Enhance the customer experience and transform your business to survive and prosper in the luxury digital era

The 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.

Experience: the dynamics of the digital luxury journey

Online 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.

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.

The impact of digital on consumer behaviour 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.

Luxury 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. 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 it 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. 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 personalised journey. 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 organised 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. The volume of chatter about brands online is dominated by consumer mentions, not by company posts.

So 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 co-created with their customers rather than controlled unilaterally by their management team.

Digital 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. 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.

So, who is winning the e-rush? 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.

If 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 lion's share of online sales. However, they are growing less rapidly than multibrand marketplaces. 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.

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https://www.mckinsey.com/industries/retail/our-insights/luxury-in-the-age-of-digital-darwinism