Digital TransformationRetailDigital transformation in luxury retail

Digital transformation in luxury retail

The luxury goods industry faces a unique challenge when it comes to digital disruption. For businesses in other sectors, online channels offer a way to scale their reach, sales and distribution whilst reducing the overheads tied to a physical store. But for luxury brands, who differentiate themselves through experience rather than price, the online environment is often a hindrance, not a help.

Luxury goods encompasses several product categories, including drinks, fashion, cosmetics, fragrances and watches. The value of the personal luxury good market is around 250bn EUR worldwide, with the biggest chunk located in the US – worth 97bn alone.

In the high-end market, consumer purchase decisions are typically driven more by brand reputation than by product quality or price. This can be seen in luxury advertisements, which tend to appeal to emotions – by depicting a desirable lifestyle or featuring a celebrity – rather than demonstrating product features.

Entering the luxury market is difficult for new brands, as it requires building trust with a highly discerning audience. This means the market is dominated by a small number of established brands, all of whom have been around for decades. French conglomerate Louis Vuitton Moët Hennessy, better known as LVMH, is the largest, valued at $29bn in 2016. The next biggest are Hermès ($23bn), Gucci ($13.5bn), Chanel ($11bn) and Rolex ($8bn).

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The shift online

In the pre-internet era, these brands were able to maintain a small number of flagship stores in major cities, relying on their brand reputation and the occasional awareness campaign to remain top-of-mind of their audience and generate sales.

The in-store experience was, and remains, a key differentiator for luxury brands. Soft lighting, marble, glass, tinkly music and a few well-dressed staff ready to talk you through the minimal number of products on display – small details that help justify sweat-inducing prices.

Then came the internet. Online channels, despite the tumult caused by competition from ecommerce businesses, gave most retail stores a host of benefits, such as democratized access to product information for consumers, third-party reviews, and the chance to list products on other websites.

However, for the luxury industry, these ‘benefits’ were in direct conflict with the fundamental tenets of a luxury brand. The mystery, exclusivity and suggestive promise that was so attractive to customers didn’t transfer well to an online environment. Tiffany diamonds somehow don’t look quite as shiny on your Twitter feed.

A poorly-executed online proposition, or listing products on another website, would risk tarnishing the brand’s most valuable asset: its reputation.

Digital consumers

But the shift to digital channels was inescapable. It was driven, in part, by the next generation of luxury consumers and their taste for cutting-edge tech.

With smartphone penetration currently hovering close to 100% for luxury consumers in most major markets, integrating with mobile devices holds a host of potential benefits for brands seeking to add value to their customer experience. What’s more, in the US over 75% reported owning two mobile devices or more – versus just 33% of the general population.

In addition to being mobile-oriented, luxury consumers are also highly social – one study reported that 80% of luxury shoppers use social media on a monthly basis, with two third generating content (photos, videos, reviews etc) and posting it to channels like Instagram, Facebook, Twitter, and Pinterest.

This creates a problem for luxury brands. Social media offers a forum for users to share their thoughts, compare products and comment on recent news. But for the brand, it represents a loss of control over their brand image. In an industry where customer experience is tightly controlled, storytelling is critical and reputation is everything, social channels had disastrous potential.

From a business perspective, selling products online also presented a problem. Listing products on sites like Amazon offers massive benefits in terms of reach and exposure, but also devalued the exclusive nature of a luxury brand.

Several companies have resisted the trend and have made their stores and official website the only place to purchase products. On an earnings call with analysts in 2016, LVMH CFO Jean-Jacques Guiony said there was “no way” it would do business with Amazon.

What next?

Although the luxury sector has lagged behind traditional retail in terms of online offering, several brands have found their place. Online sales reached 14bn EUR in 2014, representing 6% of the global luxury market.

Growth has been steady over the past five years, with an annual growth rate of 27% – consistently outperforming the total global market. Unsurprisingly, the fastest growing channel has been luxury websites themselves, representing a quarter of all online luxury sales.

From a marketers’ perspective, there appears to be a massive opportunity here. Technology has huge potential to improve the customer experience – whether that’s by augmenting physical stores, or by offering an immersive online experience. New innovations such as VR – typically cost-prohibitive for normal consumers – could see early adoption in the luxury market.

Brands that invest early could see huge benefits in loyalty, acquisition, brand reputation, and conversion.

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