Luxury Web Battle Looms as LVMH, Hugo Boss Develop E-Commerce

PARIS, France — As department stores and publishers join the ranks of those offering luxury goods online, they're running into a new breed of competitor: makers of the designer clothing, handbags and accessories they sell.

The shift is making the Internet look more like the real world. Department stores, after all, compete with shops owned by the likes of Gucci and Fendi and have seen their share of luxury sales erode in recent years as brands opened outlets from Beijing to Bogota.

The same dynamic is starting to play out online. LVMH Moet Hennessy Louis Vuitton SE and German fashion label Hugo Boss AG are shifting more resources to e-commerce as growth in China slows. That's setting luxury-goods makers on a collision course with Web distributors and could result in more deals like Yoox's merger with Net-a-Porter. The new company starts trading Monday.

It’s shaping up to be an “online luxury turf war,” said John Guy, an analyst at Mainfirst AG. “The level of competition is increasing.”

In the past year, a half-dozen or so companies have raised funds or reorganized to sell luxury goods online. Galeries Lafayette, the French department-store chain, plans to double profit by 2020 by becoming an “omnichannel” retailer. Conde Nast Inc., the publisher of Vogue magazine, is rebooting fashion-review site style.com to sell luxury products.

The online push has already spurred consolidation. Department-store chain Neiman Marcus Group Inc. last year bought fashion retailer Mytheresa.com. Yoox's union with Net-a-Porter will create the world's largest luxury Web retailer. More deals will likely follow because distributors need scale to survive, said Luca Solca, an analyst at Exane BNP Paribas.

They’re all seeking to capture more Web sales of luxury goods, which brokerage Sanford C. Bernstein predicts will grow at more than twice the pace of the overall luxury market, to 27 billion euros ($30 billion) through 2019.

Until recently, luxury companies like Giorgio Armani and Valentino tended to outsource e-commerce because of the cost and complexity of selling online. Burberry Group Plc bucked the trend, keeping its online operations in-house. E-commerce accounts for about 10 percent of the company's retail sales.

Now LVMH and Hugo Boss are going it alone online as well. In September, LVMH Chairman Bernard Arnault hired a senior executive from Apple Inc. to spearhead his company's digital push, and earlier this year acquired a minority stake in Lyst, an aggregator of luxury e-commerce sites. Hugo Boss, meanwhile, is investing in technology to let clients order online and pick up their suits, ties and shoes from its outlets.

“The industry is finally moving from dipping their toes in online to jumping into the pool,’’ said Bernstein analyst Mario Ortelli.

While Ortelli estimates as much as 9 percent of luxury sales will take place online by the end of the decade, almost double last year’s share, the Internet isn’t just a battleground for revenue. As more shoppers turn to mobile devices to browse and buy, the Web is key for capturing customer data.

That helps explain why Fendi, one of LVMH's 15 fashion and leather-goods brands, built its own e-commerce site this year. To give customers the flexibility to order how and where they want, "there was only one answer, which was doing it alone," said Fendi Chief Executive Officer Pietro Beccari.

Luxury brands will likely continue to sell via third-party websites, just as they work with department stores because they help reach customers who wouldn’t necessarily come to their outlets. Some will still rely on outsiders to manage their Web business.

As the battle lines get drawn between suppliers and distributors, a far bigger combatant lurks in the background -- Amazon.com Inc., which has bulked up its fashion offer as it seeks more affluent customers.

"The big gorillas are entering into our space," Johann Rupert, chairman of Cie. Financiere Richemont SA, which will own 50 percent of Yoox Net-a-Porter, said last month. "If you want to play in that field, you have to have size."

By: Andrew Roberts; editors: Matthew Boyle, David Rocks and Paul Jarvis.