Finding exclusivity and digital adoption in the softening markets of 2016

LUXURY RETAIL: An Omnichannel Conundrum

As the impact of e-commerce giants like Amazon and geopolitical factors contribute to slowing traffic and weakening sales in department stores, a general down cycle has taken a toll on luxury retail. But while shopping habits have changed, the fundamentals of successful luxury retail remain intact.

As luxury retail transitions through this soft phase, larger brands have found a strong presence across all digital channels, be they email, e-commerce, mobile, or social media. However, brands that maintain selectivity—such as Chanel, who sells only fragrances and has branched out to sunglasses in only recent years—face an added challenge within digital channels. According to Luxury Daily:

“Luxury retailers have built their brands on the idea of exclusivity, beauty and high touch… They have been slow to adopt digital because it’s historically been a transactional channel: buy immediately. [But] without

digital—and e-commerce in particular—an effective omnichannel strategy doesn’t exist.” - Diane Kegley, CMO of RichRelevance

Luxury brands continue to lag behind non-luxury retail sectors in terms of digital adoption, despite having made advances in adoption of social media. Additionally, m-commerce is receiving only modest attention from these brands.

When it comes to e-commerce, the biggest challenge for luxury brands is international fulfillment. Their high-value products and services face unique taxation laws, while retailers must navigate through currency exchange complications and most notably, theft—where loss of even just a few high-value items can deal a substantial blow to the business. Products shipped by post or even courier face these risks.

Another challenge to traditional luxury retail is online availability from legitimate retailers, but also from the second-hand market, or even that of fabricated goods. CNN reported on April 18, 2016:

Counterfeit trade amounted to as much as 2.5% of world trade in 2013, up from an estimated 1.9% in 2008. That’s equivalent to the size of Austria’s economy… Global data on customs seizures shows Rolex,

Nike (NKE), Ray Ban and Louis Vuitton were the brands with the most knockoffs.

THE STATE OF LUXURY RETAIL

THE OMNICHANNEL CONUNDRUM

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Luxury retailers who fail to adapt to the growing e-commerce curve fall behind the players who adapt; additionally, vendors who sell second-hand or fake products can sell for less, with the added convenience of digital shopping and fulfillment. When customers can reach products instantly, online or via mobile, there are fewer incentives for in-store shopping, where the majority of luxury retailers still receive the breadth of their revenue.

The business value of the department store becomes increasingly weak as their costs associated with infrastructure, staffing, and inventory—as well as risks associated with theft and poor store performance—give way to the scalability and availability provided by e-commerce, especially on an international scale.

Retailers who attempt to grow internationally with a physical presence in APAC, for example, may face poor demand upon arrival and lose that investment entirely. Luxury retailers who find the balance between digital and in-store channels—and the integration of the two using back-end technologies—fare far better than those who depend on physical stores as a majority.

Nonetheless, and unlike other retail markets, luxury brands gain their value—and subsequently revenue—from exclusively and limited distribution, which do not lend themselves to omnichannel. In most retail, the ideal omnichannel strategy broadens distribution channels and expands the availability of products to consumers. But for luxury retailers, there are four important factors contributing to the value of their brands:

�� exclusivity

�� limited distribution

�� authenticity

�� high perceived value

THE OMNICHANNEL CONUNDRUM

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THE IMPACT OF BREXIT ON OVERSEAS AND DOMESTIC LUXURY RETAILERSAs the British Pound weakens next to the American Dollar, and the free movement of goods and services within the European Union lays in question, British luxury exporters face a challenge. As the impact of Brexit is not fully clear, uncertainty takes a toll as well. But according to Luxury Daily:

“Luxury marketers need to look beyond this short, sharp, natural disaster that has beset the United Kingdom’s economy. And in that regard, the impact of Brexit is more nuanced, with pros as well as

cons depending on the nature of the luxury business.” - Graham Painter, CEO of Cream UK

As the British government formulates a new agreement with the European Union, economists seem confident the damages will be short-lived; and the weakened Pound makes the U.K. an attractive destination for overseas visitors, some of whom may be prone to impulse luxury purchases in a country where their own currency now carries greater value. Painter continues:

“For U.K. retailers, the outlook depends on which markets contribute most to their sales, overseas or domestic… Those with big international profiles and prominent London shops may well benefit… But U.K. retailers who rely on the domestic demand will be punished on two fronts: weak demand from

U.K. consumers further exacerbated by price inflation caused by purchasing goods from abroad with a weakened pound.”

Anything that jeopardizes these four factors is essentially bad for the retailer. This is a conundrum—luxury retailers must grow their omnichannel ecosystem to compete with other luxury retailers, second-hand retailers and fabricators who are eroding these factors; but, without contributing to that erosion themselves. According to Fashionista:

“Yes, maybe they could increase sales [by doing e-commerce, but] a brand’s goals aren’t always to increase sales. It may be to preserve the quality of the brand so that it stays in business for another 100 years.”

Sucharita Mulpuru-Kodali, Vice President and Principal Analyst of Forrester

THE OMNICHANNEL CONUNDRUM

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Geopolitical events, erosion caused by second-hand and fabricated goods, and the challenges of adopting omnichannel retail in a market dependent on brand exclusivity—these are the challenges luxury retailers face at the close of 2016. Once these retailers find an integrated, omnichannel solution that works as part of their unique goals, they must look upon digital channels as opportunities and:

�� Take advantage of international omnichannel to weather the storms of global economic uncertainty.

�� Sell better than the second-hand dealers and fakers by creating a superior online store, start certifying dealers of their products, and give customers incentives to shop through these channels as opposed to others.

�� Find an omnichannel strategy that plays to the ethos of luxury retail, where exclusivity, high perceived value and clear authenticity transition into the digital landscape, along with their business.

When building a strategy, these retailers must ask themselves, “how common do I want my brand to be?” The answer should be the foundation of those strategies.

A STRATEGY FOR LUXURY RETAILERS

WORKS CITEDKing, Jen. “Luxury Brands Continue to Lag in Omnichannel Retail: Report.” Luxury Daily Luxury Brands Continue to Lag in Omnichannel Retail Report Comments. September 15, 2015. Accessed August 19, 2016. https://www.luxurydaily.com/luxury-brands-continue-to-lag-in-omnichannel-retail-report/.

Petroff, Alanna. “The ‘fakes’ Industry Is worth $461 Billion.” CNNMoney. April 18, 2016. Accessed August 19, 2016. http://money.cnn.com/2016/04/18/news/economy/fake-purses-shoes-economy-counterfeit-trade/.

Painter, Graham. “What Impact Will Brexit have on the UK’s luxury Brands?” Luxury Daily What Impact WillBrexithave on the UKsluxury Brands Comments. July 18, 2016. Accessed August 19, 2016. https://www.luxurydaily.com/what-impact-will-brexit-have-on-the-uks-luxury-brands/.

Mau, Dhani. “Why Some Luxury Brands Still Don’t Sell Online.” Why Some Luxury Brands Still Don’t Sell Online. March 31, 2014. Accessed August 19, 2016. http://fashionista.com/2014/03/why-some-luxury-brands-still-dont-sell-online.

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ABOUT MICKEY ALAM KHAN & LUXURY DAILY

Luxury Daily is the world’s leading luxury business publication covering the marketing, retail, media and digital efforts from luxury brands and retailers as well as geopolitical considerations.

Based in New York, the daily targets luxury brands, luxury retailers, publishers, ad agencies and service providers. Subscribe to Luxury Daily at https://www.luxurydaily.com/newsletter/

Luxury Daily founder and editor in chief Mickey Alam Khan has more than 24 years’ reporting and editing experience in marketing and retail journalism. He was previously editor in chief of eMarketer and DM News and, prior to that, correspondent for Advertising Age.