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Enhance the customer experience and transform your business to survive and prosper in the luxury digital eraThe age of digital DarwinismApparel, Fashion & Luxury Group1The age of digital Darwinism IntroductionIntroductionThe trajectory of digital in luxury has come into sharper focus. Digital is a critical source of growth and a powerful way to increase brand equity by creating brand advocacy and a compelling story. Digital also enables companies to reimagine key enterprise processes, both front-end and back-of-house. A “Luxury 4.0” operating model is emerging, in which brands and retailers use data to build customer intimacy, capture emerging customer preferences, and streamline the process of turning ideas into new products. Brands can enhance the customer relationship and restore the authentic personal experiences that defined luxury when it was confined to a small elite. Finally, the trajectory of digital will likely bring further disruption, for which players in the luxury market should prepare. In this paper, we look at the impact of digital in luxury from three perspectives: 1. Customer experience2. Changes to the enterprise3. Future disruption.We believe that investors, brands, and retailers can benefit from these perspectives as they build the systems, competencies, and organizational muscles needed to take full advantage of the digital opportunity. 2 Document Title Section Heading3The age of digital Darwinism Experience: the dynamics of the digital luxury journeyOnline sales of personal luxury goods apparel, footwear, accessories, jewellery and watches, leather goods, and beauty and perfume account for 8 percent of the 254 billion global luxury market, or about 20 billion. That is up five-fold from 2009 and we expect online luxury sales to more than triple by 2025, to about 74 billion (Exhibit 1). This means that nearly one-fifth of personal luxury sales will take place online.Experience: the dynamics of the digital luxury journey Online salesSales influenced by onlinePure offline sales208%56 22%17870%SOURCE: Euromonitor; Forrester; companies Annual Reports; McKinsey80% of sales are influenced by online Sales of personal luxury goods1, billionsExhibit 2By 2025, 1/5 of luxury sales will be onlineSales of personal luxury goods1, billionsExhibit 1SOURCE: Euromonitor; Forrester234 92%2542016OfflineOnline20 8%275 88%3122020F37 12%309 81%3832025F74 19%Digital is having an even greater impact on how luxury shoppers choose brands and goods. Nearly 80 percent of luxury sales today are “digitally influenced”, meaning that, in their luxury shopping journeys, consumers hit one or more digital touch points. The typical luxury shopper now follows a mixed online/offline journey, seeking the advice of peers on social media or looking for suggestions from trusted bloggers before entering a store, then often posting about their purchases afterwards. The luxury shopper who begins and ends the customer journey offline is a vanishing breed representing just 22 percent of all luxury shoppers (Exhibit 2).1 Apparel, footwear, accessories, jewellery and watches, leather goods, beauty and perfumes4The impact of digital on consumer behavior and luxury purchases varies by product category and price point. The biggest luxury categories for online sales are beauty products, apparel (ready-to-wear), and accessories (handbags, small leather goods, etc.). Watches and jewellery trail these categories in terms of purely online sales because of their higher price points. Consumers shopping for affordable luxury are more inclined to buy online than “absolute” luxury shoppers. Overall, consumers in the affordable luxury segment are younger, with the millennial segment being over-indexed, and hence more willing to experiment. In between are “aspirational” luxury consumers (Exhibit 3).1Excluding professional usagePrice points20142016Luxury shoppers have enthusiastically embraced the digital lifestyle. Nearly all (98 percent) have smartphones, compared with 65 percent of the general population. Furthermore, enthusiasm for the online lifestyle spans age groups among luxury consumers it is not just a phenomenon linked to millennials (Exhibit 4). For example, baby boomers (aged 50 and over) use an average of 3.5 mobile devices compared with 4 for millennials. Boomers spend 16.4 hours per week on the Internet, not much less than the 17.5 logged by millennials. About 75 percent of boomers use social media, compared with 98 percent of millennials. When Exhibit 3 The affordable segment and beauty products are driving online luxury sales, where affordable luxury sales are growing fastest onlineOnline luxury sales penetration, percentSOURCE: Euromonitor; Forrester; McKinsey CategoriesAspirational 10.6+3.1%7.5Absolute 3.6 5.1+1.5%5.3Watches and jewellery+1.2%4.18.2+1.8%Accessories 6.48.7+1.5%Ready-to-wear7.2Affordable 8.5+3.5%12.09.2+2.0%Beauty 7.2Exhibit 4 All luxury shoppers are going digital not just millennialsdeviceshours417.598%deviceshours3.516.475%Millennials 18-35 years oldNumber of mobile devices personally usedWeekly time spent on Internet1Social media usageBaby boomers >50 years oldThe age of digital Darwinism Experience: the dynamics of the digital luxury journey5it comes to digital, millennials lead the way and are teaching the older generations new behaviours as well as setting expectations for the quality of digital interaction with brands. Mobile is becoming the new desktop. Consumers now spend nearly four times as many hours on mobile devices as they do on desktop computers. Mobile has become the main source of information and, increasingly, the way luxury goods are purchased (Exhibit 5). Luxury buyers are moving decisively to mobile for Internet access. This poses additional challenges for brands: how do you convey your dream and translate the magic of your story-telling to a 10 cm by 6 cm screen? How do you show the breadth of your collection and the richness of its details to a consumer who is in an elevator or on a noisy city street? How do you complement the information the shop assistant will provide to a consumer who remains connected to an additional source of information on the brand and product even in the store?The traditional, linear customer journey has been blown to bits: today the average luxury shopper engages with brands via multiple touch points up to 15 in the case of Chinese luxury consumers along a fragmented, highly personalized journey (Exhibit 6). Half or more of these touch points are digital. Today, the customer expects a seamless and coherent relationship with brands across these different touch points, even as they travel from one country to another. Creating this consistent, seamless experience is quite a challenge for brands that are still organized around channels and geographies.Digital luxury is increasingly a customer-to-customer (C2C) economy. The consumer is central to the shopping journey, from advocacy to sales. Luxury consumers are highly engaged on social media and are moving from being paying observers of the show to being actors on stage. They are becoming, in effect, another marketing channel. As Exhibit 7 shows, the volume of chatter about brands online is dominated by consumer mentions, not by company posts.1Average based on US figuresSOURCE: Zenith, “Digital inside: get wired for the ultimate luxury experience” (8 countries surveyed: US, China, Italy, Japan, Brazil, UK, France, South Korea)Exhibit 5 By 2018, time spent by consumers on mobile will be 4x higher than on desktops Global Internet consumption, minutesDesktopMobilehigher on mobile4x5127461132014 2018of luxury consumers are smartphone equipped vs. an average of 65%198%of luxury consumers own multiple devices vs. an average of 35%177%The age of digital Darwinism Experience: the dynamics of the digital luxury journey61Hashtags, i.e., number of user-generated mentions with the brands nameSo how can brands turn consumers into brand ambassadors? How do you keep the chatter positive, when you are only a click away from a “like” becoming a “hate”? How can you fashion a positive and coherent brand message when the consumer, not your marketing managers, is creating it? Brands will need to learn to deal with ambiguity and accept that some aspects of their messaging will be cocreated with their customers rather than controlled unilaterally by their management team. SOURCE: Euromonitor; Forrester; McKinseyChina2014 2016GlobalFranceSouth KoreaBrazilUSItalyJapanUKExhibit 6 Digital touch points are multiplyingNumber of touch points in the consumer decision journey7713156855911464479356 11136578558103544783455911464571035446824Offline touch pointsOnline touch points700 official posts48 800 000#14,890 official posts24 140 000#11,970 official posts25 380 000#13,660 official posts5 690 000#1SOURCE: Instagram, May 2017 Consumers are becoming the new marketing channelExhibit 7Chanel Valentino Louis Vuitton BalmainThe volume of chatter about brands online is dominated by consumer mentions, not by company postsThe age of digital Darwinism Experience: the dynamics of the digital luxury journey7Digital is also becoming increasingly C2C when it comes to actual online sales. Daigou the practice of shoppers outside China purchasing luxury goods for consumers back home is an initial sign confirming the willingness of consumers to take part in the game. Brands might discover that the jump from being a blogger to becoming a commercial channel is shorter than they could have anticipated. Are brands adapting fast enough to the new digital reality and this more articulated map of influence? The answer is mixed. We see that a good number of luxury brands are reacting swiftly to the new reality and are increasing investments in digital, as well as in events, while shrinking the investment in print (Exhibit 8). Rising spendings on events and digital go hand-in-hand because there are important synergies. Fashion shows and other events become a powerful source of content for digital communication, reaching a much broader audience than the lucky few who make it to the runway or other event venue. But the majority of brands have not shifted their investments this way. Most are incrementally adjusting their marketing budgets, which is not helping them keep up with the pace of change. Exhibit 8EventPrintDigitalSOURCE: Company reports; Bernstein researchBrands are reallocating budgets to digital and events, but not rapidly enough2016 marketing investment by channel, percent15454015454010-205035- 4034333325453030403020503010-1560- 652510-1560- 652510-1560- 6525305020454510Hermes Burberry Miu Miu BvlgariPrada Louis VuittonCartier FendiBottega VenetaGucci Omega Saint LaurentThe age of digital Darwinism Experience: the dynamics of the digital luxury journey8If we look at the breakdown of online luxury sales, we see that monobrand sites those set up to sell the wares of a single brand still represent the lions share of online sales. However, they are growing less rapidly than multibrand marketplaces (Exhibit 10). Indeed, the digital luxury consumer is increasingly seeking a multibrand experience. Among multibrand marketplaces, the new winners seem to be those that have built scalable business models, which allow them to offer a curated assortment without the risk of carrying the full inventory needed to fuel their growth.Who is winning the e-rush? 2016 online luxury sales by channel, billionsExhibit 9MonobrandArmaniCAGR2014-16Department storesNeimanmarcusMultibrand e-retailerMytheresaFlash salesVente-priveeMarketplacesFarfetchTechplacesLystTotal online luxury sales4.920%3.815%3.815%3.715%4.040%1.240%21.420%SOURCE: Previous Digital Luxury Experience reports; Fondazione Altagamma; LuxuryScope: A unique city guide to luxury growth, McKinsey, 2016; online luxury market modelSo, who is winning the e-rush (Exhibit 9)? When it comes to online luxury, the battle has just begun: more scalable, agile, and technology-savvy e-retailers are emerging. Darwinism will claim its victims. Successful e-retailers need to run faster than the wind and only the ones growing at 50 percent plus year-on-year (while maintaining an agile, inventory-light model) will generate superior shareholder value.The age of digital Darwinism Experience: the dynamics of the digital luxury journey9E-luxury business models are evolvingExhibit 101 Selected business models use a tech-based approach disrupting traditional retail but still holding inventory, limiting scalability and attractivenessSOURCE: Press search; McKinsey & Company Strategy & Corporate Finance Practice; McKinsey analysisWhat makes them different?Typical valuation multiple Different models of consumption Change buy/ownership Advanced tech algorithms Match demand and supply Unlock existing or new demand Excel at e-com sales Dependency on brands for inventoryMarketplaces (asset light)E-retailers/ multibrand platforms (full stack)Tech companies (platform-based1)SlyceInturnLe ToteDrexcodeThe RealRealAsosMyTheresaLuisaViaRomaYoox Net-a-Porter GroupRent the RunwayTrue FarfetchEtsyVestiaireZalandoMatches FashionBoohooLystWheretogetStitch FixThe age of digital Darwinism Experience: the dynamics of the digital luxury journeyThe age of digital Darwinism Section Heading 1011Digital is penetrating the value chain and creating opportunities to be more effective and responsive. While brands and retailers recognize that it is essential to experiment on this front, there is a wide variation in what companies are doing. The most forward-looking brands are focusing on three things: they are digitizing their businesses building a “Luxury 4.0” operating model that increases their speed and agility. They are using data to take customer knowledge and relationships to a new level. And fast-moving leaders are forming partnerships across the luxury ecosystem to accomplish what they cannot do on their own. Luxury 4.0 is catching onLuxury 4.0 is inspired by Industry 4.0 the fully digitized model for manufacturing. In industries ranging from autos to consumer electronics, Industry 4.0 is creating a new seamless system that ties together self-aware machines in factories, smart logistics, customer data, and design. This enables rapid response to shifts in demand and customer needs, reduces costs, and allows companies to quickly turn customer data into new products and business models that drive growth. Industry 4.0 is already a reality in the sportswear industry, penetrating key steps of the apparel value chain (Exhibit 11).Can we can envisage the impact of 4.0 approaches in luxury, a sector in which art and other intangibles are dominant factors in the value equation? Just-in-time design and manufacturing has huge implications for luxury fashion brands. We expect digital and Industry 4.0 will impact luxury operating models in ways
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