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- 4 May 2009
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Luxury 2.0: the role of digital channels in a downturn

Alfonso Ramone, a Partner at Value Partners, provides cutting-edge insights into the power of digital technologies for online retailers and luxury brands. These technologies provide as yet untapped opportunities for revenue generation, increased brand awareness and deeper customer relationships.

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Luxury businesses are feeling the effects of the economic downturn, as growing job losses and plummeting consumer confidence translate to cuts in retail spending across the board. The 2009 Luxury CEO agenda looks quite different from 12-18 months ago; the inevitable rethink of their growth strategies will place less emphasis on expanding physical retail networks and launching new product categories, and greater focus on enhancing core business, customer loyalty, and cost management. In this article we explore how online channels and web 2.0 technologies can help luxury brands to engage more deeply with their core customers and tap into new areas of growth, in a cost-effective and low risk fashion.

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The changing market context for Luxury brands

Over the past 5 years luxury CEOs have consistently pursued expansion plans based on three key pillars: 1) build up the retail network to gain direct control of the end customer, 2) extend the brand into accessories and new product categories, and 3) go international. Only twelve months ago, the mood was buoyant; the luxury sector was growing at 8-10% per annum and brands could not expand fast enough to meet the surge of demand from the emerging economies, as well as the demand from aspirational customers for their ‘accessible luxury’ ranges.

Now, strategies written before the crash are being ripped up and redefined. In fact, the peculiar nature of this recessionary cycle, rooted in the financial services sector, is affecting luxury brands more directly than ever: alongside a general drop in customer confidence, the 200,000+ City and Wall Street job losses, the collapse of hedge funds, and the implosion of equity wealth all point to a direct impact on the traditional segments and geographic hubs of growth for luxury brands. New behavioural patterns are emerging, with risk aversion, cost consciousness, and pragmatism adding to the long term trends of personalisation and interactivity.

Trend analysts predict a return to understatement and simplicity; fewer, higher quality purchases represents the new karma.

Our analysis and conversations with luxury executives indicate the following priorities:
- Focus on core business and customer engagement / loyalty
- Accelerate expansion to BRIC markets
- Develop the online channels
- Strengthen the cost management culture
- Re-assess the sustainability of the retail expansion plans.

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Exhibit 1: The new priorities for luxury CEO’s

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In a context where direct customer engagement is more important than ever, and where it may be not wise, over the next 12-18 months, to sign long-term leases to open physical retail presence in untested locations, direct online channels may prove a valuable tool to offset some of the growth challenges posed by this recessionary cycle. We illustrate how in the following paragraphs.

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Digital channels: the untapped opportunity

To move on from old preconceptions about the attitude of luxury customers towards the internet, it is worth noting that high-net-worth (HNW) customers are early adopters of online media (fixed and mobile broadband solutions, including Wifi devices and iPhone) – in 2008, 98% of US HNW HH shopped online, and 80% of affluent and HNW consumers researched purchases daily over the internet. A recent UK survey commissioned by New Media Age indicates that 35% of Britons intend to spend more money online and less on high street during 2009. This medium is not only used as a retail channel, but also as a tool to seek entertainment, socialise, engage, and influence.

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Exhibit 2: HNW propensity to spend time and shop online

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Source: Forrester Research

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While all luxury brands have by now established a web-presence, our research indicates that their approach to digital channels and social media is often sub-optimal and fails to unleash the full potential. This is because, all too often, luxury businesses pursue digital initiatives tactically and in a suboptimal fashion. Common issues we have uncovered are:

- Insufficient senior management attention devoted to online channel development: often this task is delegated so far down the organisation that initiatives are isolated, tactical and fragmented; most organisations still lack an eBusiness Director to drive the efforts and measure progress (e.g. formal corporate KPI’s for eChannel performance management are indeed a luxury)
- Organisational ‘silos’ causing disconnects between ‘digital initiatives’ and ‘physical initiatives’ – for example physical stores not reflecting online campaigns, or physical stores not accepting returns from sales made online; under-utilisation of customer data for devising new campaigns
- Lack of clarity around the objectives of the web presence (selling vs branding vs engaging) – reflecting the lack of an online strategy, leading to confused, underperforming websites
- Under-allocation of financial resources to online developments
- Within the online budget, sub-optimal spending mix ­– for example, one company was spending the vast majority of its online marketing budget on search-engine-optimisation (SEO) to direct customers to its weak and uninspiring website
- A tendency to outsource, rather than build internal capability – for example selling mostly via Net-a-Porter or Yoox, rather than proprietary websites, thus limiting learning curve opportunities and future potential of the online channel (e.g. share of revenues); this is the equivalent of adopting a pure wholesale model in the physical world, where brands like Valentino, Chanel and Gucci would never place all their products through Harrod’s, Neiman Marcus, or Harvey Nichols.

In our approach to eLuxury channels, we recommend considering Online as a three-fold “medium”, to enable:
1.Online retailing
2.Branding & communications channel
3.Interactive CRM

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Exhibit 3: Full potential for eLuxury channels

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Source: Value Partners

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Online retailing

Global online shopping has been growing strongly (CAGR 04-07: 22%); in the UK, where the high street is suffering the effects of the downturn more than elsewhere, the online channel is still seeing strong growth (15% yoy growth vs. a -2% contraction for physical) as online shopping experience grows more sophisticated and shoppers gain confidence in this tool.

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Exhibit 4: Online retail historic growth

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Source: Jupiter Research, British Retail Consortium

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Based on analysis of growth trends, relevant comparables, and proxies from precursor industries (e.g. the digital entertainment sector), we expect luxury brands that execute well to achieve some 8-12% of total sales from the Online channel within the next 3-5 years. This figure will make eLuxury by far the most important “store” in the retail network of those brands. The continued success of luxury e-malls such as Net-a-Porter and Yoox, with their 30-60% YOY revenue growth, confirms the positive prospects for this channel.

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Exhibit 5: The continued success of luxury e-malls

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Source: Value Partners analysis, websites

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Despite the strongly encouraging feedback from luxury CEOs that have fully endorsed this channel (e.g. most recently, Oscar de la Renta), our analysis shows that many brands are still lacking the required confidence. For most e-stores, only US and UK (or Japan) transactions are enabled, the catalogue is not fully represented, and the customer management policies (e.g. returns) and overall shopping experience are unfriendly and not in line with a true luxury positioning. Therefore, those luxury brands need to re-assess their approach to online retailing, taking ownership and control of this emergent sales channel. For unleashing full potential, luxury online stores need to be dynamic and inviting, a virtual reflection of the luxury experience, and must work in synergy with the physical stores. Additionally, relationships with e-malls would need to be carefully reconsidered (also in the contractual revenue sharing terms). The right online retail approach has the potential to drive growth and recapture margin, improve customer service, and extend reach to otherwise underserved geographies (e.g. BRICs).

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Branding and Interactive CRM

Digital marketing and CRM represent a significant opportunity for luxury brands to connect with their customers and remain relevant to new emerging demographics. For instance, Millennials and Young Professionals are two important segments that consume the largest portion of their ‘entertainment diet’ online. In particular, social networking (e.g. Facebook, Asmallworld, Bebo) is driving the increase in time spent online, and is now the sixth most popular leisure activity in the UK, with social networkers spending an average of 7 hours a week on these sites. Some luxury brands such as Cartier, Prada, and Agent Provocateur have begun to experiment in this space; creative use of the digital channel can be a highly cost-effective way of connecting with existing and new customers, creating a new cadre of loyal ‘brand evangelists’.

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Exhibit 6: Examples of brands using social networking and viral marketing to deepen customer engagement

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The first priority for luxury brands in this fast moving area is to define clear corporate objectives for social media to deliver on (e.g. Listening, Training, Energising, Supporting, Embracing – according to the Forrester Interactive Media framework), before committing digital advertising and web development resources. Too many digital marketing initiatives are tactical and experimental and result in wasted moneys. On the converse, the prize for a well articulated and planned marketing initiative across physical and digital media can result not only in deeper customer engagement, but also in significant cost savings on sales & marketing budgets. An enlightening case study comes from outside the luxury sector, and is the “Nike Plus” campaign developed by the sportswear leader Nike. This initiative targeted runners, offering them a combination of physical product (a distance logging gadget) and digital service (on Nike’s website) which enables logging and benchmarking their running performance against themselves, over time, and against other Nike Plus runners; it resulted in an online community for runners. Through this initiative, Nike not only gained in depth customer data to enhance its product development and marketing effectiveness, but it also saved 57% of its marketing budget for the target segment!

More extreme opportunities related to the interactive and peer-to-peer nature of digital channels include the possibility to enable cost effective forms of product-personalisation (e.g. finishing, packaging), and even involve customers in the product development cycle. While these initiatives may still be a taboo for designer-led brands, the new consumer trends point to an increasingly tougher environment in the years ahead for standardised luxury products.

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Exhibit 8: Virtuous cycle of communication enabling deeper customer insight and engagement

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Source: Value Partners

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Setting the vision for full-potential

The optimal eLuxury channel is integrated in a wired business system to drive sales, enhance brand equity & loyalty, and optimise supply chain & core processes across physical and digital customer touch points.

In moving towards the gold-standard, luxury brands should b ready to reassess their approach to online channels, by touching important aspects of the general management agenda:
- Corporate goals for digital channels to achieve; timing and priorities
- Organisational model and capabilities; balance of in-house vs outsourced
- Governance model and performance management systems (e.g. reporting lines, KPIs)
- Technology platforms and trade-offs between standard and bespoke solutions
- Level of integration between physical and online channels to pursue along the supply chain
- Role of external outsourcing partners and business model (wholesaler vs outsourcer)
- Financial investment requirements and product development roadmap phasing.

While the investment for executing a full-fledge digital strategy is in the majority of cases a scale-factor smaller than pursuing aggressive store network expansion and traditional marketing campaigns (e.g. through expensive catwalks, sponsorships & events, and premium print-media), Boards and CEOs of luxury businesses should be aware that without their full endorsement and commitment to ask broad-minded questions, any effort will be incremental, if not wasted resources. On the converse, experience from other industries that have faced the challenge earlier, shows that the prize for going through a holistic approach to luxury 2.0 is that of setting the business on a path of continued sustained-growth and long term protection of its brand equity.

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Alfonso Marone

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Value Partners consumer & luxury goods practice specializes in assisting leading brands on new markets entry, JV and partnership negotiations, retail network planning, web 2.0 and digital media development, supply chain optimization and outsourcing management, leveraging a unique combination of luxury goods, digital media, and IT & technology know how.

For more information about Value Partners
www.valuepartners.com