Luxury businesses are feeling the effects of the economic downturn, as growing job losses and plummeting consumer confidence translate to cuts in retail spending across the board. The 2009 Luxury CEO agenda looks quite different from 12-18 months ago; the inevitable rethink of their growth strategies will place less emphasis on expanding physical retail networks and launching new product categories, and greater focus on enhancing core business, customer loyalty, and cost management. In this article we explore how online channels and web 2.0 technologies can help luxury brands to engage more deeply with their core customers and tap into new areas of growth, in a cost-effective and low risk fashion. By Alfonso Marone, partner, and Kim Chua, manager of Value Partners; London.

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Luxury 2.0: the role of digital channels in a downturn
Luxury businesses are feeling the effects of the economic downturn, as growing job
Alfonso Marone losses and plummeting consumer confidence translate to cuts in retail spending across
Partner the board. The 2009 Luxury CEO agenda looks quite different from 12-18 months ago;
the inevitable rethink of their growth strategies will place less emphasis on expanding
physical retail networks and launching new product categories, and greater focus
on enhancing core business, customer loyalty, and cost management. In this article
Kim Chua we explore how online channels and web 2.0 technologies can help luxury brands to
Manager engage more deeply with their core customers and tap into new areas of growth, in a
cost-effective and low risk fashion.
The changing market context for Luxury brands
Over the past 5 years luxury CEOs have consistently pursued expansion plans based on three key pillars: 1) build
up the retail network to gain direct control of the end customer, 2) extend the brand into accessories and new
product categories, and 3) go international. Only twelve months ago, the mood was buoyant; the luxury sector
was growing at 8-10% per annum and brands could not expand fast enough to meet the surge of demand from
the emerging economies, as well as the demand from aspirational customers for their ‘accessible luxury’ ranges.
Now, strategies written before the crash are being ripped up and redefined. In fact, the peculiar nature of this
recessionary cycle, rooted in the financial services sector, is affecting luxury brands more directly than ever:
alongside a general drop in customer confidence, the 200,000+ City and Wall Street jobs losses, the collapse of
hedge funds, and the implosion of equity wealth all point to a direct impact on the traditional segments and
geographic hubs of growth for luxury brands. New behavioural patterns are emerging, with risk aversion, cost
consciousness, and pragmatism adding to the long term trends of personalisation and interactivity.
Trend analysts predict a return to understatement and simplicity; fewer, higher quality purchases represents the
new karma.
Our analysis and conversations with luxury executives indicate the following priorities:
• Focus on core business and customer engagement / loyalty
• Accelerate expansion to BRIC markets
• Develop the online channels
• Strengthen the cost management culture
• Re-assess the sustainability of the retail expansion plans.
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Exhibit 1: The new priorities for luxury CEO’s
Macro-trends … … resulting growth strategies
• Western economies in 1 • Increase focus on core
turmoil business and customer
engagement / loyalty
• Relative resilience of “New
World” markets 2 • Accelerate penetration of BRIC
markets
• Evolving behavioural
patterns: 3 • Develop the Online channels
- cost consciousness and in support to core business
pragmatism (new trend)
- personalisation 4 • Strengthen cost culture
- interactivity (supply chain, inventory mgmt,
cost transformation)
• Eco-sustainability
5 • Reassess retail expansion
plans
Source: Value Partners
In a context where direct customer engagement is more important than ever, and where it may be not wise, over
the next 12-18 months, to sign long-term leases to open physical retail presence in untested locations, direct
online channels may prove a valuable tool to offset some of the growth challenges posed by this recessionary
cycle. We illustrate how in the following paragraphs.
Digital channels: the untapped opportunity
To move on from old preconceptions about the attitude of luxury customers towards the internet, it is worth
noting that high-net-worth (HNW) customers are early adopters of online media (fixed and mobile broadband
solutions, including Wifi devices and iPhone): in 2008, 98% of US HNW HH shopped online, and 80% of affluent
and HNW consumers researched purchases daily over the internet. A recent UK survey commissioned by New
Media Age indicates that 35% of Britons intend to spend more money online and less on high street during 2009.
This medium is not only used as a retail channel, but also as a tool to seek entertainment, socialise, engage, and
influence.
Exhibit 2: HNW propensity to spend time and shop online
% of US HH that shop online, by HH income, 2008
< $15k 54%
$15-$30k 61%
$30-$50k 64%
$50-$75k 67%
> $75k 72%
HNW 98%
Source: Forrester Research
While all luxury brands have by now established a web-presence, our research indicates that their approach to
digital channels and social media is often sub-optimal and fails to unleash the full potential.
This is because, all too often, luxury businesses pursue digital initiatives tactically and in a suboptimal fashion.
Common issues we have uncovered are:
• Insufficient senior management attention devoted to online channel development: often this task
is delegated so far down the organisation that initiatives are isolated, tactical and fragmented; most
organisations still lack an eBusiness Director to drive the efforts and measure progress (e.g. formal corporate
KPIs for eChannel performance management are indeed a luxury)
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• Organisational ‘silos’ causing disconnects between ‘digital initiatives’ and ‘physical initiatives’ – for example
physical stores not reflecting online campaigns, or physical stores not accepting returns from sales made online;
under-utilisation of customer data for devising new campaigns
• Lack of clarity around the objectives of the web presence (selling vs branding vs engaging) – reflecting the lack
of an online strategy, leading to confused, underperforming websites
• Under-allocation of financial resources to online developments
• Within the online budget, sub-optimal spending mix – for example, one company was spending the vast
majority of its online marketing budget on search-engine-optimisation (SEO) to direct customers to its weak
and uninspiring website
• A tendency to outsource, rather than build internal capability – for example selling mostly via Net-a-Porter or
Yoox, rather than proprietary websites, thus limiting learning curve opportunities and future potential of the
online channel (e.g. share of revenues); this is the equivalent of adopting a pure wholesale model in the physical
world, where brands like Valentino, Chanel and Gucci would never place their products only through Harrod’s,
Neiman Marcus, or Harvey Nichols.
In our approach to eLuxury channels, we recommend considering Online as a three-fold “medium”, to enable:
1. Online retailing
2. Branding & communications channel
3. Interactive CRM.
Exhibit 3: Full potential for eLuxury channels
• Monetise growth in online shopping among HNWI
• Leverage web presence as complementary retail channel
Online retailing • Extend reach to unserved geographies
• Enhance customer reach and margins
• Enable customisation and personalisation
Role of the
luxury 2.0
channels • Tap into Millennials segment
• Pursue brand engagement
Brand building
through viral marketing
campaigns
• Develop customers into evangelists
Branding &
interactive CRM
• Use as feedback channel to gain
Customer deeper customer insight (CRM
engagement & tool)
feedback channel • Provide new levels of customer
service and after-sale
• Enhance loyalty and average spend
Source: Value Partners
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Online retailing
Global online shopping has been growing strongly (CAGR 04-07: 22%); in the UK, where the high street is suffering
the effects of the downturn more than elsewhere, the online channel is still seeing strong growth (15% yoy growth
vs. a -2% contraction for physical) as online shopping experience grows more sophisticated and shoppers gain
confidence in this tool.
Exhibit 4: Online retail historic growth
High growth in online retail Online retail still growing whilst physical contracts
CAGR CAGR UK year on year, like-for-like sales growth, 2008
Online retail sales by region, bn ’04-’07 ’07-’11
22% 17% Online Physical
Asia-Pacific 500 22%
North America 414 99
25% 20% 16% 16% 16%
Europe 352 79
15%
292 66
270 175
236 52 145 18% 15%
47
188 40 122
148 99 104
32
24 88
72 226
60 164 190
108 124 136 25% 16%
64 84 -1% -1% -1% -2% -2%
2004 2005 2006 2007 2008E 2009E 2010E 2011E June July Aug Sep Oct
Source: Jupiter Research, British Retail Consortium
Based on analysis of growth trends, relevant comparables, and proxies from precursor industries (e.g. the digital
entertainment sector), we expect luxury brands that execute well to achieve some 8-12% of total sales from the
Online channel within the next 3-5 years. This figure will make eLuxury by far the most important “store” in the retail
network of those brands. The continued success of luxury e-malls such as Net-a-Porter and Yoox, with their 30-60%
YOY revenue growth, confirms the positive prospects for this channel.
Exhibit 5: The continued success of luxury e-malls
CAGR ’05-’07
m • Exclusive online channel for various designers
80 63% • Average order value of about £500 in 2006
54 • Key strengths:
30 - up-to-date and fashion forward editorial content for the
affiliates brands (including previews from fashion
shows)
- Quick deliveries to 71 countries from the warehouses
2005 2006 2007 in London and New York
m • One of the leading online sources of designer fashion,
91
31% Yoox offers items that cannot be found in the store: last
67 season items, samples and exclusive collections
53 • Achieved strong results since its launch in 2000:
- 3 million visitors per month
- 1 million transactions in 2007
• Beyond traditional support services (customer care, free
of charge return policy), online social shopping
initiatives are to be launched: a community to share
2005 2006 2007 opinions and the chance to shop e-stores with friends
Source: Value Partners analysis, websites
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Despite the strongly encouraging feedback from luxury CEOs that have fully endorsed this channel (e.g. most
recently, Oscar de la Renta), our analysis shows that many brands are still lacking the required confidence. For
many e-stores, only US and UK (or Japan) transactions are enabled, the catalogue is not fully represented, and the
customer management policies (e.g. returns) and overall shopping experience are unfriendly and not in line with a
true luxury positioning. Therefore, those luxury brands need to re-assess their approach to online retailing, taking
ownership and control of this emergent sales channel. For unleashing full potential, luxury online stores need to
be dynamic and inviting, a virtual reflection of the luxury experience, and must work in synergy with the physical
stores. Additionally, relationships with e-malls would need to be carefully reconsidered (also in the contractual
revenue sharing terms). The right online retail approach has the potential to drive growth and recapture margin,
improve customer service, and extend reach to otherwise underserved geographies (e.g. BRICs).
Branding and Interactive CRM
Digital marketing and CRM represent a significant opportunity for luxury brands to connect with their customers
and remain relevant to new emerging demographics. For instance, Millennials and Young Professionals are two
important segments that consume the largest portion of their ‘entertainment diet’ online. In particular, social
networking (e.g. Facebook, Asmallworld, Bebo) is driving the increase in time spent online, and is now the sixth
most popular leisure activity in the UK, with social networkers spending an average of 7 hours a week on these
sites. Some luxury brands such as Cartier, Prada, and Agent Provocateur have begun to experiment in this space;
creative use of the digital channel can be a highly cost-effective way of connecting with existing and new customers,
creating a new cadre of loyal ‘brand evangelists’.
Exhibit 6: Examples of brands using social networking and viral marketing to deepen customer engagement
Agent Provocateur: viral video Cartier’s MySpace page Prada’s Facebook group
• New lingerie range launch with viral • Launched in June ’08 for its Love • Prada’s Facebook group enables
video e-mail - “The Four Dreams of collection people to find out more about products
Miss X” starring Kate Moss • Includes information and videos on the and activities and discuss the brand
• Extraordinary response rates with click collection, as well as exclusive music and its products
through over 50% and social news tracks and interviews with celebrities
sites driving traffic to the site associated with the brand
• Cost-effective way of creating a marketing buzz
• Ability to measure the success of the campaign
• Effective method of reaching the Millennials
• Greater customer insights and engagement
The first priority for luxury brands in this fast moving area is to define clear corporate objectives for social media
to deliver on (e.g. Listening, Training, Energising, Supporting, Embracing – according to the Forrester Interactive
Media framework), before committing digital advertising and web development resources. Too many digital
marketing initiatives are tactical and experimental and result in wasted moneys. On the converse, the prize for a
well articulated and planned marketing initiative across physical and digital media can result not only in deeper
customer engagement, but also in significant cost savings on sales & marketing budgets. An enlightening case
study comes from outside the luxury sector, and is the “Nike Plus” campaign developed by the sportswear leader
Nike. This initiative targeted runners, offering them a combination of physical product (a distance logging gadget)
and digital service (on Nike’s website) which enables logging and benchmarking their running performance against
themselves, over time, and against other Nike Plus runners; it resulted in an online community for runners. Through
this initiative, Nike not only gained in depth customer data to enhance its product development and marketing
effectiveness, but it also saved 57% of its marketing budget for the target segment.
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Exhibit 7: Case study: Nike Plus integrating offline and online initiatives: 57% cost saving
• Results of “Nike+” initiative:
- 57% saving on segment
advertising budget
- 450,000 kits sold in the
first 3 months
- 30,000 logins over a 24-
hour period
• Key take-away:
- Customer segmentation
- Personal targeting
•Runners can purchase a Nike Plus device (ipod connectable), which - Use of social media to
tracks runner’s performance through a wireless chip in the shoe enable a “conversation”
about the brand
•Information can be uploaded on the Nike website to track each run,
illustrating pace and distance and comparing it to the runner’s historical
performance and other runners
Source: Value Partners analysis, company website
More extreme opportunities related to the interactive and peer-to-peer nature of digital channels include the
possibility to enable cost effective forms of product-personalisation (e.g. finishing, packaging), and even involve
customers in the product development cycle. While these initiatives may still be a taboo for designer-led brands,
the new consumer trends point to an increasingly tougher environment in the years ahead for standardised luxury
products.
Exhibit 8: Virtuous cycle of communication enabling deeper customer insight and engagement
Branding & marketing
messages
Brand
• Increasing potential for high
forums viral impact, creative online
blog campaigns:
campaigns
search - online fashion shows
optimisation display - viral campaigns
advertising
• Customer insight and
engagement
- monitoring of forums, blogs
- communicating and
website & blogs engaging through
search newsletter, personalisation
analytics buzz ugc
monitoring • Optimisation of media
budgets: cost effectiveness
of online channel
Customer insights &
Customer
feedback
Source: Value Partners
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Setting the vision for full-potential
The optimal eLuxury channel is integrated in a wired business system to drive sales, enhance brand
equity & loyalty, and optimise supply chain & core processes across physical and digital customer
touch points.
Exhibit 9: Integration of digital channels into business system
Organisation / Core processes Supply chain Front end
Sales
& Distributors
Sales
Marketing Importers
Collection
Production
Design Product team
Franchisees
Merchandising
Supply chain Direct clients Client
3 • A strong feedback channel to optimise
supply chain & core processes:
- presenting high measurability DOS
2 • A powerful & cost
- offering customer data and behavioural
insight effective tool for
- providing direct input to CRM, customer
merchandising and design processes 1 • A high growth retail relationship
Online marketing and
channel enabling
brand
Marketing personalisation and
development
enhanced customer
CRM
proposition
Source: Value Partners
In moving towards the gold-standard, luxury brands should be ready to reassess their approach to online channels,
by touching important aspects of the general management agenda:
• Corporate goals for digital channels to achieve; timing and priorities
• Organisational model and capabilities; balance of in-house vs outsourced
• Governance model and performance management systems (e.g. reporting lines, KPI’s)
• Technology platforms and trade-offs between standard and bespoke solutions
• Level of integration between physical and online channels to pursue along the supply chain
• Role of external outsourcing partners and business model (wholesaler vs outsourcer)
• Financial investment requirements and product development roadmap phasing.
While the investment for executing a full-fledge digital strategy is in the majority of cases a scale-factor smaller
than pursuing aggressive store network expansion and traditional marketing campaigns (e.g. through expensive
catwalks, sponsorships & events, and premium print-media), Boards and CEOs of luxury businesses should be aware
that without their full endorsement and commitment to ask broadminded questions, any effort will be incremental,
if not wasted resources. On the converse, experience from other industries that have faced the challenge earlier,
shows that the prize for going through a holistic approach to luxury 2.0 is that of setting the business on a path of
continued sustained-growth and long term protection of its brand equity.
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About Value Partners
Value Partners consumer & luxury Management Consulting and For more information on the issues
goods practice specializes in Value Team IT Consulting & raised in this note please contact
assisting leading brands on new Solutions. alfonso.marone@valuepartners.
markets entry, JV and partnership com, kim.chua@valuepartners.com
negotiations, retail network With 16 offices across Europe, or one of our offices below. Find
planning, web 2.0 and digital Asia, South America and all the contacts details on www.
media development, supply chain MENA, Value Partners expertise valuepartners.com
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