An AltoPartners Global White Paper showcasing the changes, and challenges, within the Luxury Goods sector

Acknowledgments: with grateful thanks to the teams at Accord Group/AltoPartners East and Central Europe; Backer & Partners/AltoPartners Argentina; Diversified Search/AltoPartners USA; Jack Russell Consulting/AltoPartners Germany; MKG Partners/AltoPartners Turkey; Plongê/ AltoPartners Brazil; Search Partners International (SPi)/AltoPartners South Africa.

The Rarity vs Growth Paradox

Amid the gloom and despondency of global markets, the luxury goods business – contrarily – is booming. The sector experienced back-to-back growth in both 2017 and 2018, increasing by 5% per annum to an estimated €1.2 trillion globally, fuelled by millennials who are hitting their peak earning stride and the burgeoning middle class in China and India.

Ordinarily in the retail world, a groundswell of aspirational support would be cause for celebration. But the luxury goods sector is no ordinary industry, occupying as it does the penthouse suite of Maslow’s hierarchy of needs. It trades in desirability, and growth based on middle class expenditure makes it particularly vulnerable to ripples in the global economy, and to over-exposure in the market.

The trend toward democratised luxury means treading a fine line between creating an immersive brand experience catering to younger fans while simultaneously protecting the mystique upon which the price point depends. This raises two leadership issues: maintaining brand integrity across multiple channels; and finding the technical expertise to build platforms to appeal to diverse audiences, many of whom will have had their experience of the brand shaped by their digital interaction with it.

Hooray for the HENRYs

This is particularly true for brands targeting an emerging customer segment that Deloitte’s dubs HENRYs (High-Earners-Not–Rich-Yet). These are typically in their early 40s, although they span three generations, including Baby Boomers and Gen Xers, with the bulk of the online fire power belonging to the Millennials, some of whom quietly turned 38 this year. And they love online shopping. So much so, that analysts predict an uplift in online sales of between 25% and 30% by 2025. This puts particular pressure on brands to speed up migration from a siloed, multi-channel retail approach in which the company’s online presence exists in isolation to its physical stores, to ensure that customers enjoy an integrated omnichannel shopping experience. Millennials and Gen Zee expect to be able to script their own journey across multiple touchpoints, switching seamlessly between mobile, e-commerce and in-store.

“The customer does not distinguish between the channels – they simply see the brand experience. It has to deliver on the brand promise.” Sephora

Better late than never

With a few notable exceptions, luxury marques were fashionably late to the digital party. Prada, famously, didn’t have a website until 2007, almost two decades after the invention of the Internet. While some brands are still getting to grips with retro-fitting a coherent e-commerce strategy, others have already graduated to narrow artificial intelligence using personal shopper chatbots (such as Levi’s virtual stylist) and machine learning software to make recommendations based on individual customer preferences using voice and image recognition.

Unsurprisingly then, all participants in this survey put digitisation at the top of the list of challenges currently facing the luxury goods sector. Even those who were satisfied with their current rate of integration from multi-channel to omnichannel, were concerned about the speed at which e-commerce platforms were evolving and the skills required to keep pace with competitors within the broader luxury goods sector, as well as challengers in the premium goods sector, and increasingly, grey market platforms such as LuxuryBazaaar.com, who sell premium brand watches at steeply reduced prices minus the warranties and guaranties.

Merging legacy POS systems with e-commerce platforms adds a new dimension of cost and complexity and is likely to require significant investment in technology as well as a sustained commitment to employee training and engagement. This is not just restricted to technical know-how, but to broader change management initiatives that address company culture and conditions of employment. For example, a renewed focus on e-commerce could be met with considerable resistance from sales staff who may resent losing commission-based sales if they anticipate that customers are browsing (or showrooming, to use the technical term) with the aim of purchasing online later.

Regardless of whether customers research online and purchase offline, or vice versa, digitisation is a two-way exchange, providing consumers with basic information (store locators; stock levels; opening hours; new ranges; exclusive offers), and in turn offering crucial digital feedback about individual purchasing habits and preferences.

AI & Big Data – the Holy Grail of Digitisation

Companies are increasingly looking to use this data to deliver bespoke offers to an audience of one. Software that uses AI and Machine Learning to enhance a brand’s personalisation strategy, is clearly the biggest opportunity for next-level customisation, with some brands choosing to develop their own tech incubators such as the Boyner Group, Turkey’s award-winning luxury retail brand who has partnered with other connective technology companies to establish an R&D academy. This makes solid commercial sense given that in the next decade customers are expected to manage 85% of their relationship with a company without ever interacting with a human.

Even in emerging and frontier markets which are hampered by poor transport infrastructure and low connectivity levels outside of urban areas, digital is king when it comes to developing brand loyalty. Prune, which was founded in Buenos Aires in 1999, and now has a presence in Peru, Chile and Colombia with plans to expand into Mexico and Europe, were early digital adopters, using social media to communicate extensively with their 2.5 million customer data-base. This year online sales superseded in-store purchases for the first time since it launched its e-commerce site in 2008, although 70% of purchases are picked up at a store.

The race is on therefore to better leverage consumer data (such as individual shopper’s profile, browsing history, abandoned carts, purchases and returns) to promote the right products at the right time on the right channel. Or allow customers to find exactly what they’re looking for with the least amount of effort or inconvenience. Luxury multi-brand portal Farfetch, for example, uses image recognition to allow shoppers to upload pictures from anywhere to find a specific product or similar options. Users can select their own photos but also Instagram or Pinterest posts. Similarly, Sephora’s online Visual Artist app allows potential customers to experience a virtual makeover by uploading a photo of themselves, while simultaneously making it easy to purchase any of the products 24/7.

Big data however brings big responsibilities. Brands need to ensure that customer data is rigorously protected. To do that, they first have to gain their trust, which has implications for levels of disclosure and transparency not just around data protection but business ethics generally.

“Ultimately, our role is to serve, not sell. We’re getting better at observing clients’ choices with big data/intelligent data and responding to client needs. That’s how we build up our community and gain their trust.” Sephora

Bricks and Mortar remain as important as ever

As luxury brands extend their virtual runways to reach ever further and deeper into the digital universe, so the physical shrines to their products take on even greater significance - rising above the noise and embodying everything the brand stands for in one memorable experience. The roots of luxury’s love-hate relationship with digital lie in the difficulty of replicating the ‘’magnificent encounter’’ of the in-store experience, online. How much of the brand mystique is derived from the ritual of the gift wrap, or the attentiveness of a personal shopper? Or the chilled champagne? The private viewing? The sheer grandeur of a celebrity architect-designed space at a premium address?

One option is to partner with trusted luxury multi-brand portals such as Yoox Net-A-Porter in Milan, the UK’s Farfetch and Munich-based MyTheresa, who are expert at replicating the ‘white glove’ experience online – from fashion consultants who are available 24/7 to literally turning your office or living room into a fitting room with a ‘’you try, we wait’’ delivery service. Chinese e-commerce giant, JD.Com goes even further: any of its 292.5 million customers ordering luxury items will have them delivered the same day by a dapper courier sporting a smart black suit and spotless white gloves.

“How do you inspire a customer to buy a perfume online that they haven’t sampled?” Sephora

Keeping it real

What is clear is that there is no magic formula for achieving digital integration; what works for one brand, may not work for others. Now more than ever luxury brands need to remain true to themselves by clearly communicating their distinctiveness and singularity and translating it into digital storytelling.

Finding better ways to engage with key audiences in a way that hooks their attention and resonates with their values, was a common theme in our conversations with leaders in the luxury brand space, many of whom have abandoned print advertising in favour of digital and social media. In this respect, the brand custodian has to be both shaman and strategist, tapping into the zeitgeist and adapting quickly and authentically to customer needs and desires.

This puts additional pressure on the need for content generation and curation, often happening across diverse channels in multiple time zones and in different languages. The custodians of the brand need to be hyper vigilant for false notes and tone-deaf messaging. But it’s a fine line. Centralised communications can also put the handbrake on speed and agility, as observed by many country managers sitting far from digital HQ, who expressed frustration at watching smaller, more nimble start-ups stealing a digital march on their turf.

Respondents also agreed that they need to be better at communicating these values internally, so that employees don’t feel left behind or betrayed by perceived inconsistencies or compromises.

From customers to communities

Digitisation also allows brands to engage with a wider “brand community”. It’s a move strongly associated with disruptors who use social media to emphasise a sense of belonging and shared values among millions of followers and fans. Chanel for example has mastered the YouTube catwalk, with some 1.45 million subscribers.

While some financial analysts feel the need to sound a cautionary note about the adulterating effect of overexposure, it’s worth noting that Gucci, with its dazzling social media presence (37.3 million followers on Instagram) and fashion shows on Facebook Live, saw profits rise by 42% to €6.2 billion in 2017.

While it’s difficult to say what came first, a change in brand values, or the need to be more accessible to younger, more woke consumers, the fashion industry has found a lucrative market in the Gen Zees thanks to the meteoric success of the Streetwear phenomenon, that has made Louis Vuitton (Supreme), Ralph Lauren (Palace), Fendi (Fila), Dior, Gucci, Valentino and Balenciaga T-shirts, sneakers and jeans such coveted items among 14 to 24 year old “hypebeasts.”

Similarly, in the summer of 2017, just two years after the appointment of Ian Rogers, LVMH’s chief digital officer and former Apple Music executive, Louis Vuitton launched 24 Sevres (24S). In a radical departure from tradition, it offers not only its own brands but, also those of competitors. The site offers live, one-on-one video consultations with Parisian stylists, a “Style Bot” on Facebook Messenger to engage its more than 23 million followers and delivery to 75 countries. So, while it requires a certain degree of self-possession to walk into a LV Maison, 24S is a truly egalitarian space that takes visual merchandising to the next level, providing a unique interactive experience aimed squarely at Gen Zee, even allowing users to share products with Facebook friends and get votes on what to buy.

The lure of the disruptive was also evident at the recent opening of Balenciaga’s edgy 4,400 square foot New York flagship store where on-site graffiti artists were on hand to customise handbags (new and vintage) with names, initials, or birthdates.

“24S which was launched in 2017 was designed to create an online experience in which everyone can share.” LVMH

Luxury as self-actualisation

Ironically, one strategy for maintaining the mystique of luxury in an era of democratisation, is to put the emphasis on what money can’t buy and lay claim to the self-actualisation space.

Brand guru Agnieszka Smektala, who spent eight years learning the trade at LVMH, goes further and believes that the next big challenge for luxury brands is to see who will stay at the forefront of the self-actualisation evolution: “Brands are a big force shaping the modern world. It is therefore crucial to treat the brand development process with mindfulness and love. The exciting question for me is: Which brands will help us realize our dream of becoming better humans? Which brands will be the first one to put their marketing budgets aside for growing their spiritual intelligence in the same way they invest now behind digital presence?”

Linking luxury to mindfulness could prove to be the most important marketing coup yet.

“Will luxury brands lead our planet to business enlightenment?” - Agnieszka Smektala, Inzpirea

Conclusion

Luxury brands can no longer afford to rely on their reputations. The rapid digitisation of the consumer experience has put the spotlight firmly on an organisation’s ability to support multiple, secure online touchpoints that reflect both the brand’s values and the consumer’s expectations of the brand. In particular, the use of machine learning and AI to track and interpret shoppers’ digital footprints will be key to providing customised shopping and browsing experiences. This is a highly specialist area and we can expect to see more IT and Tech executives being inducted into the corner offices of the fashion capitals of the world. While the potential for clashes exist, of far greater interest is how brand shamans and tech gurus will collaborate to shape our experience of luxury in the next decade.