In less than a year’s time, Kering will take back full control of its e-commerce operations as part of a long-term mission to overhaul to its digital strategy and enhance its customer experience.
The company, whose brands include Gucci, Saint Laurent and Bottega Veneta, announced its intention at the end of last year, and said it would look at a variety of different elements as part of its digital transformation – namely, e-commerce, customer relationship management, data science and innovation. It noted at the time that e-commerce represented the fastest growing channel for all of its luxury houses, representing 6 percent of the group’s total retail sales for the first half of 2018.
“These exciting new initiatives have been designed to meet - and exceed - the needs of our houses’ customers and to ensure we continue to offer them an exceptional experience across all channels in a fast-changing global market,” said Grégory Boutté, chief digital officer at Kering in a statement in November.
“These opportunities have been made possible by the experience and know-how that Kering has gained over the years,” he added.
Kering’s decision reflects a growing trend amongst the biggest players in the luxury industry to take charge of their own online operations, as seen with rivals LVMH, which launched its own multi-brand website 24S two years ago, and Richemont, which completed a takeover of luxury e-tailer Yoox-Net-a-Porter for €2.8 billion ($3.1 billion) in 2018.
Even Prada, which has traditionally been more hesitant than its peers to venture online, is undergoing a digital transformation programme that it says will see it continue to invest in all its digital assets to create an increasing immersive brand experience. Part of these plans include scaling back on third-party distribution and focusing more on its own e-commerce offering.
“We are strongly committed to driving digital technology across the business, leading to more efficient decision making, as we are aware that digital innovation is key to compete in an evolving market,” said Prada chief executive Patrizio Bertelli in a statement following the company’s latest results in August. “Executing this programme is the necessary step towards sustainable revenue and margin growth, which we will target by strengthening our brands’ cultural heritage – essential to our group’s future.”
The shift towards luxury brands managing their own operations is part of a long-term strategy around brand equity protection and a move away from wholesale to directly-owned retail, explained Thomas Chauvet, managing director and head of luxury goods equity research at Citi Group.
“(These moves are) a reflection of what the luxury industry has been building over the last 20 years,” said Chauvet. “The big groups now have a 70 to 90 percent exposure of their revenue in retail and 10 to 30 percent roughly in wholesale. It’s not a surprise that online distribution is also following that idea. These brands want to have more control over their own retail operations rather than have too many third-party e-tailers, just like in the physical world.”
Luxury brands have really focused on growing their own retail channels, said Robert Burke, chairman and chief executive of consulting firm Robert Burke Associates. (“By) growing their own retail, they have become less dependent on the department stores and if they are in the department stores, they are looking at concession models. And running basically their own operation in the department stores.”
Louis Vuitton Cruise Collection 2019. Photo: Courtesy.
Another reason why brands are moving their digital operations in-house is because it allows them more control over the customer experience, added Burke. “These companies have come to realise that having the direct-to-consumer relationship is the most important thing for them to have. The consumer is in control and whether they buy in the store or whether they buy online… they are going to tell you how they are going to buy.”
Over the next six years, digital is expected to represent 25 percent of the luxury market’s value, up from 10 percent in 2019, according to a report by management consultancy Bain & Co., published in January. The report also estimated that approximately half of all luxury purchases will be digitally enabled driven by new technologies along the value chain and that nearly all luxury purchases will be influenced by online interactions.
“The internalisation of margin of e-commerce operations is one the key drivers for brands to bring operations back in-house,” said Mario Ortelli, managing partner of luxury advisory firm Ortelli & Co.
The most important thing for companies stressed Burke, was the ability to capture more information and data on their consumer. “That’s the most valuable (thing).They have the potential to develop a relationship directly and they don’t need anyone else. It gives them the ability to market directly to that customer. To know their buying patterns, to be able to see their purchasing, and to directly market to them. As opposed to relying on a third party to do that or an online retailer or a retailer.”
“These brands have seen how much power that online has, particularly with their online experiences with (pure players like) Net-a-Porter and Matchesfashion.com, Yoox, and Farfetch and it’s only natural that is the last missing link is them owning,” said Burke.
It’s a view shared by Chauvet and Ortelli. “It’s a way to control the brand presentation, to control the customer experience, because obviously these are your own staff and you train that staff. You control inventory… and more importantly, you control the price when you control your distribution,” said Chauvet.
“In-house management of digital operations permits to better control brand’s content, communication and consumer data,” said Ortelli. “If you are a brand with critical mass like Louis Vuitton or Gucci, it’s a no-brainer.”
However, brands may still look to maintain their relationships with pure players like Farfetch, Net-a-Porter and Matchesfashion.com as these companies still offer a competitive advantage in terms of curation and exclusive collaborations. “Their competitive advantage is their ability to edit for their consumer,” said Burke. “That is still very important to the luxury consumer.”
Complex and Constraints
However, bringing operations in-house is not without its hurdles. While brands can benefit massively from being able to control their imagery and content, managing operational issues like fulfilment, payment functions, and inventory can add more complexities and constraints to their business.
“The back end is obviously the most tricky part … it’s not necessarily easy and straightforward,” acknowledged Chauvet. It is a lot of additional cost, but once the profitability of their online business starts to become accretive to the industry margin, brands will see the benefits of operating in-house.
“Some of them already have critical mass,” added Chauvet. “Think of Gucci, which makes 6 percent of its €9 billion turnover online. That’s already a €500 million turnover. So the profitability is high. There are some operational issues and constraints, but nothing too problematic.”
However smaller and mid-sized luxury brands, who might not have the budget to manage their operations internally, may still have to rely on luxury retailers like Net-a-Porter and Farfetch.
“Managing your own platform for e-commerce or digital marketing costs money. You need have enough critical mass to finance the required investments in technology, in people, in digital marketing,” said Ortelli.
Looking forward, it seems most likely that most luxury brands will look to take back control of their digital operations. “It is a trend that is incredibly clear to see," said Ortelli. "It’s like the shift from wholesale to retail. Brands want to control this channel because it is becoming more and more important.”
“They will continue to gain further control over their digital operations” added Ortelli. “and I also expect that brands will increase their collaborations ties with digital platforms.”