Farfetch is on the cusp of accomplishing something rare in the world of luxury retail: It potentially could become one of the few luxury tech “unicorns” with an upcoming $5 billion IPO. The lofty valuation marks a remarkable turn for an industry that had long been resistant to selling online, fearful that the internet’s mass access would damage luxury brands’ exclusivity. But now luxury fashion houses from Louis Vuitton to Chanel and Gucci have been racing to embrace digital, whether it is partnering with multi-brand sites like Farfetch, developing their own platforms or both.
The pivot to digital makes sense: Online sales are expected to drive future growth in the luxury goods market, making up 25% of the market by 2025 up from an estimated 9% last year, according to a 2017 report from Bain & Co. That means sales from offline stores will shrink to 75% of the total from 91%. Such projections serve as a wake-up call to luxury brands that have long relied on partners such as department stores — and their own boutiques — to sell products. But traditional retailers are struggling and more customers are becoming comfortable buying luxury goods online.
“It used to be enough to just have the very best luxury product,” said Barbara Kahn, Wharton marketing professor and author of the upcoming book, The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption. “But in today’s very, very competitive retailing environment, it’s not OK to just be good at one thing. You have to be good at least two different things and good enough in everything else.”
The new skill that makes sense for them to master? E-commerce.
However, many brands didn’t have the digital expertise to replicate a white-glove experience online by themselves, said Denise Dahlhoff, research director at Wharton’s Baker Retailing Center. That’s why they are partnering with multi-brand portals such as Yoox Net-A-Porter, MatchesFashion and Farfetch to run their online stores for them. With their digital savvy and understanding of the luxury market, these e-tailers know how to provide an “excellent” online shopping experience appropriate for a luxury brand, and they also have global reach, she said.
“It used to be enough to just have the very best luxury product. But in today’s very, very competitive retailing environment, it’s not OK to just be good at one thing.”–Barbara Kahn
‘Extremely Important People’
For example, Farfetch provides an online marketplace for 500 independent luxury boutiques and 200 brands so a shopper can use her phone to order that one-of-a-kind Alexander McQueen party dress — in her preferred currency. Farfetch handles customer service and arranges for express global delivery — including same-day service in London, New York, Paris and other major cities. In the U.S., customers get free shipping and returns.
The other big luxury e-tailer, Yoox Net-a-Porter, through its Net-a-Porter site offers two-hour delivery windows, fashion consultants who are available 24/7 and a new premier service in select areas for its “Extremely Important People” or EIPs. Called the “You Try, We Wait” service, customers can get an item they ordered delivered on the same day, and the e-tailer’s agent will wait for them to try it on to see if they like it. If not, the agent will immediately collect the item to be returned.
Luxury brands also became comfortable with these websites — as opposed to eBay or Amazon, for example — because these e-tailers are careful to maintain an upscale image. Not only won’t they sell counterfeit products, but also they publish content that replicates the feel of a posh fashion magazine, according to Dahlhoff. For example, Farfetch writes about wardrobe tips and dishes on the latest runway trends. Net-a-Porter has an editorial section with a recent cover story on actress Lisa Bonet, plus how-to articles on upgrading eveningwear or using lip oil.
This approach has fared well for luxury e-tailers, which made high-end goods widely accessible to people globally. According to the latest data available, London-based Farfetch grew revenue by 74% in 2016 to 151.3 million pounds, according to Reuters. Yoox Net-a-Porter, based in Milan, said sales last year rose by 17% to 2.1 billion euros, from online stores open in both 2016 and 2017 and excluding currency fluctuations. Also, Yoox said 2017 was the first year that sales from mobile devices took up more than 50% of the total. In contrast, global retail sales overall rose by a much slower 5.8% last year to $22.6 trillion, according to eMarketer.
Keith Niedermeier, Wharton adjunct marketing professor, cited three reasons why online luxury sales are growing fast. One, an improved economy boosts sales of high-end brands. Second, “luxury has been slow to move online, with many brands very reluctant to embrace the trend for fear of reducing exclusivity and commoditizing their offerings. They now see that it is an omni-channel world and they are quickly embracing the opportunity” provided from serving all these channels, he said.
More importantly, “millennials are maturing into their prime earning years and becoming the focal luxury consumer,” Niedermeier said. Millennials now account for 13% of high-net-worth households, he said, and they grew up shopping online. While the rich have always propped up sales of luxury goods, young shoppers are key to future growth, said Ludovica Cesareo, Wharton post-doctoral research fellow in marketing. “We have seen an incredible rise in millennials and Gen Zs purchasing luxury, and these digital native consumers want to purchase luxury goods online. That is why luxury e-tailers are on the rise.”
“Millennials are maturing into their prime earning years and becoming the focal luxury consumer.”–Keith Niedermeier
According to the Bain report, millennials and Generation Z shoppers accounted for about 85% of 2017’s growth in luxury goods sales. “They represent the new aspirational class,” Cesareo said. “Millennials and Gen Zs who purchase luxury want much more than just a brand name and a status symbol. They want an experience, which for them has to encompass some form of digital interaction, [and] has to be inspirational.” Added Dahlhoff: “When your customer base is aging, you have to think about bringing in new customers, younger customers.”
Luxury Brands Are Listening
Some luxury brands are jumping in wholeheartedly. Last summer, Louis Vuitton parent LVMH launched 24 Sevres, a high-end online shopping site that offers not only its own brands but, in a rarity, also those of competitors. The site offers live, one-on-one video consultations with Parisian stylists, a “Style Bot” on Facebook Messenger to engage fans and delivery to 75 countries. “We felt it was time to take our expertise in visual merchandising, which our Maisons have long brought to their stores, and transform it online,” said Ian Rogers, LVMH’s chief digital officer and former Apple music executive, in a statement.
Gucci has streamed fashion shows on Facebook Live, revamped its website to offer more attractive visuals, posts content on social media constantly to keep fans engaged and collaborates with contemporary artists on marketing campaigns. Embracing digital has turned its fortunes around. In 2017, Gucci’s revenue rose by 42% to 6.2 billion euros, according to parent Kering. CNBC calls Gucci one of the industry’s star performers.
Chanel has more than 57 million social media followers worldwide, the most for any luxury brand, according to Luxury Society. One reason for its success: It has posted more than double the industry average of high-quality videos to YouTube as well as 47% more Facebook videos. “Chanel, despite being a century-old brand, has radically modernized its brand status through social and has ultimately become a master of online video,” the site said. “Chanel posts regularly and consistently, cross-platform.”
“Millennials and Gen Zs who purchase luxury want much more than just a brand name and a status symbol. They want an experience.”–Ludovica Cesareo
Two of China’s biggest e-tailers — Alibaba and JD.com — are also trying to get into the luxury retail market, especially since the Chinese account for a third of luxury goods sales, according to the Bain report. Alibaba launched “Luxury Pavilion,” an invitation-only shopping site featuring Burberry, Guerlain and other brands. JD.com, which already invested $389 million into Farfetch, unveiled luxury site “Toplife” with fashions from Saint Laurent, Emporio Armani and others. It also debuted a white-glove service where specially trained couriers in suits and gloves hand deliver luxury items like a $2,000 designer handbag.
The big fashion houses have also changed in another way: They are taking design ideas from the youthful masses. “It used to be that traditional luxury companies had designer items they would bring to market and more mass-oriented brands would copy them. Now, sometimes it’s the other way around,” Dahlhoff said. “Luxury is taking inspiration from street wear brands” for the younger set such as T-shirts, sneakers, denim and other goods. According to the Bain report, sales of luxury T-shirts rose by 25% in 2017, sneakers by 10%, flip-flops by 50%, down jackets by 15%, denim by 6% and parkas by 8% — for a total of 13.1 billion euros in sales out of an estimated 262 billion euros for all luxury goods.
Brands are also enabling some personalization through a limited choice of designs or colors so they can offer different options but still retain quality control. Young shoppers “want to be able to express their own identities through the luxury products they purchase,” Cesareo said. Young luxury consumers also mix and match items — buying a few pieces of luxury items or “affordable” luxury such as a key chain, a wallet or scarf to go with everyday apparel — not only to create their own individual outfits, but also because on average these customers don’t have unlimited disposable income, Dahlhoff said.
With luxury e-commerce taking off, will offline stores still play an important role? “Luxury brands must still be committed to physical retail stores because the bulk of sales still occur there,” Niedermeier said. “Furthermore, showrooming [visiting a store to see a product before buying it online] is a key part of the shopping journey that smart retailers understand and embrace. Pure online players will have to provide unique services or exclusive offerings to be competitive in the long run.”