When a woman buys a Mulberry bag she stands taller, walks prouder and feels invincible. It is because of this way a designer brand can make us feel that the luxury goods industry has thrived from affluent consumers who not only purchase these items as a symbol of their wealth and status, but also as a reflection of who they are or strive to be.
This is a very powerful position for a brand to be in and it is no surprise that this industry will continue to flourish. In fact, the Deloitte report Global Powers of Luxury Goods showed a composite year over year sales growth of 6.8%, driven mainly by consumers in emerging markets. This steady growth is also reflected in the increase of online search interest over the past 13 years.
Beautiful stores, a glass of champagne while you browse, a staff member to help with your every whim – their brick and mortar locations are an environment in which luxury brands can control and truly pamper their clientele.
For many of them, digital advertising removes any opportunity to create that personalised experience for clients and ‘cheapens’ their brand. Because of this, many have not felt the need to embrace e-commerce as warmly as other retail brands have and, to some extent, they fear the repercussions and loss of control from jumping in head first. With 63% of luxury transactions still occurring in physical stores, there has been little need to heavily invest in digital channels.
However, this is changing. As a generation of internet-savvy, price-conscious youths begin to grow their disposable income, they are going online to spend it. For those lucky enough to have a higher pay grade, this means using Google Search instead of Regent Street to find those luxury items. 42% of luxury item purchases online are carried out by millennials, with older generations preferring to make their purchases in-store.
We’ve analysed the online sales data of our luxury retailers that shows just this. With younger consumers abandoning the need to ‘try before you buy’, luxury brands can expect to see continued growth from online sales.
Cheating the system
Nearly half of luxury purchases made by consumers are done in foreign markets or airports. Interestingly, the tendency for these consumers to purchase luxury goods in their domestic market increases with age. With the disparity of prices between markets more substantial than normal for luxury goods, this is not surprising.
This price disparity can vary quite radically and quickly. When the pound fell against the dollar following Brexit, the price of luxury goods in the UK increased by 5%.
In general, strict shipping and tax regulations hit emerging markets the hardest, forcing luxury brands to hike up the already steep prices to keep the same margin. US goods are over 50% more expensive in China than in some Western European countries.
This is forcing consumers to shop in foreign markets for greater affordability. Consumers from emerging markets purchase abroad 60% of the time, not only due to price but also for the wider range of products.
NMPi’s data shows that, over the past two years, conversion rates in emerging markets have sharply dropped in comparison to established markets – a strange phenomenon when it is the emerging markets driving the industry growth.
Let’s face it, if you’re an internet-savvy millennial living in China with your heart set on a Dionysus embroidered Gucci handbag and it’s two thirds of the price in Italy, you’ll purchase abroad. With that kind of saving you could take a nice little trip to the Colosseum.
Due to this lack of initial investment in the digital space, these luxury brands may find it hard to compete. However, all is not lost. Luxury brands still have one advantage and that is the brand itself, the stories it tells and the values it holds. The most important factors of luxury goods are the uniqueness and quality of the product. Luxury brand resellers already have a strong foothold in e-commerce, making up 78% of online purchases in the luxury goods sector. Appearing alongside their resellers is something that physical stores have never had to deal with.
This is unavoidable in e-commerce with platforms such as Google Shopping giving the preferential top positions to the cheaper products. This risks the image of luxury brands looking cheap when their products are flogged off at discount prices. By keeping the newest ranges exclusive and bringing the indulgent in-store experience online, brands will capture consumer interests and their desire to be pampered.
The unparalleled popularity of e-commerce has created a need for high-quality personalised content on a huge scale. There is an opportunity for luxury brands to take the first steps in creating a truly meaningful online dialogue with their customers. Creating customised online content at this scale will be a challenge for everyone involved in the industry, from designers to marketers. But it will be worth it to move the industry on from a status-based old luxury to an experience-based new luxury.
Peter Munton is an analyst at NMPi.
This article was originally published in The Drum Network luxury special. You can get your hands on a copy here. To be featured in the next special focused on the charity sector, please contact firstname.lastname@example.org.