Navigating The New Norm For Luxury Brands

Just 50 days into 2023 and the year has already proven to be very interesting economically. At the end of last month, the IMF stated that the “outlook is less gloomy than our October forecast, and could represent a turning point, with growth bottoming out and inflation declining.” The good news for luxury retailers is China’s sudden reopening, which is expected to drive significant activity, especially in the global travel and luxury sectors.

However, even before China’s relaxed Covid restrictions, luxury hadn’t fared too badly, with the top luxury brands proving to be immune to the global economic malaise. The top brands—Hermes, Chanel, Louis Vuitton—consistently generate enormous profits, regardless of the economy, while wielding tight control over the entire customer experience, from product availability to pricing. This strategy is highly rewarding for investors, boosting the enterprise value of the top luxury players across the board. For example, a recent WWD report revealed that the world’s most valuable luxury brand, Hermès International, has an enterprise value of almost 17 euros per one euro of sales. The international luxury giants are so successful because they regularly reinforce their brand heritage, enjoy waitlists for their most covetable items, and are decidedly unapologetic about their ever-increasing stratospheric prices.

Not every luxury brand is as fortunate. As in many industries today, profitability has become the new key to Wall Street investment, pushing aside growth as its favorite metric. As WWD notes, “What has changed over the past 18 months is the market’s enthusiasm for newer brands and business models—where growth was enough to get Wall Street moving, costs and profits are now being scrutinized as well.” What can luxury brands which may not be on the same playing field as Hermès, Chanel, or Louis Vuitton, do in a contracting market to improve their profitability? Here are four top considerations for every luxury CEO today:

1. Expand a brand’s direct-to-consumer (DTC) ecommerce channel internationally. Many of my fellow CEOs say “oh, we ship internationally,” but that is not true international expansion—it’s just the tip of the iceberg. Expanding DTC ecommerce internationally means behaving with a market presence. Localized websites which fulfill from local flagship stores and warehouses are the natural extension post a cross-border phase; pricing in local currencies; fast free delivery and returns; native language marketing—these are the minimum requirements today for international DTC expansion. Increased social media presence with regionally important influencers and content is also critical to validate the brand and allow for discovery by younger Gen Z and Millennial consumers.

2. Consider that international expansion doesn’t simply mean Europe. Shoppers in countries such as China, the UAE, and India, for example, are voracious consumers of luxury products online; yet the UAE and China are the only two with any depth of in-country luxury brand representation. Brands that court young consumers by having a digital or physical presence in these luxury outposts will reap greater rewards long term. In addition, the luxury consumers in these countries have much in common: they are young (Gen Z and Millennials) with a higher brand affinity than their parents and grandparents; they are digital natives who enjoy shopping online and have no qualms about buying luxury online from international brands; and they also tend to travel frequently to luxury capitals such as London, New York, and Paris where they can shop in-person at their favorite luxury boutiques.

3. Invest in physical retail. The digital experience cannot supersede the physical. Consumers have returned to stores and expect a greater, more enriched omnichannel experience to be on offer. The experience must include every touchpoint in the store—from dressing rooms to sales associates to visual merchandising. For the very top store experiences, such as Gucci’s or Cartier’s, the physical and digital are linked so that their customers can seamlessly shop either or both formats at the same time. Create an experience to keep the customer in store longer—introduce food and beverage partnerships, devote excess space to community building, workshops, or art exhibitions—whatever might be on brand that inspires and drives excitement.

4. Use marketplaces wisely. Luxury marketplaces, like Farfetch, are important channels for luxury brands, but should be part of the strategy, not the entire strategy. The right luxury marketplace can be used to heighten awareness in new markets. However, marketplaces come at a high cost and are no substitute for a robust brand owned DTC Ecommerce strategy. Like a department store, a marketplace is promoting itself as an emporium of brands—each brand is simply one of many. Marketplaces offer brands an easy way to expand their sales, but at the cost of leaving a very direct, rich and lasting engagement with their consumers on the table.

The power of a robust, international DTC website combined with an exciting in-store experience and the right, limited marketplace presence is at the heart of delivering a total luxury proposition to consumers today and for the foreseeable future.