Is Luxury Finally Embracing Technology?

The luxury sector is deeply rooted in the past. Much of its mystique stems from 19th-century heritage stories, craftsmanship and personal relationships, down to sales staff who maintain black books of customer contacts. But the sector seems to finally be embracing a future increasingly shaped by digital technology well beyond simple e-commerce.

In mid-June, LVMH announced a 5-year strategic partnership with Google, whereby AI and machine learning technologies will be used to elevate customer experiences by providing personalised content, and to improve business operations, notably by enhancing demand forecasting and inventory optimisation. The same day, Neiman Marcus agreed to purchase Stylyze — a machine learning start-up that recommends outfits for customers based on past purchases and browsing history — as part of a wider technology investment plan.

The idea of AI used in the context of personalising content is attractive in principle: it allows a luxury brand to scale the personal shopping experience previously reserved for VIP clientele, though some have raised questions on data privacy. “For us, privacy, personalisation and luxury are synonymous, and that will always remain true,” said LVMH managing director Antonio Belloni. But is that enough to ease consumer concerns?

It turns out that attitudes towards data protection are a better indicator of a person’s age than wrinkles. Recent studies suggest younger “digital native” consumers see the sharing of personal information as part of the modern economy and are more agile in adjusting privacy settings and using data security software to protect personal data. And customer experience and brand loyalty are more powerful than data breaches in driving behaviour.

Elsewhere, augmented reality (AR) is also finding its way into the luxury sector, notably in makeup. L’Oréal, whose luxury cosmetics division includes Armani Beauty and Lancôme, saw e-commerce sales increase by 62 percent in 2020, with much of the growth being credited to virtual try-on and live-streaming technologies. Estée Lauder, which saw double-digit growth in online sales over the last quarter, recently took a group-wide approach to the opportunity, developing a virtual try-on platform template that can be tailored and rolled out to its stable of over 25 brands, giving the group the advantage of speed-to-market and cost efficiency. Estée Lauder is currently trading at an all-time high share price.

The pandemic has provided the perfect storm for boosting AR adoption. Consumers’ growing preference for using personal devices to discover products combined with strict Covid-19 containment measures have made them receptive to trying out new digital experiences. This trend is likely to stay even once social distancing restrictions are lifted.

Luxury has also been on a journey of sorts with gaming. Balenciaga, Louis Vuitton and others have developed their own games or integrated their brands into platforms like Nintendo’s Animal Crossing and Riot Games’ League of Legends, whose world championships have drawn audiences of close to 100 million people. Last month, Benefit Cosmetics launched on Twitch, the world’s top live-streaming platform for gamers.

Beyond the growing adoption of new technology, two well-known accessories brands changed hands last month: Italian shoe brand Sergio Rossi was acquired from Investindustrial by Fosun Fashion Group and Richemont snapped up Brussels-based Delvaux, one of the last independent luxury leather goods brands of significant size, which had grown over in the last decade under shareholders First Heritage Brands (Disclosure: the author of this article advised the company and its shareholders on the transaction).

The Savigny Luxury Index (“SLI”) gained close to 1 percent in June, underperforming the MSCI which gained almost 7 percent. While the luxury sector has bounced back from the pandemic, brokers have expressed concern that the current exuberant sales momentum may not continue into the second half of 2021. Also, it should be noted that the SLI is on an all-time high forward EV/EBITDA multiple of 21.9x.

SLI vs. MSCI

Going Up

• Tod’s shares gained almost 21 percent this month thanks to ongoing M&A chatter prompted by LVMH’s acquisition of shares in the company in April.
• Prada’s share price ended the month 11 percent up and close to a 7-year high; the stock is perceived to be one of the most credible turnaround stories in the sector, buoyed by the joint creative direction of Miuccia Prada and Raf Simons.

Going Down

• Safilo’s shares took a tumble this month following a cash call by the company in part to refinance a costly €90 million loan from its shareholders. The stock ended the month almost 16 percent down.
• Any positive impact on Ferragamo from the announcement that veteran luxury CEO Marco Gobbetti would be joining the brand from Burberry was offset by the removal of bid speculation on the troubled Florentine shoemaker, as the move is being interpreted as a signal that the company intends to remain independent rather than pursuing a sale. Ferragamo lost almost 7 percent of its value in June. For its part, Burberry’s share price shed nearly 9 percent on the news, erasing the gain it had made so far in June and ending the month down just over 3 percent.

What to Watch

Non-fungible tokens (NFT) are already a fixture in the art world, allowing digital art to be sold in limited editions, thereby enhancing its value. Hublot was among the first luxury brands to use NFT technology when it launched the “Big Bang e UEFA Euro 2020” connected watch in May. The bezel on the Big Bang e watch sports the flags of the 12 nations initially planned to host the tournament. Wearers can follow the Euro matches in real time via a dedicated app accessible on the watch’s high-definition touchscreen. In addition, the first 200 customers have been given an NFT containing an excerpt from one of the episodes of the Hublot Fusion Podcast. The NFTs comply with the ERC-1155 multi-token standard and can be traded on platforms such as OpenSea. Is this the start of a Bitcoin-style revolution or a marketing gimmick?

Sector Valuation

Pierre Mallevays is a partner and co-head of merchant banking at Stanhope Capital Group.

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