Digital: the one fashion luxury brands can’t keep up with

The rich are getting richer: that’s the idea keeping luxury ticking along at the moment, and the one challenging brands to balance that all-important air of exclusivity with a booming market opportunity.

The World Wealth Report, authored jointly by Capgemini and RBC Wealth Management, reports that high-net-worth individuals (HNWIs) last year were wealthier and more plentiful than they were in 2013 or any other year before that. In 2014, almost 920,000 millionaires were added to the existing 13.7 million or so, making a combined pool of $56.4trn and promising a great deal more in the months ahead. Buoyed by robust equity returns and improved economic performance, the combined wealth of the world’s HNWIs is up seven percent, and so too, clearly, is their willingness to fork out for expensive goods.

Luxury on the up
According to Bain & Company’s 2014 annual study, the global luxury market was on course late last year to clock up a growth rate of five percent. That’s slightly short of the seven percent the year before, and far closer to total retail sales worldwide than it has been historically. Growth in the US, and to a lesser extent in Europe, is expected to be sluggish, though luxury goods are still expected to rack up a 3.4 percent compound annual growth rate between 2014 and 2020, with Europe the largest market in terms of revenue. Emerging markets, meanwhile, have shown themselves to be an integral part of luxury’s success in recent years, though a return to stability in mature markets and the rise of affluent young consumers are where the sector’s future lies.

The challenge for brands is to maintain an air of exclusivity while also avoiding ubiquity

“International tourism and a stronger middle class are shaping luxury trends, including luxury experiences and alternative luxury channels, with a focus on consumer nationality rather than geography”, says the report. This consumer segment has transformed over recent years, but the retail market has been slow to keep up.

The results show growth is settling down for a quieter, albeit more sustainable, future, having enjoyed a particularly fruitful spell of late. Furthermore, the growth is unevenly distributed and skewed in large part by touristic spending, which remains the biggest contributor everywhere but in Japan, China and South America.

“With such cross-pollination of luxury spending, it no longer makes sense to think only in terms of geographies”, said Claudia D’Arpizio, a Bain & Company partner and lead author of the study. “The focus is shifting to consumers, with local trends and tastes representing only part of the picture. This new mindset has important implications for luxury brands. It requires that they think about their product offering from a more global perspective, with the concept of seasons, a key pillar of this industry, becoming increasingly obsolete.”

Area codes are of little importance to a luxury market invested in a patchwork pattern of global consumers. Lavish flagship stores are still very much part and parcel of the deal, and few brands come without a distinct national orientation or focus. But, in reality, these gestures are more about branding than they are about a legitimate moneymaking strategy. The next fight for market share will be fought, not in high-profile shopping districts, but online.

“The bottom line is that e-commerce is becoming too big to ignore even for luxury brands”, says Sarah Willersdorf, a luxury expert from the Boston Consulting Group’s Consumer Practice.

Latecomer to digital
Statistics cited by Bain show approximately 40 percent of all luxury brands choose not to sell their wares online, and others cited by McKinsey indicate e-commerce accounts for a measly four percent of overall sales. This is despite the fact online luxury sales increased 20 percent in 2013, in a period when general sales rose only two. According to Luca Solca, who works at Exane BNP Paribas as an analyst, digital could be “the next China” for luxury, in that it could tack another $43bn onto sales in the next five years.

Whether brands choose to actually list their products online, however, is quite another matter, though surely none can afford to ignore the opportunities that accompany a consumer segment in which three in four own a smartphone and half own a tablet. What’s more, a McKinsey sample of 3,000 shoppers showed over half of all internet searches were conducted on a mobile device, and one in five surveyed admitted to often or always researching on a smartphone before making a purchase.

Taken together, the figures prove luxury shoppers are among the most connected of any consumer segment worldwide, and, with Millennials fast entering into the equation, the average luxury shopper is one for whom a strong digital experience is not a luxury but a necessity.

“While the luxury brands have been slow to embrace the internet, that definitely has not been the case for their customers”, says Pam Danziger, President of boutique marketing consultancy Unity Marketing and author of Putting the Luxe Back in Luxury: How New Consumer Values are Redefining the Way We Market Luxury. “Affluent shoppers have absolutely no hesitation to use every resource available to them to get what they want, and if it’s luxury brands online, they will find a way.”

Nonetheless, the findings have done little to speed the transition to digital, particularly for heritage brands whose indebtedness to tradition can often blind them to the benefits of a strong digital presence. True, digital converts are in the majority, but it’s mostly, if not exclusively, on the sales side that brands have been slow to keep pace.

“Luxury brands currently are very much ‘control-oriented’”, says Bob Shullman, CEO and founder of the luxury-focused marketing research and consulting firm Shullman Research Centre. “Most brands want to control their distribution channels: both physically and in their marketing and advertising. As such, the vast majority still market primarily in traditional outlets and use publications in the US for marketing and advertising.”

E-commerce aversion
Even the storied French heavyweight Chanel has erred on the side of caution, and subscribed to the theory that bricks-and-mortar sales should prevail over digital. “To be able to wear Chanel clothes, you need to try them on. You need to be in the fitting room”, said Chanel’s President of Global Fashion, Bruno Pavlovsky, in 2012. “What we want today – and the way we use digital – is to have more and more people come to the boutique to see the product, to touch the product, but also to try the product. And that, for me, is the most important part.”

Encumbered by the idea that digital can in no way replicate in-store experience, nor leave shoppers with the impression that any purchase is appropriately luxurious, high-end retailers such as Chanel have been slow to change. Only this year did Pavlovsky confirm, in an interview with WWD, that Chanel will be launching its own e-commerce business late next year, though stopped short of specifying which goods it would make available online.

“Luxury brands in general have been slow to embrace e-commerce and digital. Historically, there was a feeling from some brands that e-commerce was ‘not a very luxurious experience’”, according to Willersdorf. “Until very recently, business leaders made definite distinctions between their digital channels and their ‘conventional’ sales and communications paths. But those boundaries are blurring fast. Consumers are researching handbags online and purchasing offline, buying jackets online and picking them up in a bricks-and-mortar store, trying on shoes in a store but purchasing online to get a different colour.”

The merger of Net-a-Porter and Yoox will create a new luxury e-commerce superpower

By choosing not to move with the latest digital advances, luxury brands are effectively leaving the playing field open for more enterprising companies to steal market share. Danziger notes Farfetch, Shoptiques, InstantLuxe and TheRealReal (which each host boutiques and brands on a single online platform) could profit from luxury’s digital aversion. The merger of Net-a-Porter and Yoox will create a new luxury e-commerce superpower with annual revenues of €1.3bn.

Where exclusivity has served the fashion house well in days past (and particularly in 2013, when Chanel posted profits far ahead of its competitors), this age-old tendency towards tradition and scarcity is falling out of favour in today’s globalised marketplace. “Luxury retailers have kept their distance for fear of diminishing their cachet and being subject to heavy discounting – but this has not stopped a torrent of heavy discounting across the industry”, says Fflur Roberts, Head of Luxury Goods at Euromonitor International.

“As to whether luxury brands will get their internet-groove on, time will tell, but this marketplace is moving so fast, I wonder if they will ever catch up, let alone get ahead”, says Danziger. “Among the research-based findings that popped up in our recent study of Millennials on the road to affluence is that Millennials don’t want their mother’s or their grandmother’s luxury brands. They want brands that make a meaningful connection with them, and today many of those connections are made online. Being relevant to the customer is key and any luxury brands ignoring the needs, wants and desires of their customers risk making themselves irrelevant.”

Asked why so many high-end names have been unwilling to embrace digital, Ali Mirza, CEO of Affluential, says it’s “mostly as they feel they lose the connection with the customer, as most luxury is all about high touch, high involvement purchasing”.

However, this mentality is fast becoming a thing of the past, and a string of notable exceptions have offered proof that a digital presence need not come at the expense of exclusivity. “The experiential element gets lost when the e-commerce aspect looks too detached from the exclusivity that these brands exhibit”, says Mirza. Done correctly, the adoption of digital “would increase the channels as part of an omnichannel strategy for brands to reach customers – especially those in Asia who are increasingly purchasing online but also using online to browse pricing and products before buying”.

Burberry and others
In the luxury sector, there is no more obvious a pioneer than Burberry, which not only demonstrated that harnessing digital was possible, but that it was essential for reviving dwindling fortunes. In 2010, the company became the first high-profile luxury name to facilitate online orders and its leadership has been a constant ever since.

Live-streamed catwalks, buzzy social media campaigns, cross-channel optimisation and a thriving online community have each played their part in the turnaround, and these distinctly modern solutions have done little to detract from the brand’s 150-plus years of heritage. Quite the opposite in fact: in the 12 months up to the end of March, Burberry reported sales of £2.5bn – 11 percent higher than the year before – noting digital had “outperformed” expectations once again. In Burberry’s latest full year report, the company cites “digital as a differentiator”, and the business has transformed completely in the last half decade due to its advances on this front.

The British-based trench coat maker is far from alone, however. “Crucially, more and more global luxury brands are looking at ways to strengthen their e-commerce platforms”, says Roberts. “Internet sales of luxury goods are booming, and are widely seen as the industry’s key battleground of the next five years. Consider the case of UK luxury retailer Mulberry: its digital sales were up 40 percent for the 10 weeks to June 6, 2015, compared with its overall retail growth of 17 percent. At this rate, which is typical across the luxury goods industry, it is only a matter of time before digital sales catch up with physical sales.”

Taking control
“It’s happening, but very slowly”, says Shullman of the sector’s willingness to embrace e-commerce. It’s understandable that many are cautious, given any substandard offering could take a sizeable chunk out of hard-earned brand credibility. But the odd tweet or two is not enough for the average shopper, and the transition to digital asks that brands make an all-encompassing gesture – if only to satisfy consumers for whom online absenteeism is a jarringly unfamiliar occurrence.

Greater transparency also means brands must justify their premium price tag

For the 40 percent or so of luxury brands yet to embrace e-commerce, the focus falls on building a digital presence. “Products like apps are at the forefront of retail digital innovation and are identified as key to attracting ‘internet junky’ Millennials. The luxury retail market has never been more competitive, so coming up with clever ways to attract customers is a key battleground”, says Roberts.

The challenge for brands is to maintain an air of exclusivity while also avoiding ubiquity. The changed digital landscape – not just in luxury but retail overall – has transformed the way in which brands touch base with shoppers. Greater transparency also means brands must justify their premium price tag, and some have even suggested the nature of luxury itself is changing now the products are more widely accessible and the target market growing.

Against this backdrop, it’s important to note that, by choosing not to embrace digital, latecomers are effectively relinquishing control over vitally important aspects of their businesses. When it comes to making purchasing decisions, consumers – often routinely – go online for further information, meaning brands without a digital presence are effectively ruling themselves out of the equation. The same issue applies just as easily to e-commerce, and, while concerns regarding exclusivity are understandable, omnichannel engagement means brands can more closely monitor their presence.

“The majority of luxury brands are now working to incorporate digital and omnichannel – but many of them are very late to the game”, says Willersdorf. “To be successful in luxury e-commerce, brands must master the four Cs: commerce, content, curation and community. But mastery of the four Cs is not enough. On top of developing attractive e-boutiques, brands need to focus on omnichannel and integrate e-commerce and offline retail – especially for the next generation of luxury shoppers.”

As demonstrated by the likes of Burberry and a growing number of online boutiques, digital need no longer be seen as a challenge but as an opportunity to bring more customers to the fold. And by seeing digital as a threat neither to the traditional order of doing business, nor as a destructive influence on exclusivity, brands can begin to equip themselves more appropriately for the digital age and the connected consumer.