Luxury companies are fussy about where their products are sold online and would love to remain that way. But few will have the option after the pandemic. That will boost the status of already-powerful brands, as well as tech giants like
that are eyeing the industry.
The luxury business got a crash course in e-commerce when boutiques were closed this year. “Brands made the mental switch from treating digital as 5% of their current business to 35% of future revenue,” says Ian Rogers, the outgoing chief digital officer at
Moët Hennessy Louis Vuitton, which poached him from Apple in 2015.
Traditionally, high-end brands have been cautious about selling online. While they were growing rapidly, digital transactions were a relatively low 12% of global luxury sales in 2019. They are expected to hit 23% in 2020 and up to one-third by the middle of the decade, according to Bain & Co. projections.
Paris-based LVMH, which owns
and Fendi as well as its namesake brands, spent heavily on e-commerce during the lockdowns. Although the company reduced its overall investment budget this year to save cash, digital’s share of the spending doubled to roughly 25%.
Boundaries between store and website sales also blurred in new ways this year. With boutiques closed, shop assistants resorted to contacting customers through messaging apps or arranged digital consultations to drive business. Gucci’s parent company, Kering, expects these so-called “distance sales” to stick. In the future, store workers may log on during quiet times and interact with online shoppers to improve the low sales conversion rates that afflict many luxury-brand websites.
Big brands that have already poured cash into their e-commerce businesses are in the best position to control what happens next. The ideal setup for a luxury brand is to sell mostly on its own website, where margins are highest. Roughly 75% of LVMH’s e-commerce sales flow through this channel, for example. The company only works with outside platforms that give it full control over the presentation and pricing of its products.
But small labels that don’t have the money to build their own distribution system will find it harder to keep tight ownership of this important sales channel.
Tech companies have spotted the opportunity. Amazon launched a new luxury store in September. Social-media platforms, too, have ambitions to turn themselves into e-commerce sites. Instagram, where many luxury shoppers already go for inspiration about what to buy, recently introduced a checkout button in the U.S. that allows them to purchase goods without leaving the app. Terms are very attractive: Instagram will take a 5% cut of transactions, compared with the 30% average charged by online luxury retailer Farfetch.
Small brands may face little choice but to sign up with a third-party seller. But there are downsides, especially if sales made through Amazon or Instagram cannibalize the more profitable transactions that happen on a label’s own website. Companies that have joined Amazon’s new luxury platform so far are family owned, such as Oscar de la Renta, or in financial difficulty, like La Perla.
Nor is it in the long-term interest of brands to help create a powerful online intermediary that they don’t own. As hotel companies have discovered with
the more traffic a third-party site can generate, the greater its ability to charge higher fees down the road.
China’s Alibaba—one of the few tech giants to get the offer right for luxury brands—is arguably already in that position. By the end of this year, it expects to have 220 brands signed up to its Luxury Pavillion on Tmall, a 50% increase since the start of the pandemic. If it hikes its commission from the current 5%, labels will have little choice but to pay to maintain access to the booming Chinese e-commerce market.
Designer brands also need to manage how much demand shifts online because they invest so much more in their stores than the average retailer. The rent a square foot that Hermès pays for its boutique on New York’s Madison Avenue is almost triple what mass-market labels Gap and Zara pay in lower Manhattan, data from real-estate firm CBRE shows. Keeping full control of e-commerce is the best way to make sure that these ritzy stores remain productive.
Cash-rich brands like Louis Vuitton, Gucci and Hermès have grown in confidence online during the current crisis. They already have their sights on how to use artificial intelligence to boost sales and reroute inventory to regions where demand is high. This may give them a competitive edge.
Smaller competitors are under pressure to keep pace or lose more market share. Expect to spot their brands in places they would have scorned just a year ago.
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