Digital luxury experience 2012: From customer experience to impact
Many executives have underestimated the extent to which digital channels will drive growth in the luxury goods market in the next five year.
- December 2012
- By Nora Aufreiter, Yoram Gutgeld, Marco Mazzù, Ambrogio Michetti, and Nicola Sandri
Luxury goods companies worldwide have focused considerable attention on online marketing and sales channels in the past year, to tangible effect. Initially, many were wary, fearing that e-commerce might diminish their brands’ integrity or that customers would be unlikely to buy expensive items without seeing them first. Indeed, the reasoning went, the in-store sales ceremony was an intrinsic part of the value proposition.
Most now accept that such arguments no longer hold for many luxury goods. Today’s consumers are perfectly comfortable buying all manner of items online. And even if some still prefer to make their purchases in a store, their buying decisions are often influenced by their online experience. This was reflected in the 2011 Digital Luxury Experience report by the Altagamma-McKinsey Online Observatory, in which we highlighted the growing importance of offline sales generated by online activity, and vice versa (ROPO), the way a brand’s web site and its positioning on social media shaped customers’ perception of the brand, and the way in which maintaining a presence in multiple channels was emerging as a distinct competitive advantage.
The Altagamma-McKinsey 2012 report indicates the extent to which companies have responded. The research, in which some 300 global luxury goods companies participated, shows an enormous increase in their social media presence. They have, on average, raised the number of people who follow them on Twitter by 422 percent, and the number who follow them on Facebook by 63 percent. They have also improved the functionality of their sites. Meanwhile, consumer sentiment relating to these brands has, on average, improved by 7 percent as measured by positive comments posted online.
Companies are aware, however, that the digital world evolves fast, and that they will have to work harder and harder to keep up, let alone excel. The proliferation of technological platforms and of on- and offline customer touch points makes it challenging both to capture consumers’ attention and at the same time to protect the brand by ensuring the consumer experience is always on-message. And delivering the appropriate customer experience in so many places is only part of the challenge; the experience itself then has to translate into higher brand equity and sales. Given the extent to which digital channels will drive growth in the luxury goods market in the next five years—greatly underestimated, according to our findings—companies need to get this right. The research suggests how.
Digital sales as an engine of growth
In the past two decades, the global luxury goods market has been propelled by regional growth—first in the United States and Japan and then, since the turn of the century, in the United States and Asia. In the next five years, digital channels will be one of the major drivers of growth.
That is not to underplay the importance of some emerging markets. In the personal luxury goods sector, for example, Asia Pacific accounts for 23 percent of total sales. We expect this to rise considerably in the next five years, with the vast majority of sales concentrated in China. But digital sales growth will also be crucial.
In 2011, online sales in the personal luxury goods industry reached €6.2 billion worldwide. This figure accounted for only just over 3 percent of total industry sales, but was 28 percent higher than the previous year’s figure; thus digital sales grew three times faster than total industry sales. By 2016, we estimate that digital sales will be worth €15 billion, equivalent to 5.3 percent of total industry sales and representing average annual growth of 20 percent over the five-year period. These figures tell only part of the ecommerce story, though, because they ignore ROPO sales.
ROPO sales occur in two ways. First are the in-store sales made to customers who either have no intention of buying anything when they first go online, are undecided about what to buy, or whose original preferences change once online. These are known as “directly generated” ROPO sales, as they are determined by the customer’s online experience. The Altagamma-McKinsey research suggests that directly generated ROPO sales were worth as much as €18 billion in 2011, or 10 to 11 percent of total industry sales.
The second category of ROPO sales comprises the in-store sales made to customers who go online with a fairly good idea of what they want to buy, and while there confirm their choice. Our research suggests that these sales, influenced to a degree by customers’ online experience but not directly generated by it, accounted for sales worth an estimated €34 billion, or as much as 20 percent of total market sales, in 2011.
These figures emphasize not only the powerful role of e-commerce in the industry’s growth, but also the crucial part individual companies’ online presence will play in determining their share of that growth.
The digital market contenders
All luxury goods retailers have, on average, shown strong digital sales growth in the past year. Monobrand retailers, however, have outperformed the rest. No longer needing to be persuaded of the importance of e-commerce and unwilling to give up more market share to online competitors, many have invested heavily in their online sites, attempting to recreate something of the shopping experience they have established in their stores. Catwalk shows, social networking, product rotations, virtual personal shoppers, and a high level of service are common features. Not coincidentally, their digital sales grew by an average of 37 percent last year.
Indeed, the two biggest contenders for digital market share today are the monobrands and the online stores of full-price retailers. Together they account for half of digital sales for personal luxury goods, banishing past concerns that most online sales in the industry would be for discounted goods. If the online sales of department stores are included, the proportion of full-price online sales is higher still.
Sales made on discounted multibrand sites have continued to grow—a sign no doubt of the economic environment. But we expect the monobrands to continue to enjoy the fastest digital sales growth in the next five years, given the massive investments they have made in online channels and their own forecasts. What can these do to maximize this growth potential?
Consumers in control
The online market for luxury goods is not only growing rapidly, it is also changing rapidly in terms of how customers behave online and what they expect from the experience. Luxury brand companies have no choice but to fulfill those ever-changing expectations; doing so is the price of entry into the competition for digital sales. Our survey results highlight those expectations. There are five strong consumer trends.
Strong demand for personalization
Some 40 percent of respondents said personalized offers would tempt them to make further purchases online. Customers are looking for a more direct online relationship with the brands they buy, so companies will need to respond with, for example, discounts on selected products for selected customers based on their online behavior. To do so, they will need efficient, flexible CRM (customer relationship-management) systems that can launch niche campaigns targeting the right customers with the right offers.
Exceptional service counts
Companies have to provide exceptional service in all sorts of ways, because customers value many different elements of the online offer. Quality and range of products are important considerations alongside price, while almost half of the respondents to Altagamma-McKinsey Digital Luxury Experience Survey identified first-rate service, such as same-day delivery or gift wrapping, as reasons for paying a premium. One-fifth said a more streamlined, simpler transaction process would encourage them to make further purchases.
But service levels can lose sales as well as gain them. The research shows that 20 percent of those who change their minds about making a purchase at the checkout stage do so because of what they view as poor service, be it high delivery costs, cumbersome payment methods, too much form filling, or a failure to remember data previously entered. Luxury goods customers are as short of time as everyone else. They want to be spoiled—and that includes during the checkout process.
The need for trustworthy product information
Despite all the buzz about social media, when it comes to researching luxury goods online, consumers want direct sources of information that give them facts about the product, not just the views of other people. Almost three-quarters of respondents said the key purpose of searching online was to compare products and prices, while more than half wanted information about specific products and the product range. On average, they visited four web sites, with those of department stores and monobrands the clear favorites.
Notably, almost half said a department store’s web site was their main source of information—up from 20 percent the previous year. This behavior seems rooted in trust. Twenty-nine percent of respondents said they would trust the web site of a monobrand as a source of information. Only 13 percent said the same of social media. This has implications for companies’ choice of where to focus their online investments. They need a presence on sites that are both relevant and trusted by potential customers.
One of the most intriguing insights to emerge from the survey is the speed with which consumers make luxury purchases. More than one-third of those surveyed said that if they wanted to make a purchase they did so on the same day that they conducted an online search. About one-third of these went to a store to buy the item, while the remainder purchased online. To be sure to capture the custom of these determined shoppers, the online store must be easy to access and use, display a wider range of products than many have done to date, and emphasize those products’ value, be it their craftsmanship, lifestyle appeal, or quality.
The shopping experience, not technology, is still a deterrent
Many luxury goods consumers are so comfortable in the digital world that the technology is not perceived as a deterrent, as long as it is glitch-free, and this is taken for granted. In their quest for information and opinions before making a purchase, consumers cruise effortlessly between blogs, search engines, retailers’ sites, social media, and branded mobile applications, to name but a few. Needless to say, branded goods companies need to accompany their consumers on this technology-enabled, decision-making journey, but some are lagging. Only 15 percent of the companies in our survey had a mobile site, for example, and 20 percent a mobile application. Of the latter, only 40 percent provided an android version of the application, hence failing to keep pace with a large swathe of potential customers.
Nor are consumers much deterred by other aspects of online luxury shopping such as payment systems, delivery times, or the fact that they miss out on the opportunity to show off on the way home from the shops by carrying a bag bearing the label of a famous brand. What they miss most, it seems, is the shopping experience that enables them to appreciate the physicality of the product and human interaction. Only in a store can customers be sure the item will fit, know what it really looks or even feels like to hold or wear, or seek advice from a real assistant. Companies that can do anything to compensate for these missing experiences online will find themselves at a considerable advantage.
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