Has Luxury and E-Commerce Finally Reached a Tipping Point?

To sell, or not to sell online. That is no longer the question. There can be no doubt that the ability to reach customers through digital channels during the height of the global lockdown earlier this year, meant a lifeline for many luxury brands whose stores were forced to close as concerns over the ongoing COVID-19 pandemic grew.

And while sales in physical stores have shown signs of a recovery for the global luxury industry, one bright spot has also been the growth of many brands’ e-commerce channels, where sales continue to rise alongside those of the physical stores.

In their latest results last month, Hermès and Kering reported earnings that reflected the surge in e-commerce. Hermès reported that its online shop now receives more revenue than its Parisian flagship store on Rue Faubourg Saint-Honore, with chief financial officer Eric du Halgouet noting that there was no cannibalisation between its online and physical stores and that 85 percent of online transactions were from new clients. As a result, the company said it planned to expand its online offering, except for its iconic products like Birkin bags.

A similar picture was seen at Kering, which reported that 13 percent of its sales for the first nine months of the year were online, compared to 6 percent during the same period a year ago. The results indicate that the need for a luxury brand to have e-commerce capabilities is an essential one, particularly in the future where the majority of consumers are expected to interact with brands.

According to research from consultancy Bain and Company, online is expected to account for up to 30 percent of the luxury market by 2025. And it is this rapid consumer adoption of e-commerce that has meant that luxury brands are now experiencing a broad-based digital revolution, said Luca Solca, Head of Luxury Goods at Bernstein.

Digital revolution

“COVID-19 is causing further acceleration: repatriating Chinese consumption that is fast-forwarding a shift that could have happened over ten years otherwise, boosting digital distribution by projecting digital sales from low double digits to mid-high teens overnight, collapsing the traditional wholesale channel - with more multi-brand retailers going bankrupt, and moving the bar higher on brand aesthetic relevance by further accelerating the “musical chairs” across creative departments,” said Solca.

All of these factors mean that e-commerce has become an essential channel to luxury brands, added Solca. “COVID-19 has boosted consumer adoption of digital distribution. This is indispensable when stores are locked down, and consumers want to avoid exposure to possible contagion.”

It's a view that Antonio Achille, Global Head of Luxury at McKinsey and David Sadigh, Founder and CEO of DLG (Digital Luxury Group) share.

“There has clearly been a terrific acceleration of e-commerce during these months. The pace at which the sector progressed over the last eight months was greatly increased, resulting in changes that really would have taken four or five years to achieve,” said Achille.

“The impact of COVID-19 is unprecedented, we can compare it to the launch of the iPhone as both events have acted as critical wake-up calls for many beautiful brands who used to believe they could continue to do business ‘the old fashioned way’,” said Sadigh.

“COVID-19 is creating pressure on companies, who had to adapt and quickly embrace new ways of working, communicating but also of selling their products. We are just at the beginning of this transformation,” he added.

Online versus offline

While it may seem obvious that luxury brands should all embrace e-commerce, not all companies have been quick to seize the opportunity. Historically, many luxury brands were reluctant to sell online out of concerns that a digital experience would not match that of a physical one.

Take Chanel, for instance, which does not sell its fashion, watches or fine jewellery online. Despite warning that its revenues and profit would be significantly hit this year due to COVID-19, its chief financial officer Philippe Blondiaux said in June that the company would adhere to its strategy of selling mainly via its network of shops in spite of the pandemic.

“We don’t intend, crisis or no crisis, to sell fashion, watches and fine jewellery online,” Blondiaux said in an interview with Reuters. Chanel, which does sell cosmetics, perfumes and some small accessories online, reported that e-commerce sales in these categories had grown 60 percent from their 2019 levels in June.

But have luxury brands finally reached a tipping point where the majority of brands should embrace e-commerce as an essential part of their business?

“I don’t think there is a unique answer,” Achille noted. “Because we do have brands which really embrace the opportunity without any prejudice. They establish strong internal teams; they are experimenting both in digital engagement and e-commerce. They are investing a lot. They partner with third parties, they are not scared of being on TikTok, they are not scared of doing WeChat, micro-events, so they really embrace it boldly and make it positive for brand equity.”

“However, there are others who are more and more selective,” he added. “Each brand needs to take the opportunity in coherence with their heritage, but I would be very surprised if a brand could not find a way to serve this opportunity without creating negatives on their brand. This is a channel, and consumers want to be there, so I think it would be a bit arrogant if a brand were to neglect this opportunity.”

Tipping point

Indeed, many more brands are fast tracking their e-commerce plans, either launching their own sites or using luxury platform services like Farfetch, which partners with brands and retailers on their global marketplace online or the choice to customise its platform technology and services and create their own e-commerce experience.

In its second quarter results, the company said it gross merchandise value for its digital platform was at all high at $651 million and that it had attracted more than half a million new consumers. Farfetch also said it had seen significant growth generated by its Farfetch Platform Solutions clients, including the addition of British department store Harrods onto the platform in February.

“I think we are almost past the tipping point of e-commerce,” said Kelly Kowal, Farfetch Head of Platform Solutions. “Many brands and retailers understand that in order to continue to facilitate trade, they have to be there but I think what’s really accelerated it, is COVID-19.”

“Brands and retailers are understanding how much of focus it really needs to be,” she added. And what we are really seeing too, is I think again because of COVID-19, some of the trends that are coming out, weren’t new trends but they are just being accelerated and that really is about, sort of how do you piece together both online and offline and how do you actually look at it as one consumer piece, how do you actually continue to have conversations with your customers whether they are offline or online?”

“I think a good example would be someone like Harrods, where we did a re-platform for them. They were interested in e-concessions and they were really interested in logistics and they were really interested in all of the innovation that we put in our platform,” Kowal continued. “But they actually run their own customer service, they continue to do their own product photography, so there were areas that they had already set up in-house that they felt were working really well for them. So, we can partner with anybody, in any way that they want but we absolutely have the full end-to-end, or we can actually just pick up modular services that help facilitate what they are trying to achieve.”

Partnering with platforms makes a lot of sense, noted Solca. “They have a very significant customer base and traffic, which can be very relevant for brands – especially those that want to grow fast in digital.” In terms of brands, Solca believes that LVMH and Kering are leading the way in e-commerce with their major brands like Gucci. “They have strong social media operations, global e-commerce reach and strong customer relationship management.”

However, he noted, other smaller brands may struggle to find focus and resources. “Prada is further behind but catching up fast, so is Moncler. One of the key issues that luxury brands face when it comes to improve their e-commerce offerings is integrating their physical and online distribution channels seamlessly and ensuring their pricing offering is under control, by reducing wholesale,” said Solca. “E-commerce will continue to be very relevant. COVID-19 may be a concern for more, as resurgent infection numbers in Europe testify.”

Hybrid of experiences

“If luxury e-commerce was a human being, he or she would still be a baby,” added Sadigh. “What we are witnessing across most luxury categories is just the beginning of a much bigger revolution that will change the face of many businesses in the years to come.”

Looking forward, Achille believes that the perfect balance between luxury and e-commerce will be a hybrid of online and offline. “It will always be a bit omnichannel, but different from other sectors where the basically online has completely substituted the experience of the consumer and the relationship with the consumer with the product and the brand.”

“The role of the store will evolve. In our opinion, we are not yet at the plateau, online will still penetrate, but it will not be a black and white thing, where online will be growing and stores lose relevance. It will be online growing but brands also needing to think of the consumer experience across all the different touch points, and in-store will have a predominant role in that experience.”

Sadigh agrees. “Every company will have its own definition of the perfect balance depending on its strategy. I can tell you what the worst balance is: relying entirely on one channel like wholesale, which makes you blind and not being able to interact daily with clients.”

“In today’s world, how can you really make people dream when you don’t really know them?” he added.

“I don’t necessarily think it’s a radical shift,” notes Kowal. “I think it is an acceleration of the trends that we are seeing today. I think there’s going to be a lot of new experiences that we can offer online and again with the trends that we are seeing, will accelerate that.

“So how do you deliver, whether it is in-store or e-commerce, virtual try-on? So how do you do 3D rendering? How do you do more tailored personalisation? None of this is actually massively different to what people are focused on now, but what I will say is I think that based on the needs and importance of e-commerce now, those will actually accelerate,” she added.

“I still see e-commerce being a huge important part of everyone’s day to day strategy, by utilising some of the new innovation that is coming out, I think it will help to facilitate a better experience online but again, I also think stores are still going to be really really important and the role of the store just will probably change a bit, so basically what you will need is a platform that basically can marry the online and offline experience so that’s it’s not a very fragmented experience for the customer.”

“Luxury companies are really built around the consumer, so they cannot ignore it,” said Achille. “There are very different avenues in terms of e-commerce, some brands being more commercially aggressive, others doing it primarily to provide an additional service for the consumer. Even brands which are more silent and don’t do a lot of marketing, focusing more on the intrinsics of product, they might find a way into e-commerce that is coherent with their values.

“There is not just one unique recipe, e-commerce doesn’t need to become immediately too commercial, too mass-oriented, there are very different avenues and even a really pure luxury player can find its own way there.”