Written by Geenie Choy
This generational shift within the target market demonstrates the impact of growing digital significance. It illustrates that younger consumers no longer feel the need to feel the silk, sip the complementary bubbly, and try on the Rolex if they have the option to simply click-and-collect.
Walking into the glamorous stores of Gucci and Burberry, one would expect nothing less than 30 seconds before a salesperson approaches with overwhelming enthusiasm and military-like professionalism. It may therefore seem uncharacteristic (and even unnecessary) for luxury brands to dive into the world of e-commerce and adapt their distinctive high-end shopping experiences for the digital sphere. Recent reports, however, have shown that even for luxury brands, e-commerce is no longer optional.
Gucci and Prada’s respective failure and success in e-commerce have illustrated the need to transition into e-commerce: while both luxury powerhouses hosted impressive shows during Milan Fashion Week, the two brands demonstrated polar results in their businesses. In the third quarter of 2016, Gucci enjoyed a 17% sales growth, with half of the boom credited to e-commerce expansions. Prada, on the other hand, experienced a 25% drop in earnings for the first half of the same year, leading to its recent objective of double e-commerce sales for the next three years. These results have proven a sobering moment for the luxury retail industry, which has lived for many years in a state of denial.
How did a market segment as traditional and as timeless as the luxury retail industry become so vulnerable to e-commerce consumption? Luxury experts credit this movement to a demographic shift in target market and the corresponding change in consumption behavior. Bain & Co. forecasts that by 2025, those born between the years of 1980 and 1995 will represent two-fifths of luxury consumption. This is due to the fact that Baby Boomers have passed the age of luxurious spending and Generation X is too small a group to act as an influential market. As the average age of luxury consumers decreases, brands must learn to adapt to the consumption habits of this segment. Millennials have shown themselves to be more price-sensitive and less status-conscious, both significant trends affecting luxury retail. Growing up with robust levels of mobile and Internet penetration and continual improvements in delivery infrastructure, Millennials have increasingly relied on the Internet to compare prices, read product reviews, and simplify the overall purchasing process. In fact, a Bain study shows that “among those aged 25 to 35, 9% said their first luxury purchase was made online, in comparison to only 3% for those ages 45-54.” This generational shift within the target market demonstrates the impact of growing digital significance. It illustrates that younger consumers no longer feel the need to feel the silk, sip the complementary bubbly, and try on the Rolex if they have the option to simply click-and-collect.
Not only do digital purchases most suit Millennials, they also present unique advantages with which brick-and-mortar stores simply cannot compete. One such benefit is the ability to achieve great product exposure with little to no costs. Despite stores still being the largest revenue source for luxury retail companies, in-store growth has been due to the increase in product prices instead of transaction quantity. This indicates that brands need to reach a wider range of customers in order to succeed. One solution e-commerce provides is the use of multiple channels. More brands are investing in strategies to design websites that integrate product pick-ups or deliveries using their networks of physical stores. If done correctly, omnichannel websites can drive foot traffic to stores and secure their relevance.
The digital deficit is undeniable and brands are racing to catch up. While brands struggle to build their own digital platforms, new players have joined in the competition. Distribution channels such as multi-brand online luxury retailers have already seen outstanding results in taking department stores’ market share. Websites that allow consumers to rent luxury goods are seeing unparalleled growth. As the demographic change signals digital importance for the industry, luxury brands may be forced to abandon their traditional paths of marketing, leading to a potential democratization of luxury goods.