge. The dual benefit of brand owners investing in their sustainability messaging is that consumers will be drawn to – and able to better connect with – brands grounded in authentic behavior.
Trademarks also play a role in the rise of conscious consumption. Descriptive trademarks are unlikely to obtain registration, but brand owners can still showcase their products’ sustainable features by using a trademark that makes a skillful allusion to a particular property or characteristic. For example, a sufficiently distinctive logo that conveys to consumers that an article of clothing is “environmentally-friendly” can operate as a trademark for a brand. (A simple icon of a leaf, for instance, is likely to be too descriptive or not distinctive enough).
Brand owners can also consider seeking to emphasize particular qualities of a product by using certification trademarks. Currently, there are certification trademarks administered by various authorized bodies depending on the jurisdiction. However, this is often a patchwork system that must be navigated and driven by brand owners. Some examples include Australia’s “not tested on animals” mark promotes a cruelty free lifestyle and products in which none of the ingredients have been tested on animals; the “Egyptian Cotton” logo mark promotes textile products that are made from Egyptian grown cotton and according to specified production methods; and the “No Sweat Shop” logo mark promotes products that provide equitable employment conditions to staff in the industry.
At the same time, companies must be aware that modern slavery laws are increasingly requiring businesses to report on risks in their operations and supply chains, with the United Kingdom, for example, introducing its Modern Slavery Act in 2015, the U.S. implementing the Trafficking Victims Protection Reauthorization Act in 2017 (and California, in particular, putting the California Transparency in Supply Chains Act into effect in 2012), and France adopting the Law on Due Diligence of Corporations and Main Contractors in 2017.
Still yet, Australia has the Modern Slavery Act of 2018, which has been operational for almost two years, and will have its first reporting submissions due by: December 31, 2020 with respect to foreign financial year reporting; and March 31, 2021 (for Australian financial year reporting), after the government granted an extension to the reporting deadlines in response to the pandemic.
Structured much like other countries’ modern slavery laws, Australia’s reporting requirements are mandatory for large businesses and other entities in the Australian market with annual consolidated revenue of at least AUD$100 million. However, the Modern Slavery Act also facilitates for voluntary reporting entities that are in the Australian market, but do not meet the revenue threshold.
Businesses that wish to submit a modern slavery statement voluntarily must advise the Australian Border Force. Importantly, once an entity has volunteered, and received approval to report voluntarily, the reporting period commences and the entity will be bound to report as if it were a mandatory reporting entity.
Noting the rise of consumer consciousness, there are particular aspects of the reporting requirements – in Australia and beyond – that could be helpful in demonstrating to consumers the steps that a company has taken to combat modern slavery. For example, reporting entities in Australia must describe the actions taken by the reporting entity and any entity that the reporting entity owns or controls, to assess and address those risks, including due diligence and remediation processes. This disclosure can serve at least two purposes: (1) requiring the business to actively consider how to address and mitigate the risk of modern slavery in its supply chains; and (2) as a brand and reputation statement which is powerful for those businesses that can demonstrate awareness, engagement and proactive management of the issue.
While there was a perception initially that the absence of financial penalties may have diluted the government initiative behind the legislation, given the rise in consumer awareness and the spending power that comes alongside conscious consumerism, it seems like the Modern Slavery Act may have hit the mark.
The topics above provide a brief snapshot of the new landscape luxury brands find themselves in. The pandemic is likely to fast-track the consumer-led focus on sustainability, transparency, and consumption in retail. As brands owners consider how best to promote and build their sustainability and CSR credentials, novel issues are likely to arise and they should be cognizant of the potential legal pitfalls.
Shariqa Mestroni and Leila Moddel are Senior Associates at Bird & Bird.