The Covid-19 pandemic has presented significant challenges to the luxury sector, resulting in a 20% sales downturn in 2020. However, while physical retail has suffered, online luxury sales have skyrocketed, leading to the emergence of multibrand e-tailers as winners in this digital transformation. Leading luxury labels have also grown more powerful in this context. Nevertheless, other players in the luxury industry must reinvent themselves and reconsider their distribution strategy in order to stay competitive.
Bernstein, in collaboration with Altagamma, an association of Italian luxury brands, conducted a study entitled “Luxury retail evolution & the digital revolution” to examine the state of luxury goods distribution post-2020. The study highlights the integration of offline and online sales, resulting in the emergence of “onlife” sales. Online sales in the luxury market increased from 12% in 2019 to 20-23% in 2020, generating a total revenue of €50 billion. This upward trend is expected to continue, with online sales projected to account for one-third of the luxury market by 2025.
Several factors have contributed to the shift away from traditional monobrand stores, including influencers, social media, e-shops, and multibrand websites. The Covid-19 crisis has further dampened in-store footfall, offset only partially by high conversion rates in the e-tail channel. As a result, luxury labels face the risk of declining sales per square meter. Solca’s study demonstrates the connection between growth in comparable sales and return on investment, emphasizing the significance of growth in creating value and driving stock market success for luxury groups.
In order to counter declining footfall and profitability, luxury labels are implementing strategies such as in-store events, capsule collections, pop-up stores, and tailored customer services. However, these approaches come with additional costs that only the most powerful luxury groups can afford. The same logic now applies to the online realm as well. Multibrand e-tailers have capitalized on the digital acceleration by attracting consumers with a wide range of products and brands. Platforms like Lyst and Farfetch, alongside Mytheresa and Net-A-Porter, now generate more traffic than traditional department stores such as Selfridges, Saks Fifth Avenue, and Galeries Lafayette.
Chris Morton, CEO and founder of Lyst, believes that multibrand e-tailers have become the new winning proposition. Lyst experienced a sales growth of 50% in 2020 and is currently available in 200 countries, serving 150 million annual buyers with 17,000 brands and 8 million products. The technological and business advantages of e-tailers have allowed them to solidify their e-concession model, enabling luxury labels to maintain ownership of goods and manage deliveries directly. This differs from the traditional physical retail distribution model, where inventory is allocated locally to each department store branch.
Luxury labels benefit from selling online by setting retail prices and retaining only the commission owed to the e-tailer, unlike their traditional multibrand clients who pay 40 to 50% of the retail price. However, this system favors larger labels and poses strategic disadvantages for smaller ones. Luxury houses such as Dior, Hermès, and Louis Vuitton have already integrated the e-tail model into their distribution ecosystem and can drive traffic to e-tail sites.
While e-tail plays a crucial role in the luxury market, online sales will not completely dominate. The in-store experience remains vital, and there will be a rebalancing of sales channels in the future. Michele Norsa, executive vice-president of Salvatore Ferragamo, believes that geographical and sales channel rebalancing is essential to avoid homogenizing the luxury experience. Michael Ward, managing director of Harrods, has noticed a significant return of customers since the store’s reopening, as people seek out unique in-store experiences.
In conclusion, the luxury sector has undergone a transformation due to the Covid-19 pandemic and the digital acceleration. Multibrand e-tailers have emerged as winners, enticing consumers with their vast range of products and brands. Luxury labels must adapt and rethink their distribution strategies to remain competitive in this evolving landscape. While the in-store experience remains crucial, online sales will continue to play a significant role in the luxury market. Striking a balance between these two channels will be key for luxury labels moving forward.
Useful links:
– Business of Fashion: Luxury Retail Has a Big Online Problem
– Vogue Business: Are digital concessions the answer for luxury?
