The future of luxury e-commerce
“Fashion is above all an art of change.” — John Galliano
The scale of the disruption caused by COVID19 is unprecedented.
According to research by GlobalData, the fashion sector will be the hardest hit in retail by the pandemic, experiencing a 20.6% reduction in growth, down from a previous forecast of 0.6% growth for 2020.
However, the troubles facing the UK high street are nothing new. The pandemic has simply accelerated the rate at which these issues must be addressed, particularly for retailers with predominantly physical sales channels, many of whom have been considering how to adapt to the changing landscape for some time. Within every crisis lies opportunity.
While luxury brands are arguably better poised to weather the storm than their high street counterparts due to having higher margins and lower volumes on average, the luxury market is forecasted to be similarly impacted. Bain forecasts that the luxury market will decline by 25-30% in the first quarter of 2020 and Bernstein predicts that demand in China could drop by 30-50%.
This will force brands to adapt and shift focus for maximum revenue generation once the crisis is over.
The changing composition of the luxury market
According to research by Bain & Company, the luxury market grew by 4% to an estimated €1.3 trillion globally in 2019. The Chinese market accounted for 90% of the growth of the luxury market in 2019, and was responsible for 35% of the value of luxury goods purchased. By contrast, the luxury market in Europe grew by a mere 1%.
Millennials accounted for 35% of luxury goods consumption in 2019, and Bain forecasts that this could reach 45% by 2025. Gen Z customers made up only 4% of the luxury market in 2019 but could reach 40% by 2035. Collectively, millennial and Gen Z customers accounted for all of the luxury market’s growth in 2019.
According to research by Google, millennials spend 60% of their shopping time online, more even than Gen Z (56%). Smartphones are a key driver, and user experience is extremely important – a 1 second delay in mobile loading times can reduce conversion rates by as much as 20%. Even when millennials shop in bricks and mortar stores, 86% have researched online beforehand and 40% of all shoppers use their smartphones in store to help them make decisions.
As millennials and Gen Z customers continue to account for an ever-increasing proportion of the luxury market, and growth remains strong in emerging markets, luxury brands will have to adapt to accommodate these changes.
The rise of the platform
As the debate about the relative merits of the aggregator vs the direct to consumer models in e-commerce continues, one thing is clear – there isn’t yet an out-and-out winner.
Aggregator platforms, such as Farfetch and Net-A-Porter, which aggregate different brands’ products together and sell them in one place, continue to dominate the online luxury market. This model is typically favoured by brands seeking immediate access to an existing customer base or who lack the capacity or desire to set up and maintain a direct-to-consumer platform. A disadvantage of this model for brands is that they will lose a margin on any sales made via the platform but if volume is high enough this doesn’t need to be a reason for brands not to use them.
Amazon is reportedly planning to enter the luxury e-commerce market in 2020 with a global luxury platform which will operate via a concession model, which will allow brands relative autonomy over how they market and sell their products on the platform. It will be interesting to see whether Amazon can apply its success in e-commerce to the luxury market, and whether it will unseat any of the currently dominant players.
By contrast, the direct-to-consumer model, which allows brands to sell directly to their customers, is seen as requiring more investment but offers brands greater freedom over how they market and sell their products and communicate their brand stories. With e-commerce platforms such as Shopify and Demandware reducing the barriers to entry for brands by enabling them to implement direct-to-consumer e-commerce offerings with relative ease, we may see an increase in the number of brands implementing this model over the next decade.
The social responsibility factor
With an increasing focus by customers on their social commitment and the need to consume goods responsibly, even in the luxury sector, the second-hand channel and retail rental services such as Rent the Runway and HURR are growing fast. In 2019, the global market for second-hand luxury goods surged to €26 billion according to Bain & Company, a result of strong growth in Europe and growth among specialised online platforms.
Luxury brands have traditionally favoured exclusivity but Caastle suggests that, by blending ownership with access and offering a CaaS (Clothing as a Service) model, consumers are able to experiment more deeply with the brand not only by owning garments but also by accessing a rotating collection each month. Brands may see this as a way to attract a new customer base or deepen brand loyalty with existing customers but the look and feel of the platforms the brands are listed on will need to meet the highest standards and the service to consumers must be flawless to ensure that, notwithstanding the much lower price point, the luxury feel is retained throughout. Service levels are likely to be important in contracts between brands and platforms to ensure that goods are turned around quickly and carefully maintained to ensure that customers only receive goods which are of the highest quality. We would also expect a lot of emphasis to be placed on following brand guidelines and rights for brands to remove their products from circulation on the platforms if they felt their reputation may be damaged by association with the platforms.
The power of data
Data has always been important to retailers but the importance of leveraging customer data in e-commerce continues to grow. Customers expect a personalised service, with advertising and shopping suggestions being tailored to meet a customer’s needs.
It is important to balance the value placed by customers on privacy, particularly those affluent customers who value their anonymity and do not want everything they do be in the public eye, with ensuring that customers receive the personalised experience they have come to expect when shopping for luxury goods. Transparency is therefore key to making sure that customers understand what data is being collected and how it is being used. This helps to build trust between a customer and the brand and, if done well, can help to foster a strong relationship between customer and brand.
New opportunities: Luxury in the gaming sector
As brands adapt to reach new markets, new opportunities have arisen for collaboration between brands and video game developers and other content creators.
GQ reports that video games are the next big thing in high fashion, and this trend is likely to continue over the next decade. The global video games market was worth $196 billion in 2019, according to research by Newzoo, and is now worth more than the movie and music industries combined.
Burberry released a mobile video game, B Bounce, at the end of last year to coincide with the release of its Monogram Puffer Collection and Gucci has released several games via its mobile app. Louis Vuitton recently collaborated with Riot games to design the trophy trunk for the League of Legends World Championship, several in-game cosmetic skins and a line of co-branded products.
Such collaborations can be mutually beneficial – luxury brands are able to tap into huge existing markets either by releasing games themselves or by licensing digital versions of their products to appear in popular games, and game developers benefit from new revenue streams and elevated status from licensing luxury products. This trend is likely to continue over the next decade as brands seek to broaden the reach of the luxury goods market.
In 2019, prior to the breakout of the pandemic, online sales were the fastest-growing channel, accounting for 12% of sales of luxury goods worldwide, an increase of 22% on the previous year, according to a report by Bain. This compares to an increase of only 11% for other retail channels. The online channel influenced 75% of luxury purchased globally, and around 25% of purchases were digitally enabled.
The shift towards digital will continue over the next decade as online channels increase their proportion of total luxury sales. Bain forecasts that the global number of physical stores could peak in 2020 and brands are now considering whether digital fashion weeks can replace physical ones. The move towards e-commerce may have been slow for some luxury players, but those that get ahead of the curve will reap the benefits during the pandemic and beyond.
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