How the Luxury Sector is Changing, 3 Trends to Watch
Change is hard but when you have no choice but to do things differently there are often surprising results. That’s what happened this year when COVID-19 caused a global pandemic, forcing retailers around the world to close their doors. The opportunity amidst the devastation was immediately apparent for retailers selling essential goods like canned food and toilet paper. But in the luxury sector which has struggled, it is eCommerce that has emerged as a bright spot. It turns out that consumers, and lots of them, don’t mind spending great sums of money online to buy their favourite designer jacket or purse. Prada’s online sales were up by 150% in the first half of 2020. LVMH’s CFO Jean-Jacques Guiony said that the company’s recent online sales performance is: “too good to be mentioned.” Kering’s eCommerce sales in the first half of 2020 jumped from being 6% of total sales last year to 13% of sales this year.
Those numbers are almost too good to be true. But they are real and have prompted a great rethink in the luxury sector. No one can dispute the importance of eCommerce to luxury sales anymore. Online sales will only grow in importance. On the back of that trend is more and more luxury brands moving their eCommerce operations in house. And finally luxury retailers have to grapple with the inevitable, eCommerce sales are expensive. As eCommerce continues to grew brands will have to figure out how to make that growth profitable. As a year of unprecedented change in retail continues on consider these three trends impacting the luxury sector.
1. Digital sales continue to grow in importance
For a long time the luxury sector shunned online sales. The typical argument against eCommerce was that a high-end and high-touch experience could not be replicated online. If a consumer wants to purchase a $10,000 coat surely they want tailored in person customer service. As a result online sales in the luxury industry have lagged. Last year 12% of luxury sales globally took place online. Then the COVID-19 pandemic hit. With stores shutdown around the world luxury retailers had to change their thinking and quickly. With eCommerce as the only option for reaching consumers at scale, luxury retailers double downed on this channel.
The growth in online luxury sales came quickly, surprising even the largest luxury retailers. “When I see the amount of business that we’ve been able to generate in the last six months on our e-commerce platform, I think there is a future for these platforms to generate a significant amount of the global sales,” says Guiony. Bain estimates that as much as 30% of all luxury sales will take place online by 2025, a significant jump from where the market was last year.
Perhaps one of the real reasons it took so long for luxury sales to move online is because luxury retailers were concerned it would be difficult for them to justify their high prices. Is it really worth it to purchase a $4,000 bag if I am not making that purchase in a store worth millions of dollars? Can an online store really do a product justice?
eCommerce for luxury retailers is like a great reckoning of the value proposition luxury retailers have worked so hard to create. Is a Burberry jacket really a Burberry jacket if I buy it online while relaxing at home? It is now clear that decades of storytelling, craftmanship and understanding what the customer wants translates across channels. If I buy a Saint Laurent bag whether I purchase it in store or online it still carries the same status and investment value. When a woman shows up a party with her new Saint Laurent bag no one is going to ask her if she bought her bag in store or online. Perhaps one of the greatest learnings for luxury brands is that a single channel may not be as important as they once thought it was.
Another thing to keep in mind is that it’s not the 1950s when a discussion with a store sales associate would have been one of few sources of information about luxury goods. A quick internet search is all it takes now to find out about a consumer’s favourite brand. Yes customers like and desire white gloved service but today’s consumer is drastically more informed than the consumer of the past.
Selling online has also evolved over time, it’s more than just a transactional experience. “Luxury is synonymous with impeccable customer service and retailers have had to recreate this online for top spenders, who expect the same level of attention and care as they would get in a high-end department store or boutique. To reach them, brands are looking to connect them with sales associates via virtual platforms such as Zoom, Skype and Facetime, recreating that same level of customer service, with a focus on personalisation,” says Laura Saunter, senior retail strategist at WGS, a trend-forecasting company. All of the innovation that is happening in the online selling process makes the shift to eCommerce easier.
Net-a-Porter is an example of how luxury and eCommerce work well together. Net-a-Porter has been in business for nearly as long as Amazon. Amazon launched in 1994 and Net-a-Porter launched six years later in 2000. “In terms of its success, what Net-a-Porter has done well is unlock the apex between great quality and premium service at scale. Usually quality control of service is the first thing to dilute when anything scales, but they’ve maintained that, which is the key to being number one. The company has essentially closed the gap between content and commerce while offering the kind of white-gloves service that one would expect in a luxury store, but replicated online,” says Saunter.
It’s also interesting to see Amazon taking more steps to establish itself as a player in the luxury space. In September Amazon launched Luxury Stores which will is a place for luxury retailers to set up shop on Amazon’s platform. The first and only brand to launch so far on Luxury Stores is Oscar de la Renta. The Oscar de la Renta experience on Amazon is only available on mobile and features a custom designed Oscar de la Rental store instead of the minimalist product pages we are used to seeing on Amazon. “We are always listening to and learning from our customers, and we are inspired by feedback from Prime members who want the ability to shop their favorite luxury brands in Amazon’s store,” said Christine Beauchamp, president of Amazon Fashion.
With over 150 million Amazon Prime members many of Amazon’s existing customers are undoubtedly luxury customers as well. “We want to be able to talk to her wherever she’s comfortable shopping,” says Alex Bolen, CEO of Oscar de la Renta. “This idea that you don’t want to speak to a customer where she’s spending a lot of her time is a mistake.”
Many luxury retailers are already dismissing Amazon as a threat including Farfetch. “Luxury is an industry of relationships. Most true luxury brands are European and family run. For them the protection of brand equity is paramount,” says José Neves, CEO and Founder of Farfetch an online luxury marketplace. “From the conversations we’ve had with them [luxury brands] about Amazon, having another multi-brand store is not of strategic importance, and it could even be a losing proposition if it cannibalizes existing channels,” says Neves.
But if you take a look at China you will see that eCommerce giant Alibaba, has made great in roads in getting luxury retailers to set up shop on its eCommerce platform. As online sales of luxury goods have taken off this year, so has the number of luxury brands on Alibaba’s online Tmall Luxury Pavilion, increasing from 150 last year to an estimated 220 this year. More than 50% of brands on Gartner L2’s index of luxury Chinese brands have stores on the Pavilion. Some of these brands include: Valentino, Versace, Bottega Veneta, Givenchy, and Burberry.
Even Net-a-Porter has a store on the Pavilion. Brands selling on the Pavilion have control over pricing and what their store looks like, to make it differentiated from other brands. Speaking about why brands choose to have a presence on the Pavillion, Liz Flora, editor of Asia Pacific research at Gartner L2 said: “one of the main factors is that it offers brands exposure to a massive audience at a time when it’s becoming increasingly challenging for brands to drive traffic to their China sites or WeChat accounts.”
While many are dismissing Amazon most realize that you should never completely ignore Amazon as Amazon takes a longterm approach and doesn’t mind failing over and over until it gets it right. Amazon’s courting of luxury brands is just more proof that luxury sales made online are here to stay.
2. Brands are assuming more control over their digital businesses
Now that eCommerce sales have taken off many luxury retailers are bringing eCommerce operations back in house. This makes sense as eCommerce is a strategic asset and luxury retailers need to build that knowledge in house so that they can best serve their customers. Moncler is one of several retailers that decided to bring eCommerce operations in house after outsourcing that function to Yoox Net-a-Porter for many years. “During this time, when attitudes to shopping may be changing and habits may become even more online, I felt we needed not only an evolution, but a revolution in our digital culture,” says Remo Ruffini, CEO of Moncler. It’s probably a good idea not to outsource your fastest growing channel to another company competing in the same space. Moncler’s plan is to double its eCommerce sales so they reach 20% of sales by 2023.
Kering has also gone down a similar route after also relying on Yoox Net-a-Porter for its eCommerce operations since 2012. “Having robust eCommerce is a strategic asset beyond the rationale that we had in the past. This crisis reinforces our decision to invest early on in this area and to bring our eCommerce activities in-house, as per Gucci’s model,” says Grégory Boutté Kering’s Chief Client and Digital Officer. “Our physical stores provide among the best experiences in the market.” “Our ambition is to do the same thing online. We will achieve that if we control the experience end to end,” says Boutté. Kering’s eCommerce sales were up 13% in the first half of 2020 up from 6% of sales during the same time frame last year. Kering plans to bring its eCommerce operations in-house by the end of this year.
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3. It’s still difficult to have a profitable digital business
eCommerce is expensive. When you shift activities consumers used to complete on their own to a retailer, someone has to pay for it. Think about the last time you made a purchase online, say for a jacket from Canada Goose. Canada Goose picked, packed and delivered that order to you all while you sat patiently or not so patiently and waited for your order to arrive. Even if you paid a delivery fee it is often not enough to cover those expenses. A study by the Capgemini Institute found that on average retailers charge their customers just 80% of the cost of delivering goods. Companies also have to continually make capital investments in eCommerce just to just to keep up with the pace of change. Yoox Net-a-Porter spent 10% of sales on capital investments last year.
The irony of online shopping is that the most economical model for a retailer is when customers are not purely online shopping at all. As Bloomberg reported: “if retailers can continue to convert a meaningful portion of that demand into pickup versus delivery, it will provide an offset to the inherently higher supply-chain operating costs of a digital model.”
If getting the order to you is expensive what about returns? Raise your hand if you have ordered multiple versions of the same outfit in different sizes because you don’t know what your size is at a particular retailer. This process of ordering and returning goods is very expensive. Take mattress retailer Casper. In 2018 Casper spent $80.7 million on “refunds, returns, and discounts”. Since Casper launched in 2014 it has yet to make a profit. The challenges facing luxury retailers are no different. “We haven’t found a way to make it profitable,” said LVMH Chairman Bernard Arnault. “All of them are losing money,” Arnault said speaking about his competitors. “The bigger they are, the more money they lose.”
Farfetech hasn’t made a profit in the 13 years since it opened for business.
Mytheresa is an online luxury marketplace that has figured out how to be profitable. It has been profitable since it launched in 2006 and it made €377 million in revenue in 2019 up 24.7% from the year before.
One of the things that has contributed to Mytherera’s success is not relying on overly expensive marketing tactics to acquire customers. Speaking about the rising cost of digital marketing, high end beverage maker Dirty Lemon’s CEO Zak Normandin said: “having advertised with Facebook and Instagram since very early on, we saw the cost to acquire customers rise significantly, and it's at a place now where it's just unsustainable. I think that's happening because brands that have historically relied on traditional advertising methods are now shifting their ad dollars to online and to Facebook and Instagram. When that marketplace gets flooded with demand, it raises the price to connect with and acquire customers. As the prices rise and more advertisers enter the marketplace, there was a point for us that it no longer made sense to spend millions and millions of dollars on Facebook and Instagram.”
Mytheresa also focuses on customer lifetime value to keep its profits in check. It’s not interested in the unprofitable consumer that buys one bag from Mytheresa never to be seen again. Commenting on its customer acquisition strategy, Mytheresa’s CEO, Michael Kliger, said: “we have tried to understand which traffic brings what type of customer, because there is a customer that buys a pair of sneakers who then continues spending a lot over the next couple of years and there's another type of customer who buys that same pair of sneakers and nothing happens — that's probably the only luxury piece they will buy for some time.”
Mytheresa’s disciplined approach also applies to buying. “In e-commerce, the other big trap is the endless aisle,” says Kliger. “You have no physical walls to otherwise force you to think hard about what you buy. This may work for Amazon, but in luxury fashion, the belief that ten more products mean more revenue is a fallacy.” Retailers like Trader Joe’s which have a narrow rather than broad range of SKUs know that reducing SKU count simplifies business operations. It means fewer buyers, less people required to create product listings online and a better understanding of your business because there are fewer SKUs to manage. Apple has often credits its success to having a narrow set of products instead of a proliferation of devices.