According to a McKinsey report, by the year 2025, nearly one-fifth of all personal luxury sales will be made online, and luxury players hoping to stick around will have to answer to a new order of business for a digitized world.
In the management consulting firm’s study, The Age of Digital Darwinism, which tracked luxury brands’ increasing need for digital relevance to realize continued growth, findings pointed to online sales of personal luxury items like apparel, footwear, accessories, jewelry, watches, perfume, leather goods and beauty, will reach 74 billion euros ($91.6 billion) in the next seven years—more than triple the more than 20 billion euro ($24.75 billion) the market accounts for now. Affordable luxury (as opposed to absolute luxury) and beauty will drive online luxury sales, with affordable luxury leading the charge as millennials coming into their own will be willing to buy bigger ticket items on the web.
The bulk of today’s luxury sales are already digitally-driven; McKinsey said as much as 80 percent of luxury sales are influenced by what’s happening online. That’s thanks in part to the fact that today’s consumer engages with brands through as many as 15 touchpoints, at least half of which are digital.
“Digital luxury is increasingly a customer-to-customer (C2C) economy. The consumer is central to the shopping journey, from advocacy to sales. Luxury consumers, highly engaged on social media, are evolving from paying observers of the show into actors on the stage,” the report noted. “They are becoming, in effect, another marketing channel.”
Many brands, however, simply can’t relinquish the control they think they still have, and they’re not adapting fast enough to retail’s present realities. And it’s a retail race where only the savvy survive.
“Successful e-retailers need to run faster than the wind,” according to the report. “And only the ones growing at 50 percent plus year-on-year (while maintaining an agile, inventory-light model) will generate superior shareholder value.”
Brands wanting to expand their businesses and generate revenue growth will have to focus on three elements, according to McKinsey: digitizing and building a Luxury 4.0 operating model (based on an Industry 4.0 approach that marries self-aware machines, smart logistics, customer data and design to increases speed and agility); using collected data of customer knowledge and relationships to establish personalized services; and partnering and collaborating with other brands that have proven track records of online success.
Monobrands like Gucci and Armani are continuing to see growth, though they’re not growing as fast as multibrand marketplaces, like online fashion retailer Farfetch. According to McKinsey, Armani saw a 20 percent compound annual growth rate between 2014 and 2016, and in that same time, growth at Farfetch was 40 percent. One illustration of Farfetch’s success since it launched in 2007? High-end U.K. department store Harvey Nichols announced Monday that it was partnering with Farfetch to sell clothing and accessories in an effort to increase Harvey Nichols’ online sales.
McKinsey attributes the marketplaces’ success to their scalable business models, which allows them to carry curated assortments of luxury goods without having to stock entire inventories in stores.
The study also took notice of companies that offer rental services on luxury goods, like Rent the Runway. While McKinsey said it’s too early to determine whether Rent the Runway will make a sizeable impact, it did point out that the company had 6 million customers and generated roughly 1 billion euros ($1.24 billion) in revenue in 2016, seven years after its launch. And recently, the company secured a $20 million investment from Alibaba founders Jack Ma and Joe Tsai that has it now reportedly valued at $800 million.
Another company that McKinsey speculated was worth watching—and which will come as little surprise—is Amazon. The company has more than proven itself as a formidable retail opponent, and evidence points to it having a strong presence should it decide to seriously focus on luxury brands.
“Amazon is on track to grab nearly 16 percent of the U.S. apparel market by 2021… [It’s] already a clear winner in the contest for first screen, surpassing Google when consumers enter search terms for consumer items, including apparel and footwear,” McKinsey noted.
Companies keen to keep up will have to think and act broadly, according to McKinsey.
“Digital is no longer only a sales or communication channel,” the report noted. “In our view, it has become a key element of the value equation brands need to master.”
It will also become increasingly imperative to be prepared for ongoing transformation—and digital shouldn’t be a focus area for one designated department in a company, nor should it target only one portion of the supply chain. Digitation needs to run through the entire value chain so that companies have better access to data, and thus a better grasp on what risks their actually facing.
Organizations have to evolve if they expect to keep up with the demands of digital.
“There’s no longer marketing and digital marketing—there’s just marketing. Digital and IT officers are now one and the same. The digital officer sits on the executive committee and participates in key decisions over the life of a brand,” McKinsey noted.
Leveraging the power of big data and machine learning will be key factors in going all in with digital, as will developing ecosystems that ensure access to “cutting-edge skills.”
“Advanced analytics is a reality,” McKinsey said. “CEOs should ensure that their teams use it properly to bring authenticity and intimacy back to the customer relationship.”