Think Tank: Luxury E-commerce and the Path to Profitability
Seismic changes in advanced technology over the past few years have disrupted traditional consumer shopping patterns, creating an increasingly complex retail landscape and, with it, a shift toward luxury e-commerce.
Despite significant investments over the past decade by luxury consumer brands in e-commerce ventures related to IT, customer support and supply chains, the last rule of the notorious 24 Anti‑Laws of Marketing for European luxury brands, “do not sell openly on the Internet,” held strong. However, over the past year the consensus on this strategy has started to shift. The giants in the industry are now eager to profit from e-commerce sales, and this about-face has profound implications for the luxury industry as well as e-commerce as a whole.
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Shifts in Shopping Behavior
According to statistics compiled by McKinsey, e-commerce sales are anticipated to reach $80 billion annually as more and more companies enter the market. For example, in 2017, even LVMH (Moët Hennessy Louis Vuitton), one of the top three conglomerates in the luxury fashion industry, entered the e-commerce market with its launch of 24 Sèvres. LVMH launched the site as an experiential online shopping platform and digital outpost for the iconic Parisian luxury department store, Le Bon Marché.
These changes in the luxury retail ecosystem are largely attributable to shifts in shopping behavior in recent years. The vast majority of luxury shoppers, whose average age has fallen from 48 to 34, now engage with brands and goods online before making purchases, regardless of whether the ultimate transaction occurs online or in-store.
A recent report by McKinsey highlights: “[t]he typical luxury shopper now follows a mixed online/offline journey, seeking advice of peers on social media or looking for suggestions from trusted bloggers before entering a store . . . . The luxury shopper who begins and ends the customer journey offline is a vanishing breed.” Today’s luxury shoppers are no longer satisfied with a one-dimensional shop-and-buy approach and, instead, seek out brands that offer both online and in-store experiences that go beyond the physical product.
E-commerce Imperatives
To fulfill the expectations of this new generation of shoppers, luxury companies have begun cultivating a digital presence capable of enticing and fostering brand loyalty. Industry players have approached this challenge through full launches of e-shops, partnerships with e-commerce retailers, strategic investments and acquisitions and combinations of all three. For instance, earlier this year, Harvey Nichols, a luxury British department store, which already operates its own e-commerce web site, entered into a partnership with Farfetch, an online fashion retail platform, to expand its customer base by making its accessories and clothes available in almost 190 countries.
For retailers operating both virtual and physical businesses, the formula for merging online and in-person experiences can require costly and time-consuming trial and error — the path to brand engagement and customer loyalty is hardly clear-cut. To succeed in this new omnichannel ecosystem, Maria del Carmen Fernández González, chief executive officer of marketing and e-commerce agency Infinitum Ecommerce, explains that noticeable brand DNA, dominant presence on social media networks, and personalized services, such as exclusive access and live chat functions, are essential to attracting “younger, more diverse, tech-loving clientele.”
Neiman Marcus has been particularly successful at creating an omnichannel brand, with the “Snap. Find. Shop.” feature on its mobile app. Using the app, shoppers can use their smartphone camera to take a picture of a shoe or handbag. The app’s digital image recognition software will then scan the store’s network to find similar products on the Neiman Marcus web site, which can be purchased with a simple screen tap. Neiman Marcus also has pioneered in-store ChargeItSpot lockers where shoppers can charge phones while they browse, as well as Memory Mirrors, which let shoppers record and send 360-degree videos of outfits or makeup that they try on in-store. Few other retailers, however, have proven as adept at utilizing these new technologies as Neiman Marcus.
Another successful e-commerce entrant, Moncler, adapted to the industry’s growing pressure to deliver new products at a faster rate in its own way. Moncler recognized that it needed to accommodate its younger shoppers who are heavily influenced by social media. It did so by developing a robust online digital culture, which involved building an e-commerce site that “fully reflects the brand’s ‘physical’ retail policies” and, among other things, highlights monthly product launches rather than twice-yearly collections. Moncler’s strategy to “keep an open mind and constantly evolve, welcoming changes but keeping true to [its] DNA” was a resounding success. The company recently announced that it exceeded its goal to double online sales revenue to 6 percent in April. This Italian firm also has shown its attentiveness to its clientele by deciding to engage Chinese shoppers, which made up 32 percent of the worldwide luxury market in 2017, and to maintain a more current, modest pricing strategy to retain its younger shoppers.
Conversely, companies that ignore this new omnichannel approach are taking a considerable risk. Consider an Italian luxury fashion house whose brand has been one of the most highly sought after for over a century. Its hesitant approach to e-commerce left the company’s online sales approximately 4 percent below the industry’s average, at 5 percent of total sales. This result is attributed to the company’s lack of an online presence, including a dearth of social media posts, limited-edition products promoted online and collaborations with social media influencers. In addition to its lack of online visibility, this company’s sales suffered due to its investments in physical stores. These expenditures were higher than those of its competitors and offer a lesson on ignoring the perils of staying offline in an increasingly digital world.
Risks and Competition Associated With E-commerce
While the e-commerce market convinced even famously digitally adverse industry players, such as LVMH and Celine, to participate, entrance into the market does not come without substantial risks. Generally, and particularly with respect to full launches of e-commerce web sites, significant investments are required to maintain e-commerce businesses. According to data released by McKinsey, such investments range from the obvious expenses necessary for the implementation and development of web site-related technologies, customer support and marketing to less obvious expenses, such as the costs of physical storage and AI technologies. These costly investments reflect the security and technology concerns that naturally follow a shipment worth thousands of dollars. Hermès, for example, offers its Pliplat clutch online for $49,400.
Competitive risks include not only direct competitors, but also market disruptors, such as online retailer partnerships and new market entrants, including luxury consignment sites, sharing sites and shopping clubs. The risk assumed by an online retail partnership, such as the one between Harvey Nichols and Farfetch, is carried by both parties. For example, products offered on third-party online retailing web sites may cannibalize the sales of the manufacturer’s own e-commerce web site. For this reason, the manufacturer may choose to discontinue offering their products on one or the other web site.
The proliferation of luxury consignment sites, sharing sites and shopping clubs allows customers to enjoy luxury products without spending a fortune. Consignment sites offer secondhand luxury goods. Shopping clubs provide customers with opportunities to purchase luxury goods for less through event-based sales. Sharing sites allow users to essentially rent luxury goods for a fee. Luxury fashion manufacturers may suffer in sales if consumers switch to the more accessible and affordable options offered by these new market entrants. The threat is made apparent in PricewaterhouseCoopers’ recent report, which claims that the “sharing economy,” worth $15 billion in 2016, is expected to grow to $335 billion by 2025 and reach new sectors such as luxury cars and art. Such market disruption may be of significant risk to luxury fashion manufacturers who are still grappling with the e-commerce market.
Finally, luxury brands need to pay particular attention to the various legal issues involved when intermingling assets. This is especially true for the lifeblood of any brand: its intellectual property. As manufacturers and retailers navigate and blend their virtual and physical ecosystems, it is increasingly important to ensure that the brand’s intellectual property, especially any derivative branding developed for purposes of an online or social media presence, is clearly and explicitly owned by the brand. Accidentally siloing a trademark, patent or copyright with an independent contractor, for example, will result in the brand losing ownership of, and potentially royalties derived from, those assets. Fortunately, these risks can be eliminated with clear and carefully drafted contractual language.
Moreover, the e-commerce ecosystem is filled with third parties who fulfill specific niches a luxury brand may not have the resources to handle independently. If a company chooses to partner with one of those third parties, either for purposes of distribution or collaboration, it is imperative that they sign a detailed license agreement that ensures that the brand owner has the right to exercise control over the licensee’s use of the brand owner’s intellectual property. Without such control, the brand owner can potentially be deemed to have forfeited certain of its rights. Luxury brands are especially vulnerable in this regard since they spend so much of their time carefully cultivating their image and culture. After all, it is difficult enough to manage a brand’s image even when it is under the full control of the company, as Dolce & Gabbana experienced recently in China with its “Eating With Chopsticks” ads. Without careful planning and contractual control, third parties utilizing a brand owner’s IP have the power to diminish a brand’s value irreparably.
In the same vein, a brand’s value lies largely with the key individuals behind the brand. Oftentimes, those key players have market power that brings risk in addition to opportunity. If not employed by the company, luxury companies should determine which of these key individuals are so essential to the brand’s expansion and success that he or she should be offered an employment or similar arrangement with appropriate incentives to maintain the brand relationship. On the flip side, a non-solicit or other appropriate covenant should be inserted into that individual’s employment contract to protect the business if the arrangement is terminated.
Developing the Right Strategy
Several practical steps that any luxury brand should take to adjust to the world of e-commerce are as follows:
1. Identify the target market. In the face of this evolving marketplace, luxury companies may still choose to focus on traditional luxury or high net worth customers. However, the world of e-commerce has demonstrated that there is room to reach a much wider audience and pivot to new targets as they become identifiable. This also speaks to how fast a brand may wish to enter the e-commerce playing field or how exclusive it seeks to remain in its implementation strategy.
2. Choose brand partners wisely. A luxury brand must consider when it is best to develop something in-house or to export the responsibility to a specialist. Many sites are already adept at carting luxury brands from brick-and-mortar stores into an equivalent digital experience. However, if a brand comes up with a novelty concept, it might be best to expend the resources to develop the concept itself and capitalize on the first-mover advantage. This strategy would include choosing which personalities to target as social media influencers.
3. Create a seamless experience. Luxury brands expend tremendous resources on articulating a particular vision of their persona to the world. The last thing a luxury brand needs is an online presence that does not correspond with its carefully curated and transcendent in-store experience. Of course, some of that comes down to simple marketing, but oftentimes synching up mobile and desktop versions of the same web site can have profound implications on how younger generations see the brand.
Final Remarks
As the market anticipates online sales of luxury goods to reach 25 percent of total sales by 2025, it may not be surprising that the online presence of industry leaders has surged in the last few years. In fact, given changing consumer demands, the move onto the Internet may be inevitable. However, e-commerce ventures require substantial investments and involve significant risks, some of which cannot be anticipated in this rapidly evolving landscape. As such, companies should carefully plan their e-commerce strategies ranging from investment approach to implementation details. Luxury companies should be ready to fully commit to their e-commerce strategies in order to (1) provide a wide range of personalized services, (2) create a dominant presence online and (3) allow a digital medium to function as a natural extension of its unique brand DNA. The future of the luxury market is online, and with careful planning and forethought luxury brands can be poised to seize a digital avenue for exponential growth.
Tracy Bacigalupo is a partner in the corporate department of Morrison & Foerster, and Elnaz Zarrini is an associate in the corporate department in Morrison & Foerster’s New York office.
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