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Luxury's New World Order

The global luxury market is being reshaped by the maturation of Chinese consumers and digital disruption, increasing the polarisation between successful fast-growing brands and everyone else, argues Luca Solca.
A Gucci store in China | Source: Shutterstock
By
  • Luca Solca
BoF PROFESSIONAL

GENEVA, Switzerland — Starting from the '90s, large-scale new wealth creation in China and the resulting need to display newfound social status brought millions of new consumers to the luxury market. These consumers were primarily after the best-known products from the best-known brands. They had lots of cash and little in their wardrobes, so satisfying them was relatively easy.

There was little demand for innovation across product, communications and retail. Rather, for most brands, the most important priorities were ramping up manufacturing volume and expanding store networks, while maintaining quality and service standards. Therefore, they focused largely on standardisation across product icons, store formats and selling ceremonies.

But China has changed, and the country’s luxury consumers are now in a very different place. They raced along the maturation curve faster than their predecessors in the West primarily because of significantly higher per-capita consumption compared to Western peers: buying one handbag every month makes you an expert faster than buying one handbag per year.

Today, the wardrobes of many Chinese consumers are full, and a second generation of shoppers is driving most of the nation’s luxury growth. This cohort is very different to their parents in terms of their consumer preferences and behaviours. They learn about brands differently (they are overwhelmingly exposed to local social media platforms); they buy differently (they are e-commerce natives); and they want newness (yesterday’s icons are no longer sufficient).

Brands that believe luxury is about static, timeless appeal are falling by the wayside. Staying desirable means putting innovation centerstage across products, store environments and communications. In the growing polarisation between successful, fast-growing brands (think: Louis Vuitton, Gucci and Moncler) and everyone else, the ability to surprise and re-invent is a decisive factor.

Digital disruption is the other major vector of change in the luxury’s new world order, impacting all key processes and reshaping the competitive arena. For a start, digital offers new ways — primarily through social media and influencers — for brands to communicate and interact with consumers. There was a time when communications strategy was largely reduced to choosing a photographer to shoot a campaign to be published in the usual glossy magazines. No longer. Young consumers, who account for a large percentage of luxury growth, hardly read magazines and are learning about luxury brands from digital channels. As a result, brands have seen the cost and complexity of their communications efforts increase significantly.

Brands that believe luxury is about static, timeless appeal are falling by the wayside.

Digital also offers new ways — through e-commerce — for brands to serve shoppers. This may seem obvious, but it has taken many years for brands to accept this reality and organise themselves accordingly. Less than five years ago, many brands still preferred consumers to come to their stores. In the real world, however, consumers were flocking to websites and brands have mostly since shaped up and seized this opportunity, defining a new paradigm of digital distribution and taking steps to integrate e-commerce with physical retail, including services like buy online and pick-up or return in store and buy in store for home delivery.

Digital is also making the shortcomings of physical distribution very clear, forcing brands to shape up their wholesale strategies. Brands with material exposure to wholesale are seeing their own wholesale customers compete with them online, mostly on price. This is causing two problems: First, limiting their own development online (Who wants to buy at full price from brand.com, when you can buy the same product elsewhere 30 to 40 percent cheaper?) and second, increasing the risk of brand trivialisation, by weakening price discipline, a key pillar that supports brand exclusivity and brand value perception. As a result, companies have had to backtrack on wholesale exposure — Luxottica is a case in point — and this can be a long and painful process.

If wholesale is a problem, the grey market and off-price are even worse. The same channel conflict and brand trivialisation problems coming from wholesale exposure are hitting brands with legacy grey market activities and significant off-price engagement. If the grey market was once something that existed in the back streets of Hong Kong, today grey market products risk appearing whenever consumers Google your brand, plus platforms like Farfetch have created a conduit for the grey market to reach a global audience. This is forcing prudent brand stewards to reduce grey market activity. Digital has also made off-price products highly accessible and this similarly risks shifting consumers away from full price sales.

Digital, coupled with big data and artificial intelligence, is also allowing brands to make their processes more scientific. For example, achieving finer consumer segmentation and differentiating assortments by store; briefing designers and merchandisers based on systematic analysis of what styles and prices are trending on social media; engaging consumers with CRM in more effective ways. I expect an arms race on this front, as leading companies have already started to invest significantly to create muscled-up data science departments within them.

Of course, digital distribution is also opening up the luxury market to new entrants. Newcomers no longer need material upfront investments to open flagship stores in expensive prime locations. They can start their distribution online, turning much of their fixed costs into variable costs. The high SG&A (selling, general and administrative) expenses of incumbents and low cost of goods sold is creating a price umbrella for new entrants to offer great value for money. A number of product categories — like eyewear (Warby Parker, Gentle Monster, Hawkers), footwear (Allbirds, Paul Evans, Velasca) and watches (Daniel Wellington) — are seeing new entrants stealing growth from incumbents.

And yet, both fundamental drivers of luxury’s new world order — the maturation of Chinese consumers and digital disruption — are converging to increase scale-driven competitive advantage. Scale advantage was originally about outspending competitors on communications, driving higher sales densities. Add to that the ability of larger brands to outspend on digital channels; make processes more scientific and effective through big data and AI; shed lower quality distribution faster and reduce brand trivialisation risk; and manage a faster-paced product innovation pipeline. It’s clear that today’s luxury market is not for the faint-hearted and increasingly demands both sophistication and heft.

Luca Solca is head of luxury goods research at Bernstein.

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