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Sunday, June 25, 2017

CEIBS Forum Explores Luxury: The Digital Challenge

June 24, 2017. Shanghai – “The luxury brand is coming back!” That’s the word from Zhou Haiying Deputy Governor of Shanghai’s Jing’an District, home to luxury brand haven West Nanjing Road which did RMB28 billion in retail sales last year. Up to this May there has already been a 36% increase over those numbers.

In fact according to Bruno Lannes, Partner at Bain & Company which does an annual global luxury index, the rebound in China’s luxury goods market began in 2015 with 4% growth. This was after three years of “serious decline” because of locals’ penchant for buying goods overseas and the government’s efforts to clamp down on corruption (in the past luxury items had often been used as ‘gifts’). Lannes anticipates overall growth of 6-8% this year. “Chinese consumers are coming back to China stores, or maybe they are buying online,” he said. These purchases are being made by consumers flush with funds from the real estate market and buoyed by the depreciation of the RMB, he explained. “It’s the wealth effect, they feel they have more to spend,” added Lannes. “China used to be unique as it had a male dominated luxury market. It’s now becoming a normal market driven by females. We’re seeing more females and more younger consumers buying.”

To attract and engage with younger consumers, savvy luxury brands are looking to digital. According to Bain & Co data, a large chunk of spending by today’s global luxury brands goes to events and half their budget is spent on digital. “All the major personal luxury brands have WeChat accounts, and have experimented with WeChat campaigns. The three leading personal brands – Chanel, Dior and Gucci – have more than 1,000,000 views a day. Chinese consumers have embraced digital as a way to get info and know these brands better,” he said.

As CEIBS President Pedro Nueno pointed out, this is in stark contrast to 10 year ago when CEIBS hosted the first Prestige Brands Forum. Back then, luxury brands shied away from the internet. That’s because it was seen as contrary to the very essence of luxury – exclusivity. Today, that has changed and there has been a strategic shift in how luxury brands view and engage with the digital landscape. “Luxury goods companies are all jumping on the digital bandwagon,” said Luca Solca, Managing Director and Sector Head for Global Luxury Goods at the investment firm Exane BNP Paribas. He explained that the old approach of “opening stores in China and jacking prices up” has been less effective over the years as much of the growth is now coming from the country’s middle class. They have less to spend than the rich, who spurred growth five years ago. Solca predicts that by 2020 the growth from digital distribution will be “close to 15-20%”, much faster than that seen by the entire luxury market.

This may be because online stores offer many advantages including not having to pay high real estate rental fees as with physical stores, less labour costs as there is no need for in-store staff, the ability to offer a wider range of products as orders are not limited to what’s in the store, etc. However Solca cautioned that digital will only work for luxury brands if it’s done right.  This means brands will need to have “a tight grip” on how items are distributed, specifically in terms of the price tag.  He cited examples of two luxury products being offered on Amazon.com at 36 and 40% less than on the brands' own websites, describing this as the “dark side of digital luxury”.  “Luxury goods have largely become retailers. Digital is important to drive profits and shareholder value; but only if you have good control of distribution. It’s important to price discipline,” he said. “The modern idea of luxury means you have to convince people that value and price are one and the same thing. So you have to be careful not to ruin the brand. If prices are too obviously different on and offline that’s a problem.”

Another area that luxury brands need to address as they rely more and more on the digital landscape, according to Solca, is the customer experience. A big part of the offline experience involves being fawned over by attentive store clerks. The trick is now finding a way to incorporate that into the online purchase.  “There’s a lot that luxury brands still have to improve [in the online shopping experience]. They have defined the in-store experience but as far as the internet is concerned we’re still in the early days,” he said.

Today’s CEIBS - Jing’an 9th Prestige Brands Forum brought together major players from the luxury industry and related sectors such as media, investments, ecommerce, etc. The day-long event saw presentations by executives from Alibaba Group, Tencent, L’Oreal, LUXHUB China of Havas Media Group (which looks at global trends in luxury retail), German luxury forum MEISTERKREIS, well know brand Shanghai Jahwa Group, along with fashion bloggers who are influencing and shaping the luxury landscape. About 200 people attended.

Charmaine N. Clarke