For Luxury Industry, Ecommerce Is No Longer a Luxury

By 2025, online will represent 25% of luxury goods sales, study projects

Author: Andria Cheng

April 13, 2017

In retailers’ race to beef up their digital strategy and ecommerce sales, the traditional luxury industry has been a slow starter. A new study signals that they need to pick up the pace.

A survey found that younger users were far more likely to have used an online channel for their first luxury purchase. Among those ages 18 to 24, 14% said their first luxury purchase was made online. The survey of 2,000 US online shoppers, conducted by consultancy Bain & Co. for Farfetch, an online platform that sells goods from luxury boutiques and brands, found far lower levels among older consumers. Among those ages 25 to 35, 9% said their first luxury purchase was made online, in comparison to only 3% for those ages 45-54, the Bain study released Wednesday showed. 

While those percentages may not look that big, it demonstrates the coming generational shift. Bain & Co. forecast online sales will take an increasingly significant share of the total luxury market. It currently makes up 8% of total luxury sales, but that will grow to 25% by 2025. At that point, Bain predicts, online will equal luxury brands’ own “monobrand stores” as the most significant channel for luxury sales. (Over that same period, monobrand stores’ share will slide from 30% to 25%.)

Meanwhile, as has been well illustrated by struggles at luxury retailers and brands including Neiman Marcus and Ralph Lauren, department stores, once the second largest luxury goods selling channel after brands’ own eponymous stores, will see their share of the market decline to 13% from 23%.

Ralph Lauren’s latest quarterly wholesale sales to department stores and other customers slumped 26% while comparable sales at its own stores also dropped. The company said this month it will shut its Polo flagship store on New York’s Fifth Avenue as it seeks to come up with a better ecommerce strategy. “We are looking carefully at the way consumers are shopping online,” said CFO Jane Nielsen in a statement.

In another sign of the increased digital importance, 70% of consumers said their luxury purchases were influenced by online interactions, the Bain study showed, adding that online traffic to luxury brand websites is double that of store visits. Luxury consumers also tend to be more tech savvy: across all age groups, at least 80% of them use the internet, including 100% for those 15 to 35. In comparison, the percentage ranges from 34% to 77% across different age groups among regular consumers, the study showed.

Why are these shifts critical? Credit millennials again. Their changing behavior has affected even the behavior of older generations, who accounted for nearly three quarters of luxury purchases last year, according to Bain. By 2025, millennials and the younger Gen Z group will represent two-fifths of the luxury spending, up from 27%. (Bain defines millennials as those born between 1980 to 1995.)

Critical Moment for Luxury

The luxury industry is “in a very delicate moment,” said Federica Levato, a Bain & Co. partner in Milan, said in an interview. Luxury retailers “are struggling with what the customer is looking for. Millennials are exposed to so much information. They are very knowledgeable about the real value of the product. They are also influencing other generations towards how they are approaching luxury.”

Internet use and widespread global travel have increased consumers’ knowledge of prices, and even inspired a bit of consumer backlash against price increases.

The luxury industry has historically been reluctant to sell online due to counterfeiting and other concerns.

Meanwhile, the industry has a new challenge appealing to millennials, who tend to want to spend more on experiences rather than material things, and who now have more options to rent luxury items, for instance designer outfits, rather than own them.

Some luxury retailers have responded in kind. Neiman Marcus opened an in-store boutique featuring Rent the Runway designer rental service in San Francisco. (It’s partly in the hope that customers will pick up accessories while in store.)

And in yet another internet-driven challenge, access to once-exclusive fashion shows has become democratized, with viewers tuning in online. That would not be a problem but for the traditionally slow luxury product cycle.

"The fashion cycle is out of sync with the customer."

“The fashion cycle is out of sync with the customer,” Neiman Marcus CEO Karen Katz said in a financial call in September. “Until a few years ago, only retailers in the fashion media attended the major fashion shows. Access was exclusive. Today fashion shows are now blogged and broadcast all over the world via social media. By the time the merchandise ships many months later, the newness and excitement have worn off and in many cases the customer has moved on.” (Neiman Marcus, after posting declining sales, has put itself up for sale.)

In a separate study done for Fondazione Altagamma, the trade association of Italian luxury goods manufacturers, Bain & Co. estimated the personal luxury goods market in 2016 was “essentially flat” at about 249 billion euros (or $264 billion), the third straight year of “modest growth” when excluding currency impact. However, sales dropped 3% each in the Americas and Asia (excluding Japan), two major luxury markets.

“Luxury companies no longer benefit from a favorable market and free-spending consumers,” the report, released in December, said.

In response, luxury companies are not only honing their social media and digital marketing strategies and getting on sites like Snapchat to engage with the younger consumers. More of them are also partnering with sites like Yoox Net-A Porter Group (YNAP), which runs ecommerce sites for luxury labels from Valentino to Emporio Armani. YNAP also sells luxury items on a variety of its own ecommerce sites.

YNAP’s results are another sign of ecommerce being the big bright spot for luxury. While many brick-and-mortar luxury retailers and department stores are posting declining sales, YNAP posted a nearly 18% increase in net revenue in 2016.