01/06/2007

Internet sales of luxury products are booming and brands are joining in
Sales of luxury products on the internet are booming. Forrester Research estimated global internet sales of luxury goods to be $3.2 billion in 2005, a 28% increase on 2004.

Pioneers such as multiple brand retailers Neiman Marcus and Nordstrom as well as specialist sites Net-à-Porter, which posted a 75% sales increase in 2006, and eLUXURY.com have paved the way for luxury brands. Over the last couple of years, leading brands such as Louis Vuitton, Hermès, Dior, Gucci, DeBeers and Bottega Veneta have rolled out dedicated transactional websites. Louis Vuitton, based on the success of its online boutique on eLUXURY.com in the USA, opened a transactional website in France in autumn 2005. Dior’s site, launched initially in France in autumn 2005 and now transactional in the UK, Italy, Spain and Germany, already achieves sales comparable to one of its largest boutiques. Hermès’s US site, opened in 2002, is the second largest sales channel for the brand’s silk ties in the USA.
The question is why now and why did it take the luxury sector so long?

A better understanding of the internet audience
Luxury brands were initially reluctant to establish a web presence principally owing to concerns that such widespread distribution, be it in the form of a purely informational site or transactional site, would dilute the brand’s image by making it accessible to a too wide or inappropriate audience. This perception was reinforced by the proliferation of “bargain” websites, such as Lastminute.com and eBay. The internet appeared to be the destination of choice for the ultimate bargain experience, rather than the ultimate shopping experience luxury brands strived to convey.

That negative perception was shattered when luxury goods bosses realised how much business Neiman Marcus, Bergdorf Goodman and Saks were doing online, and saw the success of Net-à-Porter. Recent surveys also help paint a different picture. New Yorkbased Luxury Institute found that 96% of Americans with annual incomes of $150,000+ buy products and services online, and that 99% use the internet to research before they buy. These findings were reflected in a similar study conducted in France, which also found that people in lower income brackets were less likely to buy products online.

Cannibalisation of sales or access to new markets and customers?
Another reason cited for eschewing the internet as a channel of distribution was the fear it would cannibalise sales of luxury brands’ own stores or those of their distribution partners.

The success of transactional luxury websites in the USA has shed a new light on this matter. The internet has enabled luxury brands to cost-effectively reach target audiences in markets unable to support a bricks and mortar retail presence. Information gathered from web sales has also enabled companies to identify regions/states, such as North Carolina, with sufficient demand for luxury products to justify investing in a store. Furthermore, customers in luxury goods’ primary markets that are either cash rich/time poor or too intimidated by the exclusive boutique environment are ideally suited to the internet. Nordstrom’s website has emerged as the chain’s “biggest door”, generating $530 million in sales in 2006 and forecast to reach $1 billion within three to five years. The company claims that multi-channel customers shop four times more than the customer who shops one channel, justifying its heavy investment in its website as a complement to its bricks and mortar business.

Missing out on the brand experience?
Having invested heavily in the development of monumental flagships in the 1990’s, luxury brands found initially that the technology behind the internet was insufficient to translate the brand experience from the store to the web.

The advent of broadband, along with flash graphics and audio-visual capability, liberated the creative potential of the internet, allowing brands to present their collections in an appropriate setting. Better resolution and the possibility to zoom in on product features, examine them from different angles and, in the case of apparel, on different body shapes also facilitated and enhanced the shopping experience. Websites are now working hard to create a special environment, add editorial content and improve customer service.

Bergdorfgoodman.com not only shows the latest Theory collection but has a ”Ways to Wear Theory” page showing how different pieces can be combined into outfits. Neimanmarcus.com has gone one step further, partnering up with In Style magazine to create an “Instant Style” section in which shoppers can put together ensembles. Net-à-Porter’s homepage and its “what’s new” and “magazine” pages read like a high quality fashion glossy.

The Web 2.0 generation: tomorrow’s customer, today’s challenge
The next generation of luxury goods consumers has been brought up on a diet of social networking sites (SNS), such as MySpace and Facebook, blogging and interactive new media sites, such as YouTube and Joost. This generation presents both a challenge and an opportunity for luxury goods brands.

The challenge is to reach this audience, which has largely turned its back on traditional media. The signs are already there in the current generation of luxury consumers. The Luxury Institute found that, whilst 73% of wealthy Americans said that internet presence improved their perception of a company and 30% of those surveyed found ads on internet search engine sites to be an effective marketing technique, only 10% found ads in traditional media effective. Some brands are beginning to pick up on this trend. Fendi launched a “buzz” campaign in Japan to launch its B Mix leather accessories, Armani broadcast its Paris show on MSN online with video excerpts sent to Cingular phones, and Dior launched four pieces of its latest jewellery collection on the virtual digital world of Second Life. Sources in the advertising industry estimate luxury brands will spend c.8% of their communications budget on the web in the near term. This figure is likely to increase as the new media universe matures. The emergence of dedicated new media channels, such as luxe.tv and fashion.tv, will not only allow luxury brands to access their target audiences effectively but also in a more controlled environment than generalist sites.

The opportunity for luxury brands lies in using the web’s SNS features to foster a community spirit around them. A platform where customers and fans of the brand are able to communicate not only with the brand but amongst themselves (in an appropriate, monitored environment) will increase their sense of ownership in the brand and their loyalty. Additionally, by encouraging feedback from customers in this manner, luxury brands will be able to gain valuable insight into perceptions of the brand, its products and services.

Whilst luxury brands’ initial reticence towards the internet has been overcome and significant steps have been taken by some in the right direction, the potential of the internet has yet to be fully realised. The rewards are likely to be significant for those who stay ahead of the game.