Amazon launches luxury store, but will luxury brands buy it?

If there is one thing it has nailed it is efficiency. A ruthless algorithm, predictive inventory ordering, self-serve media offerings, dynamic pricing have all enabled it to operate a tech-heavy and human-light model of retail. This works brilliantly for categories with millions of SKUs and billions of transactions and which are ably supported by Amazon’s deep insight into the consumer and what motivates. But could its big assets become vulnerabilities in luxury?

One of Amazon’s crown jewels is its algorithm, which recommends products from its vast assortment that it thinks consumers wants when someone searches for “coffee maker”. That is because there isn’t a line of coffee maker launched four times a year, that could look completely different to the previous set, and generally the ones that work tend to continue to be the hero product.

With luxury, products bifurcate quickly – into icons like the Tiffany T bracelet or those that are part of a constant refresh cycle. The Balenciaga consumer doesn’t really care about what products sold best last season, and that data doesn’t give Amazon any particular advantage to forecast what will sell this year, especially when you move to categories where the total stock may be less than a hundred units.

While entry level luxury could likely do quite well with Amazon in an aspirational consumer (and prestige beauty has done just that) this may not necessarily translate to windfalls down the road for harder luxury, because the notion of customer lifetime value is very different between brands and quite different from the way Amazon looks at it – there isn’t an average luxury brand or average luxury buyer. For example, while Prada Sport is the entry level brand for Prada and the same consumer could easily buy both brands which sets up a clear trade-up opportunity, there is such a vast difference between Valentino, Valentino Red and Valentino Garavani that they end up being three different consumers. These esoteric examples are what define luxury, and are a nightmare for an algorithm.

It is also why the luxury brands that do well are the ones that understand their consumers best – and that is where ownership of the data comes into play. While Amazon does share back some data to vendors, it is not nearly as rich as what the most basic DTC platform would allow a brand to do. It is by poring over site search data that luxury brands create new merchandizing experiences or combine products together in new ways. The biggest body blow to Amazon here might be any reluctance in sharing data.

For many luxury categories, purchases are on an annual or less frequent cycle, which requires the creation of very sophisticated and complex consumer profiles. It is also why luxury is one of the categories in which email market still works spectacularly well and whole businesses are built around clienteling. Amazon will need to figure out how it allows brands to recreate this, given its approach to vendor management is one of minimal human intervention.

The other asset Amazon has that turns into a liability here is the 3P marketplace. Amazon has espoused repeatedly the importance of the third-party sellers and this is a total nightmare for a luxury buyer, where even the whiff of it not being the genuine product is a deal breaker. This is part of the reason why Nike – a decidedly mass market brand – pulled out of Amazon.

If Amazon was to pursue a more white glove service for luxury purchases, especially around fulfilment, that would take out of the running the vast majority of its brilliant fulfilment capability. Unboxing is such a key part of the purchase experience, especially with gifting, and even the slightest scratch on the box would be a problem. This is before we get to the damage rates, which at Amazon are generally quite low but a 3% damage rate is a significant problem when you are shipping literal gold.

The comparison with Tmall Luxury Pavilion is an obvious one, but it ignores the fact that few players have the logistical heft of Alibaba in China as well as Alibaba’s dominance in payment systems. While Amazon Pay is gaining traction, it still isn’t Visa. There is also the issue of dynamic pricing, which if deployed would wreak havoc on the traditionally vertically integrated nature of most luxury brands. It would be odd for Celine to be undersold by Amazon than on celine.com or its own boutiques. If Amazon avoids it, it takes another key asset – dynamic pricing – out of the running.

That said, discounting a $2tn player that has reams of data and a reputation for upending categories would not be wise. Amazon absolutely could change luxury retailing. It’s just not immediately clear how that would be or, more importantly, whether the luxury consumer would want it to.

Luxury products are the ultimate in irrational decision making. Nobody needs a Rolex Submariner and yet many crave it because luxury purchases are about the experience and the frisson of indulging in what is largely a pleasurable experience. The way that Amazon would crack this is by identifying what consumers find dissatisfying about the current luxury purchase experience. I’m not certain that listing the Oscar de la Renta collection on an Amazon subdomain is quite the solution.

Mudit Jaju is the global head of e-commerce at Wavemaker.