This is part 1 in a 2-part series. Part 2 will be published next week.
Compared to such “first mover” retail industries as consumer electronics, books and entertainment, the luxury industry is a relative newcomer to e-commerce. Even today, with global online retail sales increasing 17% annually, “about 40% of high-end brands don’t sell via the web,” Bloomberg recently reported.
Despite the thriving growth opportunity, the industry’s prudence isn’t misguided. These are prestige brands with a proud heritage, after all, with meticulously-crafted images and stellar reputations. For some brands, e-commerce represents the antithesis of a luxury retail offering—it’s a mass-market approach that lacks exclusivity and an intimate consultative sales experience.
Some companies also fear they won’t be able to keep up with demand, if their company launched an e-commerce site.
But change has been on the wind in this industry in recent years. Why? As Omar El Ali, a Global Online Strategist for MotionPoint’s Global Growth team, explains: “Luxury brands learned that they needed to cater to a new generation of luxury customers. These consumers are younger, digital-savvy, pressed for time, and very practical.”
Or as a recent business feature in The New York Times put it, luxury retailers “believe in the primacy of the customer experience … in touch, and talk. They also, however, have come to believe that the future of their business and a route to global expansion lie online.”
This pivot is literally paying off. According to a McKinsey report, luxury e-commerce sales are expected to reach $21 billion in the next five years. Furthermore, the luxury e-commerce industry is seeing much larger growth than many other e-commerce sectors. “E-commerce has been described as the ‘next China’ for luxury in terms of opportunity,” worldwide director of JWT Intelligence Lucie Greene recently said.
It’s clear luxury brands are winning big online. But those that are launching e-commerce sites in international markets stand to win even more. Indeed, global e-commerce is on track to hit $2.3 trillion by 2018 … and most of that robust growth is hailing from overseas consumers.
But which international markets are presently primed for luxury e-commerce expansion? Perhaps it’s best to start with where luxury brands should not currently expand, to help avoid costly mistakes.
Avoid Most of BRIC—for Now
The equilibrium of several key countries’ purchasing power has been disrupted in the last two years, “due mainly to fluctuations in fuel prices and changes in the international political landscape,” Omar says.
As a result, online and offline luxury shopping in these markets has been greatly impacted—especially in most of the traditionally luxury-booming BRIC markets.
Brazil has had a tough time in recent years—it dropped by 13 ranks in 2015’s global e-commerce index. The Brazilian economy is currently in recession, due mainly to plummeting commodity prices caused by the Chinese economic slowdown. The Central Bank’s recently-instituted high interest rate (to fight inflation and stabilize the currency) has also been a contributor.
Brazil may be down, but it’s not out. “Keep watching this market in the years ahead,” Omar advises. Brazil has a solid internet penetration of 53% and rising, but “unfortunately, the current recession—and the minimum 50% tax rate on luxury items—makes it very hard for luxury e-commerce initiatives to succeed in the short term,” Omar says.
Russia rose 5 ranks in 2015’s global e-commerce index from last year, but its economy has seen better days. The recent crisis in the Ukraine—and its accompanying sanctions—caused a massive capital flight from the market, which caused the ruble to drop. “Low oil prices further increased pressure on the currency,” Omar explains, “raising concerns if the government could make good on its external debts.”
Like Brazil, Russia remains a market to watch. Its 61.4% Internet penetration rate is on the rise, a perfect fit for e-commerce endeavors. However, its current recession has put a chill on luxury spending.
This year, the Chinese economy continues to slow, which has negatively impacted its global e-commerce index rank. The government’s attempts to improve the situation haven’t been as effective as expected. While China’s economy grew by 7.4% last year, that’s the nation’s lowest growth rate in 25 years. The government expects even less growth this year (7%). Luxury spending is suffering as a result.
A recent governmental crackdown on corruption has also affected the industry. (Luxury items are traditionally presented as gifts to influence others.) Interestingly, the crackdown has spooked many wealthy Chinese consumers into not wearing visibly-branded luxury goods, fearing they might be associated with the corruption.
To Be Continued…
So now luxury brands know, as the saying goes, “what not to wear”—or in this case, where not to expand. So where should they plant their international e-commerce flags? Learn more early next week!
Stay tuned to learn more about the luxury e-commerce opportunity in Part 2 of this series. Can’t wait till next week to learn more? Contact us for more information.