To survive and prosper, luxury players need to enhance the customer experience and transform their businesses for the digital era.
The trajectory of digital in luxury has come into sharper focus. Digital is a critical source of growth and a powerful way to increase brand equity. It also enables companies to reimagine key enterprise processes, both front end and back of house. A Luxury 4.0 operating model has begun to emerge: brands and retailers use data to get closer to customers, capture emerging preferences, and streamline the process of turning ideas into new products. But digital will probably bring on further disruption—and players in the luxury market should prepare for it.
This article highlights findings from our new report, The age of digital Darwinism. We focus on the impact of digital in luxury from three perspectives: customer experience, changes to the enterprise, and future disruption.
Online sales of personal luxury goods (accessories, apparel, beauty products and perfume, footwear, jewelry and watches, and leather goods) account for 8 percent of the €254 billion global luxury market. That’s about €20 billion—up fivefold from 2009—and we expect online luxury sales to more than triple by 2025, reaching about €74 billion (exhibit). Nearly one-fifth of personal luxury sales will take place online.
Digital is having an even greater impact on how luxury shoppers choose brands and goods. Nearly 80 percent of luxury sales today are “digitally influenced”: consumers hit one or more digital touchpoints in their luxury-shopping journeys. Although digital’s impact on consumer behavior and luxury purchases varies by product category and price point, nearly all luxury shoppers have enthusiastically embraced the digital lifestyle—this isn’t just about millennials.
As these shifts take hold, the traditional, linear customer journey has been blown to bits: today’s average luxury shopper engages with brands through multiple touchpoints—up to 15, in the case of Chinese luxury consumers—along a fragmented, highly personalized journey. Half or more of these touchpoints are digital. Even as customers travel from one country to another, they now expect a seamless, coherent relationship with brands across these different touchpoints. Creating this consistent experience is quite a challenge for brands still organized around channels and geographies.
Digital luxury is increasingly a customer-to-customer (C2C) economy. The consumer is central to the shopping journey, from advocacy to sales. Luxury consumers, highly engaged on social media, are evolving from paying observers of the show into actors on the stage. They are becoming, in effect, another marketing channel. This in turn has implications for brands, which must learn how to deal with ambiguity and accept that some aspects of their messaging will be cocreated with their customers rather than controlled unilaterally by their management teams.
Are brands adapting fast enough to the new digital reality and this more articulated map of influence? The answer is mixed. A good number of luxury brands are reacting swiftly and increasing their investments in digital and related activities. But the majority have not shifted their investments in this way. Most are incrementally adjusting their marketing budgets, and that’s not helping them keep up with the pace of change.
Changes to the enterprise
Digital is penetrating the value chain and giving companies opportunities to be more effective and responsive. While brands and retailers recognize that it is essential to experiment on this front, there is wide variation in what companies do. The most forward-looking brands focus on three things. They are building a Luxury 4.0 operating model that increases their speed and agility by digitizing their businesses. They are using data to take customer knowledge and relationships to a new level. And fast-moving leaders are forming partnerships across the luxury ecosystem to accomplish what they cannot do on their own.
Luxury 4.0. Industry 4.0—the fully digitized model for manufacturing—is the inspiration for Luxury 4.0. In industries ranging from autos to consumer electronics, Industry 4.0 is creating a new seamless system that ties together self-aware machines in factories, smart logistics, customer data, and design. These connections make it possible to respond rapidly to shifts in demand and customer needs, to reduce costs, and to turn customer data quickly into new products and business models that drive growth.
Will this extend to a sector in which art and other intangibles are dominant factors in the value equation? Indeed, just-in-time design and manufacturing have huge implications for luxury fashion brands. We expect digital and Industry 4.0 to affect luxury operating models in ways that make operations more agile and responsive, without diluting the DNA of luxury products: craftsmanship, unique design, and personalization.
Customer intimacy. Big data and machine learning are bringing authenticity and relevance back into the customer relationship. It may seem paradoxical to use machines to get “real and personal,” but luxury brands can win big by using technology to be as authentic with the consumer as they were historically. In the early days of the luxury époque, Louis Vuitton hand-wrote specific suggestions to a customer to recommend particular travel bags for a transatlantic journey to New York City. Today, big data and advanced analytics help brands find opportunities to provide services uniquely tailored to each customer and occasion, so the brands seem as authentic as Vuitton’s notes. This will make consumer relevance ubiquitous in luxury.
The luxury ecosystem. Players in the luxury market have a lot to accomplish on the journey to digital, and not much time to do it. To get where they need to go, luxury brands and retailers can complement in-house competencies through strategic partnerships—for example, by enlisting help to create novel and exciting customer experiences. To develop the new competencies that digital requires, companies should become adept at choosing whether to make, to buy, or to partner with others.
What else can we expect? A few trends we’re keeping an eye on:
Store wars. Digital will continue changing consumer behavior, fostering an appetite for experience rather than simply for shopping and buying. Consumers are no longer just purchasing a product. They are purchasing the experiences and emotions the brand can offer them. Digital has trained consumers to expect continuous excitement. A consumer’s most recent and most exciting online experience sets the bar not only for the next online shopping experience but also for the kind of experience the consumer expects when shopping in stores. The time of reverse omnichannel has started—the store must match the quality of the online experience. Digital is no longer only a sales or communication channel. Instagram becomes the new store window, and digital now becomes the source of inspiration for reinventing the role of the store and the customer experience.
Renting versus owning. Will digital bring disruptive change to luxury, as iTunes and Spotify redefined the music industry? It’s not easy to predict how far digitization will go in luxury. However, we do see early symptoms of a broader change, which in the not-too-distant future might fundamentally alter the way consumers approach luxury. For example, start-ups such as Rent the Runway are offering access to a “fashion library” of clothes and accessories on a subscription basis, similar to the way Spotify provides its music service.
The influence of Amazon. The giant online retailer is on track to grab nearly 20 percent of the US apparel market by 2021. This impressive share underscores a reality: the dot-com rush is a “winner take all” game, with clear scale benefits in acquiring and retaining customers, the supply chain, and advanced analytics. Today Amazon has wide-ranging strengths across many types of merchandise, but it’s had its greatest success in convenience-led segments and low price points. As a result, its brand portfolio is limited mainly to value or premium brands. What if Amazon starts to focus on luxury brands? Will it replicate the success and disruption it is bringing in the apparel industry? That move into luxury could pose significant challenges for protecting luxury brand equity and maintaining luxury economics.
Digital, a multifaceted opportunity for luxury brands and retailers, will require well-considered actions by CEOs. There is no single recipe for success, but every CEO and top team should consider five elements:
Think and act broadly. Digital is no longer only a sales or communication channel. In our view, it has become a key element of the value equation brands need to master. It spans a range of disciplines, including brand management, customer engagement, retail, and the supply chain.
Prepare for continual transformation. Digital shouldn’t be the name of a channel or a specific function of the organization. It needs to be a stress test that brands apply to every element of their offer, so they better understand which opportunities they can capture or which risks they face.
Evolve the organization. Digital requires organizational changes. There’s no longer marketing and digital marketing—there’s just marketing. Digital and IT officers are now one and the same. The digital officer sits on the executive committee and participates in key decisions over the life of a brand.
Fully leverage the power of big data and machine learning. Advanced analytics is a reality. CEOs should ensure that their teams use it properly to bring authenticity and intimacy back to the customer relationship.
Develop ecosystems. Winning brands source competencies from the outside—their ecosystems—to ensure access to cutting-edge skills.
- Download The age of digital Darwinism, the full report on which this article is based (PDF–543KB).
About the author(s)
Antonio Achille is a senior partner in McKinsey’s Milan office and our global leader for Luxury; Sophie Marchessou is a partner in the New Jersey office and a member of the Apparel, Fashion & Luxury Group; and Nathalie Remy is a partner in the Paris office and the global leader for Digital in Fashion.
The authors wish to thank Benjamin Durand-Servoingt, Aimee Kim, Anna Sanfilippo, and Jennifer Schimdt for their contributions to this report.