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Retail's Luxurious Side

Volume 3, 2017

A discussion about retail wouldn’t be complete without mentioning big ticket items. After all, Shanghai’s luxury brand haven West Nanjing Road did RMB28 billion in retail sales last year; and up to this May there had already been a 36% increase over those numbers. Who, exactly, are the people spending all this money on high-end brands? And how are changes in the digital space – and the emergence of New Retail – impacting retail’s luxurious side?  Read on for excerpts from two of the keynote speakers at this year’s CEIBS Prestige Brands Forum which looked at Luxury: The Digital Challenge.

 

Bruno Lannes, Partner at Bain & Company

Digital: Key to Engaging China’s Consumers?

Digital is becoming critical when it comes to marketing. More than 50% of marketing luxury budgets [in China] are now in digital. A big part of the other half is event organisation.

This is because the Chinese, especially the younger ones, are spending more – and a lot of time the way they get information is on their smartphones.

Essentially all the luxury brands now have a WeChat account, and they are all experimenting with WeChat campaigns. Some of them are more effective than others. Chanel, Dior and Gucci have more than one million views per day, which is very significant. Others have 200,000 to 300,000 per day, but that’s still very high. Essentially, Chinese consumers have embraced digital as a way to get information and know the brands better.

The not-so-good news is what happens when ecommerce gives us the ability to buy luxury online. There is more appetite to buy luxury online but I think it’s still early days in getting these brands online, except for cosmetics brands which are way ahead among the luxury categories when it comes to buying online.

Only seven of the top 30 really big luxury brands, have a Tmall store and – not surprisingly – a lot of them are cosmetic brands. The really big luxury brands are not so popular on Tmall.

But Alibaba’s acquisition of mei.com, a flash sale specialist in China, shows they are increasingly willing to get more involved with luxury brands online. They are preparing what they call a luxury pavilion where they want to have a special space on Tmall dedicated to luxury brands.

At the same time JD is also working on a similar project called Top Life where they want to attract luxury brands. So I think we’ll see more activity from those big platforms online. But as I said, except for cosmetics, it’s still very, very early days.”

 

Bruno Lannes is the head of the firm’s Consumer Products, Retail and Luxury practice for Greater China. He has over 25 years of strategy consulting experience, especially in Consumer Goods and Retail industries. He initiated and is leading Bain’s annual China Shopper Report and China Luxury Market Study which are both a reference in the industry.

 

Luca Solca, Managing Director, Sector Head Global Luxury Goods, Exane BNP Paribas

“In the most recent 15 years, the luxury goods sector has been largely banking on growing the number of stores and increasing prices. If you look at the growth rates of the number of stores of the major brands globally (Burberry, Cartier, Gucci, Hermès, Vuitton and Prada) you see that prior to 2012 the growth rate has largely come from increasing the retail network. So, to put it simply, you could say growth in luxury was about opening stores in China and jacking prices up. 

In the most recent four years we’ve seen that retail network expansion – opening more stores – was not really as much of an opportunity as before. Neither was increasing prices. I think this is largely because we now have growth in the industry, which is coming largely from the middle class. Five or 10 years ago, the richest consumers were driving growth. But today’s it’s the middle class, which has more limited means and more limited purchasing power. 

Digital Imperative

Today’s luxury industry is recognising what’s digitally strategic. Digital and travel offer opportunity, and this is probably going to be a cornerstone of growth going forward. We predict, and we’re not alone in this, that luxury digital distribution is going to continue to grow significantly faster than the market as a whole and represent between 15 and 20 percent by the year 2020. Similarly, travel retail is also going to be an important channel for distributing luxury goods products as the number of travellers is predicted to continue to grow above global GDP for the foreseeable future.

I remember a couple of CEOs telling me, a few years ago, “we have more important things to do than just care about digital”.

Things have been changing quite significantly. One way to monitor how luxury companies have changed their attitudes is to count the number of words in their annual reports and you’ll see that the word ‘store’ has declined in most recent years while the word ‘digital’ has continued to increase. So there’s a bandwagon now, and luxury goods companies are all jumping onto it with more or less proficiency. A number of brands have been introducing digital activities and very recently LVMH even launched a multi-brand foray through the Bon Marché Department Store. It’s called 24 Sèvres. 

In theory, ecommerce should benefit the luxury goods industry. What the data has shown is that consumers that buy both online and in-store, consumers that adapt, typically spend more per brand per year.

This is also beneficial in terms of margins because digital sales carry no rental costs. Luxury goods stores are typically located in very prime areas, with very significant rental costs that average between 12 and 15%. So digital has an advantage there, you also have an advantage in the kind of labour costs that you attach to these sales. When you’re selling online, you don’t pay front office personnel, only back office personnel – for the most part.

By integrating digital and physical distribution, you also improve conversion rates in-store because you can sell people what you don’t physically have in-store and you can deliver it to their homes. This is the bread and butter of a more effective retail. If you agree with me that luxury goods companies have largely become retailers, this typically brings higher sales per square foot and, as a consequence, better returns on invested capital. In fact, if you simplify a little, for luxury goods companies you can equate return on invested capital to sales per square foot, which correlates directly with total stronger returns. So we think that again, in theory, digital luxury development is going to be important to drive top line, but also important to drive bottom line profits and shareholder value.  That is if – and that is a big if – you have good control of your distribution. 

We often talk about luxury as a whole, but we should break it down by category and we need to recognise that different categories and different brands have a very different grip on their actual distribution. Some brands have more direct involvement in retail while other brands still rely quite significantly on wholesale. Why do I mention retail and wholesale? Because this is very important when it comes to distributing your brand and, most importantly, maintaining your price discipline.

The modern luxury goods industry is built on the idea of selling exclusivity to people.  The idea of exclusivity and price discipline go hand in hand. You need to convince people that value and price are one and the same thing. If you have poor price execution, then it’s quite likely that brand equity is going to be ruined over time.  The internet and digital space is, basically, creating a major magnifying lens on whatever pre-existing shortcomings brands had in their physical distribution.

Today everybody can go on the website and use Baidu or Google to look for your brand [and they will be able to see if it’s selling at different prices in different locations]. So lack of discipline in price is going to be far more obvious, and the potential damage to brands is also going to be far more important.

When we look at the actual experience of buying luxury goods products online, we see that there’s still a lot of dispersion in the quality of the experience that consumers can have online. This tells me that there’s a lot that luxury goods brands still have to improve. While they have defined – more or less – the in-store luxury goods experience, as far as the internet is concerned we’re still in the early days.

What is really going to be a game changer for luxury goods companies is integrating physical and digital distribution in store. One example is Luxottica and their newly rolled-out format in US stores. You can virtually try any frame you like, even if they are not physically there. And this is allowing stores to be smaller over time, store productivity to be higher and it’s offering consumers a wider choice. So, it’s a win-win opportunity, but it’s happening at relatively slow speed because other than Luxottica and Burberry there’s very little that we can write home about in terms of digital and physical integration.

The internet offers the opportunity for brands to engage consumers in a multitude of ways. So far the focus has been largely limited to e-commerce. There are very few brands making direct contact with consumers that are interested in products at the same time they express that interest online. We think this is going to be an area that will have to be developed. In terms of CRM (customer relationship management), the fact that you have details about your consumers, that you know their email address, doesn’t mean that you’re going to be relevant and capable of having a dialogue with them if you just bombard them with thousands of emails and standardised messages. There’s a lot to be done by luxury goods brands to articulate how they can have a dialogue with consumers appropriately – it’s all about saying the relevant thing at the right time.”

 

Luca Solca has been voted a top ranked luxury goods analyst in both the Extel and Institutional Investor surveys (#1 in 2011, 2014, 2015, 2016). His more than 25 years’ experience in luxury goods includes 12 years in consulting and a partner of the Boston Consulting Group – serving luxury goods, consumer goods and retail clients all over Europe. He moved on to lead a publicly traded luxury conglomerate, which he restructured and refinanced between 2002 and 2005. He has worked on the sellside in the past 12 years, covering both luxury goods and general retail – as well as trying his hand as Director of Research in 2012 and 2013. Luca is a magna cum laude SDA Bocconi MBA (1990).