Global Luxury Retailing

ISSUE: 4SUMMER 2011

T H E R E T A I L R E V I E W F R O M

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COUNTER CULTURE

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Our summer 2011 issue of Counter Culture focuses on the continued growth of the luxury retail sector. So-called ‘luxury goods’ cover a broad range of products and services, from fashion to furniture, premium drinks to prestige cars.

Luxury retail has seemingly withstood the global recession and emerged stronger than ever. Yes, there is certainly a point to make about socio-economic inequality, but traditional audiences have also fragmented and the demand for luxury now comes from a more diverse customer base.

This continued growth also serves as evidence that luxury brand owners have in most cases managed to maintain growth in traditional formats while creating new revenue and brand-building opportunities through new channels and new markets.

The relentless march of the Chinese economy and the related appetite for Western luxury brands has certainly fuelled growth, as has the embracing of e-commerce. Nervousness around the potential to be undermined by the free dialogue inherent in today’s digital world has been overcome and many are now harnessing the power of social media (see Facebook statistics on page 9).

As a fi nal thought, our last issue of Counter Culture focused on corporate responsibility in retail and it will be interesting to see how (or indeed if) the luxury sector responds to this trend with a greater emphasis on ‘sustainable luxury’.

Watch this space…

ISSUE FOUR

LUXURY UNLIMITEDFashionably late to theworld of e-commercePage 2 – 3

High-end luxury switches onto hi-tech engagementPage 8 – 9

Winners and losersPage 12

Investment in luxurybegins at homePage 4 – 7

The continuing rise of ChinaPage 10 – 11

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COUNTER CULTURE ISSUE FOUR 01

Fashion is a fast-moving industry: just as one catwalk look makes the high street, a newer, fresher look is ready to usurp it. Where e-retailing is concerned, though, luxury fashion houses have been anything but the trend-setting icons we expect them to be.

FASHIONABLY LATE TO THEWORLD OF E-COMMERCE

Particularly worrying for them is that selling high-end designer goods online could make them too accessible, thus eroding their exclusivity in the eyes of luxury customers.

Luxury brands also understandably worry that e-retailing will fuel the black market for counterfeit goods. With online shops now boasting 360 degree rotation and zoom functionality, luxury goods are on far better display than ever before – making it much easier for fraudulent manufacturers to create realistic replicas.

Perhaps most crucially though, the virtual space offers a very different experience to that of a physical store. Luxury retailers have long relied on exquisite shop interiors and exceptional customer service to differentiate themselves from peers and high street retailers. These atmospheric features are inherently diffi cult to communicate online.

While well founded, these fears have not been enough to outweigh the sheer success of the third-party sites selling high-end goods. Luxury houses want in on the action – and rightly so.

In 2010 Gucci launched its fi rst e-store which delivers to 12 countries – most of which are in Western Europe.

Ralph Lauren also launched a transactional site in 2010 in the UK. Trendsetting Burberry – one of the fi rst to launch an online store – has fully embraced the e-retail format, now offering almost all of its products online (while the majority of luxury brands still limit their online offerings to certain ranges or product categories).

The British heritage brand has also developed an e-commerce site specifi cally for the Chinese market at a time when most are still focusing their online efforts on Europe and the US. China is home to the world’s fastest-growing online shopping industry and Burberry has shown real savvy with an early entry into that market.

Recent changes in legislation have also encouraged luxury brands to view online retailing with less suspicion.

Until recently, many luxury fashion brands remained suspicious of the online retailing format, preferring to use their

company websites for informative rather than transactional purposes.

The past couple of years, however, have seen something of a U-turn; the success of third-party e-retail sites has forced many luxury brands to rethink their online strategies.

Online retail sales for Yoox.com and TheCorner.com were €163.7m, a 31.8% increase on the prior year. Similarly, before its acquisition by Richemont, Net-a-porter hit sales of £81.5m in the year to 31 January 2009, enjoying 3.3 million unique users per month.

These success stories have proved that people are in fact eager to buy luxury goods online. They have also gone some way to dispelling some of the concerns that have prevented many luxury brands from moving online in the fi rst place.

COUNTER CULTURE ISSUE FOUR 02/03

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KEY FEATURES WHEN BUYING CLOTHINGAND FOOTWEAR ONLINE

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Interactive features

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Customer reviews

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Choice of delivery time

A quick and easy payment/checkout

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Buying guides

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Online auctioning site eBay was found liable for allowing users to sell counterfeit Louis Vuitton and Christian Dior goods online, and forced to pay €5.7m in damages to LVMH Group. The ruling and stricter guidelines will go some way to ensuring that luxury retailers can protect their brands online.

So, while initially slow to enter the e-commerce space, luxury brands are fi nally catching up and taking back control of their brands online. Many are also proving that you can still offer a luxury experience online through sophisticated website design, high-speed delivery and luxury packaging.

The online format offers an exciting opportunity for luxury brands to increase their revenues and reach. The most successful ones will be those that can marry the modern consumer’s desire for speed and digitally enabled convenience with a high-end experience – from fi rst click through to delivery. CC

Source: Verdict Research, 2011

Europe plays a crucial part in the luxury sector, especially as its countries such as France and Italy are home to many of the

world’s major luxury houses. European cities have become synonymous with fashion and luxury, with key locations including London, Milan and Paris all showcasing the forthcoming ranges during their respective fashion weeks twice a year.

Europe is the largest market for global luxury retailing and, like all other regions, even the home of luxury was hit by the downturn, experiencing a sales decline of $17.7bn during 2009 to then start bouncing back to pre-recessionary levels during 2010.

The European market for luxury retail is mature and Europe’s share of the global luxury market expenditure is in decline as demand in Asian markets fl ourishes. Despite this there are still a great number of opportunities for growth and it will remain the most valuable luxury retail region in sales terms.

According to Verdict, the market will reach $175 billion by 2015, which is 22% higher than forecasts for the Asia Pacifi c region, excluding Japan.

Despite all our economic problems the number of very wealthy individuals in the region (those with over $300,000 in fi nancial assets) is set to rise by as much as 10% in the UK alone and by 7% in France, Italy and Germany over the next four years based on Datamonitor forecasts.

Luxury retailers are keen to capitalise on the increasing number of wealthy consumers in Europe by ensuring they have fl agship stores in high-profi le locations. In 2010 Louis Vuitton opened an impressive new store on New Bond Street in London and further along the road Chanel is taking on the 25-year lease of a 10,000 sq ft outlet which is currently occupied by Nicole Farhi. Slightly newer luxury brands, such as Tory Burch of the US, are also investing in prime retail locations.

By investing in new company-owned stores, luxury players are also hoping to reassume control of their brand and its sales performance. Europe, like the US, has a high number of department stores, and these were adversely affected by the economic downturn with many destocking and cutting back on orders. This has prompted many luxury players to move away from relying on department stores and to focus on company-owned stores.

2012e1. Europe 36.1%2. Americas 21.7%3. Asia-Pacific

(exc Japan)26.1%

4. Japan 10.2%5. Middle East

(and others)5.9%


(exc Japan)27.2%


(and others)5.9%


(exc Japan)28.3%


(and others)5.9%


(exc Japan)28.9%


(and others)5.9%

RETAIL EXPENDITURE ON LUXURYBRANDED PRODUCTS, EUROPE

RETAIL EXPENDITURE ONLUXURY BRANDED PRODUCTS,SHARE BY REGION

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2009

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€120bn

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€60bn

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20111. Europe 36.4%2. Americas 22.4%3. Asia-Pacific

(exc Japan)24.7%


(and others)5.7%

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Europe, home of luxury icons including Chanel, Louis Vuitton and Mulberry, will remain the most lucrative luxury retail market in the world and will grow by nearly $60bn to be worth $175bn by 2015 according to Verdict Research.

INVESTMENT IN LUXURY BEGINS AT HOME

Growth in Europe’s luxury market will also be fuelled by investment in online retail. Traditionally, luxury retailers have used the internet to provide information rather than sell and they are only now putting their weight behind developing an online presence.

This increases accessibility to luxury as consumers, regardless of where they live, don’t have to wait until they visit

the major cities to buy their favourite products. Not only will this make ardent luxury shoppers purchase more, selling online also allows luxury retailers to reach the mass market. These consumers, who may feel a little intimidated by prestige stores or may struggle to get to these stores, can easily view and access products which may encourage them to save for that once-a-year luxury purchase.

Another driver of growth for the European market is the infl ux of tourists. This will only be bolstered by a number of high-profi le events that are set to take place over the next fi ve years including the 2012 Olympics in the UK, the 2014 Winter Olympics in Russia, and the 2015 Expo in Milan.


Prominent European cities are attracting foreign visitors, particularly Chinese, with a growing appetite for luxury goods.

London’s major department stores, luxury shopping streets and the outlet villages surrounding the city are frequented by Chinese visitors with bulging wallets, an ability to travel and an appetite for luxury items. Despite luxury players opening stores in major Chinese cities to profi t from this newfound wealth, goods in the UK can be around 30% cheaper and the sheer variety of products and brands on offer is appealing.

Chinese shoppers also know that in London they are more likely to fi nd up-and-coming brands which aren’t yet available in their home market. There is also scope to receive some kudos at home by buying luxury brands such as Mulberry from their country of origin. In order to accommodate this demand British retailers are investing in Mandarin-speaking staff, and premium department store Harrods made a big splash in-store during Chinese New Year celebrations by following Selfridges and opening Chinese UnionPay bank terminals.

One key gripe of luxury brands retailers is that the visa application process for Chinese people entering the UK is hampering the growth of this lucrative group of visitors.

The majority of Chinese people travelling to Europe apply for a Schengen visa, which enables them to enter 24 European countries – but the UK isn’t currently part of that scheme.

Vitally though, the European market is still benefi ting overall with some Chinese tourists making trips to other luxury shopping destinations such as Paris, where the visa entry procedure is simpler.

The decline of the euro has also meant that it’s now cheaper to buy luxury items in Europe creating an additional draw to the likes of France and Italy, and many luxury stores are bending over backwards to cater for the infl ux of tourists.

The famous department stores Printemps and Galeries Lafayette in Paris have signs in Chinese, despite not having them in English, and services for Chinese visitors include personal shoppers and courier services.

In fact, conscious of the opportunity among this customer group, Galeries Lafayette will also enter the increasingly lucrative Chinese market in 2013, with a newly built fl agship store in the Beijing’s core shopping district, Xidan.

The opportunities for growth in the Asia-Pacifi c region are undeniable, particularly in China, but while venturing into new pastures luxury retailers must keep their eye on their lucrative home market where local consumers will continue to spend out and foreign visitors will come seeking the authentic luxury shopping experience. CC

Steeped in rich heritage, luxury houses are striding into the digital era to connect with new customers and strengthen ties with existing ones.

HIGH-END LUXURY SWITCHES ON TO HI-TECH ENGAGEMENT

Dolce & Gabbana, for example, has over 2.7 million fans, while Burberry boasts almost six million fans on Facebook. Lagging behind, Prada has almost 714,000 Facebook fans and Dior just over 690,000.

Social media and new mobile and internet-enabled technologies offer an excellent opportunity for luxury brands to reach out and connect with their demanding customers. In the luxury market, a good relationship between a brand and its target market is particularly important due to high price tags.

Crucially though, luxury brands will need to strike a fi ne balance between growing their band of digital followers and maintaining that all-important element of luxury: exclusivity. CC

It’s also a measure of the effort luxury houses are putting in to connect with existing and aspirational customers to boost engagement and loyalty. Technology makes it easier than ever for them to do so and some luxury brands are even venturing bravely into the world of smartphone applications.

Ralph Lauren, for example, has developed apps for its Ralph Lauren Collection and Rugby brands, enabling customers get details on recent shows, view video highlights of catwalk shows, explore collections, or – in the case of the Rugby app – customise their own shirt, rate other users’ styles, and purchase their customised designs.

Engagement and improved brand loyalty are the ultimate aims of these ventures, and Facebook and Twitter are popular platforms amongst luxury brands (though some fare better than others).

From streaming runway shows to Facebook and Twitter profi les, the world of luxury fashion is in the throes of a

radical 21st century-style makeover.

Runway fashion shows – once the exclusive pleasure of a select few fashionistas – are now watched by thousands via live online streams, with English heritage brand Burberry charging ahead in this space.

For its autumn/winter 2010 collection, the fashion house broke new ground when it streamed its catwalk show at exclusive events in fi ve major cities using 3D technology. The show was also streamed in traditional 2D on the company’s website, where viewers could comment, critique, and ‘like’ different pieces in real-time using Facebook or Twitter.

During its spring/summer 2011 runway show at London Fashion Week, Burberry went one step further by making it possible for customers to order pieces online in real-time.

The company also invited 1,500 people across the world to watch the show in-store on high-defi nition screens and order products via an iPad application.

Burberry is not alone however. No fewer than 40 designers at New York Fashion Week last year streamed live videos of their shows online, illustrating just how common the practice has become, so quickly.


LUXURY HOUSES AND THEIR FACEBOOK FANS

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THE CONTINUING RISE OF CHINAWhile Europe remains the spiritual home of luxury, Asia-Pacifi c – and China in particular – undoubtedly represent the ‘new world’ for high-end luxury retailers.

According to Verdict Research,the luxury retail market in Asia-Pacifi c (excluding Japan) has more than doubled over

the last fi ve years (2005–2010). More importantly, growth rates in excess of 10% year-on-year are forecast until 2014. The region is hungry for luxury goods, and with increasing wealth and spending power, there is no slowdown in sight.

As expected, new demand from China is chiefl y responsible for the region’s strong performance. China is now a global economic superpower and luxury retailers are investing massively in the country, all too aware that the growing middle classes of the People’s Republic have excess disposable income.

By way of illustration, the number of ‘wealthy individuals’ in China is set to grow at 19.7% per year until 2014.

These people (who have over $100,000 in fi nancial assets) are the target market for high-end luxury goods.

But China is an attractive prospect for a number of other reasons too. Its massive population and high number of densely populated cities mean that luxury retailers can reach increasingly large segments of new customers.

Chinese consumers today – aided by the internet – are also far more knowledgeable about foreign luxury brands and the world of celebrities and fashion. Luxury items show off new wealth and status, and foreign brands – particularly traditional British brands such as Burberry or those with strong heritage – are among those most favoured.

In 2009, the overall Chinese market for clothing, accessories and luxury goods was worth a sizeable $155,653m.

Jewellery and watches, and luggage and leather goods showed the strongest growth between 2004 and 2010 – partly as a result of the strong gift-giving culture in Chinese business circles.

Retailers and manufacturers in the luxury space can be further encouraged that there are few domestic players active in the Chinese luxury goods sector. Luxury brands are still largely synonymous with European fashion houses in the Chinese consumer’s mind.

The new world dominator has never been more ready for an invasion of luxury brands and retailers. CC

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GETTING IT RIGHT

HERMÈSWith leather goods accounting for almost half of its sales in 2009, its turnover grew by 22.7% in 2009 from 2008. Hermes continued to expand even during the economic downturn, with new stores predominantly directly operated allowing it to have full control over brand and merchandising. Hermes also focused on new stores in Asia-Pacifi c which is a key growth market – launching a local Chinese brand Shang Xia.

It will be interesting to see what happens now that the creative director, Jean Paul Gaultier has left and Christopher Lemaire has taken over. With LVMH’s stake in Hermes drawing considerable attention this may help the brand grow even further.

BURBERRY It’s become a fashionable brand again (particularly due to its creative director Christopher Bailey). Its interaction with consumers is also at the heart of current success. They have a strong presence in social media (over 6m Facebook fans) and innovative use of the internet – streaming its runway shows live. Burberry joined the FTSE100 in September 2009.

Although it remains focused on its core outerwear lines, the company has expanded into cosmetics. Europe is its core market, but there’s potential to grow in the US & in Asia-Pacifi c (new stores are planned for China). It restructured its Spanish operations and has concentrated on cost-cutting which has helped to boost profi ts.

MISSING THE MARK

RALPH LAURENIssues have been caused by strong dependence on the US, combined with a lackluster approach to evolving products to refl ect changing consumer tastes. Sales in 2009 fell back 0.8% on the year (between 2004 and 2009 it has dropped market share from 5.2% to 4.9%).

Ralph Lauren is aiming to expand its international presence but wants to focus on Europe. The brand is attempting to engage younger consumers, in November 2010 it had its fi rst 4d fashion show – but it still needs to do more to attract younger consumers.

RICHEMONT & PPR (OWNERS OF GUCCI GROUP)They lost out on Bulgari to LVMH. With Richemont sales set to pass €6bn in FY2011 (results due out as we go to press) and with its position as no 2 in the luxury market – this was a missed opportunity for it to better compete with LVMH.

Richemont has also put store openings on hold in the past few years, so it will need to act quickly before others take control of the Asia-Pacifi c market. However, it has seen success with its acquisition of Net-A-Porter.

WINNERS AND LOSERS

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Global Luxury Retailing

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