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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 jobs 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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Luxury 2.0: the role of digital channels in a downturn

Alfonso Marone Partner

Kim Chua Manager

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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Exhibit 1: The new priorities for luxury CEO’s

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.

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.

Exhibit 2: HNW propensity to spend time and shop online

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 KPIs for eChannel performance management are indeed a luxury)

% of US HH that shop online, by HH income, 2008

54%

61%

64%

67%

72%

98%

< $15k

$15-$30k

$30-$50k

$50-$75k

> $75k

HNW

Source: Forrester Research

Macro-trends … … resulting growth strategies

• Western economies in turmoil

• Relative resilience of “New World” markets

• Evolving behavioural patterns:- cost consciousness and pragmatism (new trend)

- personalisation- interactivity

• Eco-sustainability

• Increase focus on core business and customer engagement / loyalty

• Accelerate penetration of BRIC markets

• Develop the Online channels in support to core business

• Strengthen cost culture(supply chain, inventory mgmt, cost transformation)

• Reassess retail expansion plans

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2

3

4

5

Source: Value Partners

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• 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 their products only 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.

Exhibit 3: Full potential for eLuxury channels

Role of the luxury 2.0 channels

Online retailing

Branding & interactive CRM

Brand building

Customer engagement & feedback channel

•Monetise growth in online shopping among HNWI

•Extend reach to unserved geographies•Leverage web presence as complementary retail channel

•Enhance customer reach and margins•Enable customisation and personalisation

•Tap into Millennials segment

•Develop customers into evangelists

•Pursue brand engagement through viral marketing campaigns

•Use as feedback channel to gain deeper customer insight (CRM tool)•Provide new levels of customer

•Enhance loyalty and average spend service and after-sale

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.

Exhibit 4: Online retail historic growth

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.

Exhibit 5: The continued success of luxury e-malls

Online retail sales by region, bn

High growth in online retail

64 84 108 124 136 164 190 2266072

88 99 104122

145175

2432

4047 52

6679

99

236188

148

270 292352

414

500

2004 2005 2006 2007 2008E 2009E 2010E 2011E

Asia-PacificNorth America

Europe

25%

18%

25%

22%

CAGR’04-’07

16%

15%

20%

17%

CAGR’07-’11

Online retail still growing whilst physical contracts

22%

16% 16% 16% 15%

-1% -1% -1% -2% -2%June July Aug Sep Oct

Online Physical

UK year on year, like-for-like sales growth, 2008

Source: Jupiter Research, British Retail Consortium

• Exclusive online channel for various designers

• Average order value of about £500 in 2006

• Key strengths:

- up-to-date and fashion forward editorial content for the affiliates brands (including previews from fashion shows)

- Quick deliveries to 71 countries from the warehouses in London and New York

30

54

80

2005 2006 2007

63%

5367

91

2005 2006 2007

31%

CAGR ’05-’07

• One of the leading online sources of designer fashion, Yoox offers items that cannot be found in the store: last season items, samples and exclusive collections

• Achieved strong results since its launch in 2000:- 3 million visitors per month- 1 million transactions in 2007

• Beyond traditional support services (customer care, free of charge return policy), online social shopping initiatives are to be launched: a community to share opinions and the chance to shop e-stores with friends

m

m

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 many 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).

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’.

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

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.

Agent Provocateur: viral video

• New lingerie range launch with viral video e-mail - “The Four Dreams of Miss X” starring Kate Moss• Extraordinary response rates with click

through over 50% and social news sites driving traffic to the site

• Cost-effective way of creating a marketing buzz• Ability to measure the success of the campaign• Effective method of reaching the Millennials• Greater customer insights and engagement

Cartier’s MySpace page

• Launched in June ’08 for its Love collection• Includes information and videos on the

collection, as well as exclusive music tracks and interviews with celebrities associated with the brand

Prada’s Facebook group

• Prada’s Facebook group enables people to find out more about products and activities and discuss the brand and its products

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Exhibit 7: Case study: Nike Plus integrating offline and online initiatives: 57% cost saving

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.

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

• Results of “Nike+” initiative:

- 57% saving on segment advertising budget

- 450,000 kits sold in the first 3 months

- 30,000 logins over a 24-hour period

• Key take-away:

- Customer segmentation- Personal targeting

- Use of social media to enable a “conversation”about the brand

•Runners can purchase a Nike Plus device (ipod connectable), which tracks runner’s performance through a wireless chip in the shoe

•Information can be uploaded on the Nike website to track each run, illustrating pace and distance and comparing it to the runner’s historical performance and other runners

Source: Value Partners analysis, company website

Branding & marketing messages

Customer insights & feedback

search optimisation

blogforums viral

campaigns

display advertising

buzz monitoring

website & search

analytics

blogs

ugc

Brand

Customer

• Increasing potential for high impact, creative online campaigns: - online fashion shows- viral campaigns

• Customer insight and engagement - monitoring of forums, blogs- communicating and

engaging through newsletter, personalisation

• Optimisation of media budgets: cost effectiveness of online channel

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 brandequity & loyalty, and optimise supply chain & core processes across physical and digital customertouch points.

Exhibit 9: Integration of digital channels into business system

In moving towards the gold-standard, luxury brands should be 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, KPI’s)

• 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 broadminded 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.

Organisation / Core processes Supply chain Front end

DistributorsImporters

Collection Production

Franchisees

Direct clients

DOS

Supply chain

Design Product team

Sales

Merchandising

Design Product team

Sales & Marketing

Merchandising

Online

ClientClient

•A powerful & cost effective tool for customer relationship marketing and brand development

2

•A strong feedback channel to optimise supply chain & core processes:- presenting high measurability- offering customer data and behavioural insight

- providing direct input to CRM, merchandising and design processes

3

•A high growth retail channel enabling personalisation and enhanced customer proposition

1

Marketing

CRM

Source: Value Partners

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About Value Partners

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.

Founded in 1993, Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. It comprises two sister companies: Value Partners

Management Consulting and Value Team IT Consulting & Solutions.

With 16 offices across Europe, Asia, South America and MENA, Value Partners expertise spans corporate strategy and financial business planning, cost transformation & organizational development, commercial planning, technology decisions, and change management. Its 3,000 professionals, from 25 nations, combine methodological approach and analytical frameworks with hands-on attitude and practical industry experience developed in executive capacity within their sectors of focus: media & telecoms, luxury goods, financial services, energy, manufacturing and hi-tech.

For more information on the issues raised in this note please contact alfonso.marone@valuepartners.com, kim.chua@valuepartners.com or one of our offices below. Find all the contacts details on www.valuepartners.com

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