E-commerce for high-end goods is ramping up substantially, but there may be a limit to its growth.
Online sales for luxury retail jumped 24% in 2017, making up 9% of the space overall, according to the latest Bain Luxury Study.
“Fashion cannot be digitized like media, music or video,” said José Neves, founder and CEO of Farfetch, an online platform that sells products from 800 boutiques around the world. “I believe the physical experience is here to stay, whether it makes up two-thirds or three-quarters of it, we’re really passionate about the physical store experience that’s at the core of our DNA.”
Unlike other luxury fashion sites like Net-a-Porter, Yoox and Matches Fashion, Farfetch is entirely dependent on brick-and-mortar retailers for its inventory.
“What makes us unique is that on Farfetch, you will find that tiny little boutique in Tokyo or Capri, Italy that you would never be able to find and we bring that to you in an easy way. What that means for the consumer is they really have access to fashion they cannot find anywhere else,” Neves told Yahoo Finance.
Amazon-proof… for now
By virtue of being an online platform, Neves is banking on the fact that a customer won’t want to physically seek out obscure boutiques around the world. But, the luxury shopper is very much intent on trusted sites for high-end items, which prevents Amazon (AMZN) from encroaching on all of commerce.
“Luxury is built on emotion, desirability, heritage. And so, we believe that the DNA of Amazon is at present not really compatible with the luxury industry,” he said, adding that Amazon has “really nailed convenience and price. They’re bringing lower prices to the market and convenience, which brings tons of customers, which allows them to go back to the suppliers, lower the prices and create this flywheel. That doesn’t work with luxury. It’s oil and water.”
Neves himself is a happy Amazon Prime customer in the UK, but remains skeptical that Amazon is going to be the destination for luxury goods — that’s not what the niche customers want anyway.
“That’s not where the consumer would expect to find these products. You wouldn’t expect to find a Prada bag next to a toothbrush and a washing machine,” he said. “But that’s what will happen, right? Never dismiss Amazon, they’re an incredible company. Who knows what’s going to happen next?”
Amazon has been trying to get its feet wet in the high-end universe. Last fall, Amazon offered a “see now buy now” experiment with former Diesel creative director Nicola Formichetti’s Nicopanda fashion show in the UK. Customers in London could get one-hour delivery on the items shown on the runway. The e-commerce behemoth has also been investing in “At Tokyo,” a program where it invites three brands that wouldn’t normally be a part of Fashion Week to get a chance to show their creations.
Since Amazon Prime has arguably reached a peak saturation among affluent Americans, this foreboding possibility of Amazon penetrating the high-end market may come sooner than imagined. Eighty-two percent of households that earn more than $112,000 per year are Amazon Prime members.
Farfetch’s vision for the ‘store of the future’
Despite Amazon’s looming foray into the high-end space, platforms like Farfetch have gained steady traction among a niche audience.
Founded in 2008, Farfetch bills itself as the one-stop shop for consumers looking for boutiques and brands across 50 different countries. Gross profit hit 87 million euros (or $114 million) and sales hit 151 million euros ($198 million) in 2016, up 74% from 2015.
The UK-based company raised $397 million from Chinese e-commerce behemoth JD.com last year to tap into what Neves calls “the growth engine for the luxury industry” that’s experiencing triple-digit growth. And, earlier this year, Farfetch signed a joint venture with Chalhoub Group, the Middle East-based luxury retail distribution company.
Farfetch is in a unique position of being able to make a dual bet — on both the growth of physical spaces and e-commerce. Neves claims it isn’t a zero-sum game.
“We connect the most beautiful shops and brands to consumers worldwide and from day one we did it to connect physical spaces to digital platforms, which at the time was very new. We still believe that the magic needs to be kept alive,” he said.
The next frontier of physical retail
Over the next decade, Bain expects physical stores will still account for 75% of all luxury purchases, but the mix of store formats will shift toward off-price stores and airport stores. That means single brand, department and specialty stores will get the short end of the stick.
This begs the question — what do retail players need to do to make sure customers want to step foot in their stores? Personalization through technology, according to Neves.
“Great technology as Steve Jobs taught us all needs to be as invisible as possible. It’s really not about gimmicks. If people see the technology, it’s not good technology,” he said. “There’s this tension that exists between our digital lives, which are ultra-personalized, and our anonymized physical experiences.”
Technology like digital mirrors in dressing rooms, RFID (radio-frequency identification), which automatically tracks tags on objects, and NFC (near-field communication), which allows two electronic devices to establish a connection if they’re in close proximity to each other, are exciting, but there’s a crucial layer that’s missing, according to Neves.
“[We need a] data and personalization layer, which extends from online to offline. But the layer is what no one has built. We have hundreds of startups, amazing companies that are building things, but there’s no layer. The mirror is not connected to anything. The customer leaves and nothing was added in terms of value to the experience. And that’s where in-store technology has failed so far,” he said.
But, with the allure of convenience and ease of the online world, even this added layer of in-store customized shopping may not be enough to get customers in the door again.
Melody Hahm is a senior writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.