The future of luxury e-commerce
Updated: Jul 22, 2020
Luxury e-commerce in 2019 and 2020
Online sales of luxury goods continue to grow. In 2019 consumers spent $37 billion. This is predicted to increase to $98 billion by 2025. Whilst there is a healthy profit to be made, the marketplace faces disruption from new entrants, discount culture, increasing operating costs and Covid-19.
In 2019 YOOX Net-A-Porter (YNAP) experienced increased competition from across the board. Moda Operandi and other multi-brand retailers continued their expansion. Own-brand direct-to-consumer solutions such as Louis Vuitton increased their market share and retained exclusive rights to their most popular products. Farfetch, the luxury marketplace leader, saw revenue increase by 89.9% but faced concerns over its long-term profitability. Growth in pre-owned luxury fashion, such as Vestiaire Collective, rental services such as Rent the Runway dampened demand for new purchases.
Operating costs increased as the luxury e-commerce industry spent more than ever on acquiring new customers. Farfetch spending was up 62% in Q1 2019, from the same period the previous year. This was partly driven by too many multi-brand retailers offering identical stock, allowing customers to find the lowest price point via a quick google search. This, in turn, led to discount culture taking hold, with many sites slashing prices too readily, such as Net-a-Porter offering 10% off at the beginning of the season. This practice eroded profitability.
2020 has made things even more challenging. Analysts are estimating global luxury sales will decline by 30% due to Covid-19. This decline has already been felt in bricks and mortar stores as well as online. Many UK high streets have been closed for 100 days and now that they're reopening, the shopping experience will be fundamentally different due to social distancing. The online market is becoming more crowded with Facebook rolling out Shops, Google switching its Shopping service to mostly free listings and Amazon rumoured to be entering the luxury e-commerce space.
With increased competition and a multitude of challenges, how can luxury e-commerce retailers beat the competition?
1. Recreating luxury in-store experiences
Luxury brands and department stores and have long put an emphasis on unique experiences to draw customers in and keep them coming back. Selfridges recently spent £300 million transforming their stores with new restaurants, beauty services, a skate bowl and a cinema. As Selfridges welcomes customers back after lockdown they plan to create a "joyful experience" with a mix of virtual experiences and live entertainment.
By contrast, online shopping tends to be very functional. Retailers have prioritised optimising their sales funnel rather than surprising and delighting customers, assuming a red carpet is meaningless when rendered in pixels. But with some innovative thinking, it is possible for e-commerce retailers to replicate the in-store luxury experiences. Retailers who make this a priority will be well placed to gain market share from those who do not.
Gucci has recently launched Gucci Live, a video service that lets staff communicate with shoppers on their mobile devices or laptops. “The mission of our Gucci 9 global service centre is to provide our customers around the world with a direct connection to the Gucci community that is a seamless, always accessible, personalised experience.”
Squadded is helping recreate the "mall experience" by enabling groups of friends to shop together online via a "Squadded Shopping Party". Integrating with Squadded leads to increased customer acquisition and conversion thanks to "81% of consumers trust[ing] the advice of family and friends over businesses."
2. Unlocking the value of data
There are fundamental differences in how different luxury retailers use data. Some put data at the heart of all of their decision making, whilst others take a more human approach, trusting hunches and gut-feel. Retailers that use data will be able to make smarter decisions, reduce waste and increase profit, compared to those who do not.
In 2017, YNAP opened a large innovation hub in London, where their new chief data officer was tasked with increasing data collection, data analysis and data-driven decision making, leading to more personal and relevant experiences for shoppers as well as increasing customers retention and profit.
Predictive models will allow YNAP to work out how many of a particular size 8 Gucci dress would have sold, rather than just relying on how many actually sold. Identifying this "missed opportunity" will lead to smarter buying decisions the next season and fewer disappointed customers.
Shoppers favour personal experiences, both in-store and online. Customers want to be presented with 10 handbags that match their style, not a random selection of 100. Luxury e-commerce retailers who are able to target their customers with personalised recommendations and tailored experiences will end up with happier customers, increasing both referral rates and customer retention figures.
Julie Bornstein recently launched The Yes, a women’s shopping platform that creates tailor-made experiences for each user, courtesy of its sophisticated algorithms. The Yes builds a store around each user, who has answered questions about their style, brand preferences, size and budget. The more a user uses the app, the more the algorithm learns what they like. The team have created the "most extensive taxonomy that exists in fashion" to drive the personal shopping experience.
YNAP create a detailed profile for each customer to improve their personalised shopping experience. Each profile contains information on purchase history, frequency, size, colour, fabric, style and taste and is accessible to personal shoppers, buyers and AI-driven recommendation engines.
4. Efficiency and economies of scale
As competition grows, some luxury fashion retailers will face mounting debt and falling profits, like Barneys, which filed for bankruptcy in 2019. One solution is to reduce operating costs and streamline processes to stay profitable. This will likely lead to a new wave of mergers and acquisitions, such as the 2014 merger of Yoox and Net-a-Porter.
It also presents opportunities for new entrants who are unencumbered by legacy technology and operations. The Yes doesn't own any inventory and they do not reshoot merchandise, instead, they leverage the brand's existing warehouse infrastructure and photos. They plan to reduce costs further by targeting "the lowest [customer] return rate in the industry" thanks to their highly tailored experience. If The Yes is successful it will give them an edge over the competition.
Consolidating supply chains and/or delivery infrastructure is another way retailers can improve efficiency and reduce overheads. Mergers and acquisitions are therefore also likely in this space.
5. Innovate faster than the competition
There are many other trends which will emerge in luxury retail. For example, spending on acquiring new customers cannot keep increasing. Retailers may decide to harness the power of their brand or enter into the discovery space in order to reduce this.
Companies will likely need to explore other business models to remain competitive such as offering a clothing rental service or entering the pre-owned luxury market, which is growing four times faster than the primary luxury market. These models also have better sustainability credentials, a topic which is becoming increasingly important for consumers. Another trend may be the expansion into fashion-related industries, such as Lululemon, who recently acquired "interactive fitness" startup Mirror for $500M. The acquisition gave them a new subscription-based revenue stream, cross-sell opportunities and access to another growing industry.
Retailers may be able to avoid deep discounts and reduce the impact of stocking identical items, by offering more value to customers or by increasing the cost of switching to another retailer. This may be achieved by introducing loyalty programmes or by pivoting to a service-based model. For example, a customer would be less likely to shop elsewhere if their usual retailer offered early access to sales, faster delivery, exclusive in-store experiences and personal styling, all for a few pounds a month. Amazon Prime has shown the merits of this type of model.
A huge opportunity lies ahead in the world of luxury e-commerce, with revenues set to more than double by 2025. But there are also many challenges. The winners will be the companies who prioritise innovation and learning. Only by trying new things and learning from both their successes and failures will they beat the competition.