The Dark Side of Digital Luxury

LONDON, United Kingdom — Luxury brands spent much of the last decade trying to tighten their grip on distribution. These efforts coincided with the growth of the broader online marketplace, sowing widespread fear of digital threats to both price discipline and control of distribution, two fundamental pillars of modern luxury. As a result, the luxury industry was relatively slow to adopt — and adapt to — digital media.

But after a slow start, the industry has raced forward to seize the e-commerce opportunity, the only bright spot in a stagnant luxury market. Being late to the party has allowed players to take advantage of established technologies and learn from the missteps of first movers and, today, the luxury industry is evolving towards a new reality where the physical and digital worlds are merging, allowing brands to tap a deep pool of profitable growth. At the same time, exploiting the digital opportunity is not without its dangers.

Channel conflict

E-commerce increases the risk of channel conflict and magnifies deficient control over distribution. What you do not want as a luxury brand is wholesale customers selling your brand on the Internet at lower prices than your own stores. In the past, you may not have noticed — or may have turned a blind eye towards — wholesale customers selling your products at a cheaper price; but you will certainly feel the difference when lower quality websites are selling your products from anywhere in the world. This may seem obvious, but it is what happened to Luxottica with Ray-Ban. As a result, the company was forced to slim down in the US and implement a MAP (or Minimum Advertised Price) policy, prohibiting wholesale customers from advertising Ray-Ban products at a deep discount in order to “protect the reputation” of the brand.

Geographic conflict

E-commerce can also short-circuit the geographical price-gap architecture that’s built up within the industry over the years. A brand that sells at higher prices at stores in China, but then gives Chinese consumers the opportunity to buy at lower European or American prices from its website, will clearly face problems.

Several American brands are in this predicament. Closing access to US or European websites for Chinese consumers would mean losing significant business. But maintaining an inconsistent approach between digital and physical channels can lead to even greater problems in the future as digital sales grow.

To go a step further, it’s one thing to have a physical wholesale customer soft-discounting in-store or selling cross-border. It is quite another when the same behaviour is magnified across the Internet: suddenly anybody, anywhere in the world can access the ‘store’ and the resulting damage to revenue and brand is exponentially higher.

Digital off-price

This leads me to the danger of brand trivialisation through digital off-price distribution. In the early days of digital luxury, using the Internet to clear end-of-season merchandise seemed a great idea: it was cleaner, more efficient and generated higher yields than conventional clearance channels. But that was when digital luxury was still niche. Today, digital luxury is mainstream and consumers enjoy far higher convenience in price discovery. Indeed, checking for off-price offers before buying anything at full price is just a smartphone screen away. The days of driving to a distant factory outlet mall may soon be over. And the implications of this have yet to sink in, though luxury companies may decide to become more stringent in their online off-price forays.

Niche competition

Finally, the Internet is a democratic domain that goes some way towards levelling the playing field for smaller niche competitors. Luxury megabrands have built high barriers to entry by escalating investments in physical flagships. But the Internet now allows smaller brands access to global consumers at a relatively modest investment level. Acquiring customers is still a challenge, but paying prohibitively high real estate rental costs is less so.

That said, companies with a strong grip on distribution have a lot to gain from e-commerce and are least likely to fall for the "dark side of digital." Louis Vuitton and Hermès rank highest. Other soft luxury companies come just behind them, with Moncler, Prada and Ferragamo ahead of most. Watches and eyewear brands have the most fragile position. Indeed, Luxottica is currently paying a price to bring order to its wholesale distribution, while watch brands have yet to address how they can move to a tighter distribution arrangement.

Luca Solca is the head of luxury goods at BNP Exane Paribas.

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