Digitization is a luxury that high end brands can't ignore after COVID-19 - the tipping point from 'nice to have' to 'must have' for retail e-commerce?

This was supposed to be a big year for luxury e-commerce. As noted previously, the emergence of online retail platforms, and particularly third parties such as the 'Great Satan' of Amazon, has divided the strategic mindset of so-called high-end names. For some, online offers an additional route to market; for others, it lowers the cachet of the brand and is to be avoided at all costs, up to and including a basic grasp of digital age retail realities.

But over the past few years, there has been a chipping away at resistance, fuelled in large part by the opportunity to crack the lucrative Chinese market digitally. Analysts and researchers had seen 2020 as a potential turning point. Then of course came COVID-19. While certain retail sectors have benefitted hugely from a shift to online, these have tended to be purveyors of essential items, such as groceries and hygiene/medical products.

Unless you have a very particularly mindset and lifestyle, a designed handbag doesn’t fall into the ‘essentials’ category. We’ve already seen how fashion retailers have struggled in the current crisis, even those with mature online transactional platforms, as the impulse buy for the latest logo-embossed sneakers or little black dress gives way to buying decisions based on 'slouching around the house making Zoom calls’ wardrobe choices. And the bankruptcy protection proceedings of the likes of Neiman Marcus tell their own stories...

It’s certainly true that expectations for the luxury e-commerce market have been reined in as a result of the pandemic. Analyst firm Bain had predicted that online sales would make up 30% of the personal luxury goods industry by 2025; that’s now been pulled back to 25%, but the firm is still looking at a growth rate of 12% per annum under the current circumstances. As China and Asian economies open up for business at a quicker rate than their Western counterparts, that could yet be subject to further upwards revision.

'Must have'

That’s certainly the sort of thinking coming from José Neves, Founder and CEO of online luxury retail platform Farfetch, a veteran of this niche market, having been founded in 2007. The firm now boasts over 500 brands and over 3000 independent boutiques using its channel as a route to high disposable income demographics around the world. He states confidently that an e-commerce tipping point is here, fuelled by pandemic lockdowns, but accelerated underlying trends that were in motion anyway:

We believe that the digitization of brick-and-mortar was 'nice to have' in the view of many brands and many retailers and will be promoted to a 'must have'…Our unique business model has enabled us to remain operational throughout the COVID-19 crisis, which has in turn allowed our tens of millions of monthly marketplace visitors to continue to shop for beautifully-crafted fashion items and enabled our suppliers to continue selling their curated collections during a period when most have had to shut their physical retail businesses. Unlike most other businesses in the luxury fashion industry, our revenues are primarily generated by digital channels, which enables us to reach a global consumer base across the 190 countries we serve.

The lockdowns around the world have been a positive catalyst for the presumed shift in mindset, including, usefully, in the high-spending Asian markets keen to access Western brands, and validates Farfetch’s prior decision to build out a local footprint in key geographies:

Industry sources indicate that Chinese consumers represented 35% of luxury consumption in 2019, of which approximately 70% was made while traveling. This amounts to approximately $70 billion of personal luxury goods purchased by Chinese nationals while traveling outside mainland China. [That’s] demand which, with all else being equal, will now need to be repatriated as international travel is expected to decline up to 80% in 2020. We believe the same scenario applies to other major luxury goods markets, where we also have localized operations, such as the Middle East, Brazil and Russia.

There’s also an expectation that existing Farfetch retailer ‘converts’ will also be upping their activity online, he adds:

The vast majority of online sales by our sellers is on Farfetch and the [rest] is physical store sales…If you’re a boutique or department store on Farfetch, if previously Farfetch was 30%, for example, of your mix, because of unfortunate closures - or even after the closures - because of less traffic general installs, we will be a bigger part of the mix.

Success factors

Farfetch’s ability to adjust demand generation efforts in real-time in response to market fluctuations has been a major asset, attests Neves:

For every 100 pieces that are uploaded on the platform, we used to take a certain percentage. That percentage is now higher because the offline channel which competes for the inventory, if you want to picture it that way, is obviously tapping less on that same inventory pool. And that's very unique with our model.

That, I think, is a major competitive advantage as it will allow us to capture, even faster, market share from the competitors that are e-tailers essentially or hybrid retail/e-tail businesses. They don't have that capability. They long to have the direct-to-consumer model with brands and they don't have the agility to tap supply wherever supply is. We had it coming from 50 countries, and directly to demand wherever demand is.

He adds:

For example, when we saw a slowdown in late Q1 in customer activity in our larger markets in Europe and North America, we pulled back our demand generation efforts in those regions. On the other hand, in the China region, where lockdown measures began in January, we increased our marketing efforts as customer interest began to accelerate starting February, which resulted in faster growth in this region by the end of the quarter than for all of 2019.

As lockdowns are lifted at varying paces around the world, Neves predicts:

Over the course of the past decades and economic downturns, the luxury fashion industry has proven to be extremely resilient, and we expect that to remain true. But one thing that has become evident over the past weeks is that the world will not go back to the same normal as we knew with pre-COVID-19.

But he argues that Farfetch has a number of critical differentiators that align it well to emerge from the crisis in a stronger position, including the “resilience of our business model, which has enabled us to continue serving the industry and our consumers throughout the pandemic with minimal disruption” and the aforementioned shift from physical to digital shopping at the high-end of the market:

Even prior to COVID-19, brands listed digital transformation among their top priorities, along with the transition away from wholesale distribution channels. In the current environment, we believe there is even more urgency behind these initiatives, which favors Farfetch's direct-to-consumer approach.

Names, names, names

This could mean more interest in Farfetch Platform Solutions (FPS) arm as firms look at building out their own digital strategies and need underlying proven tech to do so. Currently used by 20 luxury brands around the world, Neves cites the example of Harrods in London as an exemplar for FPS in action, where the retailers’s e-commerce operation has been re-platformed in under a year:

In hindsight, the re-platform was impeccably timed as the London store was temporarily closed one month later due to COVID-19 lockdown measures. By leveraging the Farfetch platform capabilities, harrods.com has not only managed to continue to serve customers around the world with very high service levels throughout the ongoing lockdown of its London department store, it has been trading well above expectations since launch. This has not gone unnoticed. And in light of the current environment, which is heightening the urgency for luxury businesses to implement digital strategies, we have seen an acceleration of conversations with other leading department stores and brands. Watch this space!

He also makes the case that Farfetch’s e-concession business model is well-suited to potential disruption in the sector in the second half of 2020/first half of 2021:

In a scenario where brands are slower in terms of production or are producing less because of factory closures or in the scenario of rationalization of channels, brands will prioritize their direct-to-consumer sales. So the first inventory to come will be for those channels. For example, we are connected to Gucci.com. So the same warehouse that services Gucci.com, services Farfetch. The same warehouse that services Prada.com services Farfetch etc...We have 500 concessions and we tap directly into the brands inventory. This is completely unique because our competitors will not have access to these priority deliveries.

And with the advent of social distancing - and the requirement to continue adhering to this practice once physical stores re-open - there will be a need to re-imagine the bricks-and-mortar retail experience. Fitting rooms will have to go, for example, and the amount of available square footage for footfall will be reduced. Here, Farfetch’s work with Chanel on the Store of the Future could well pay off. Neves says:

Sales per square foot are a very important KPI for luxury brands and retailers....What we've seen, even in some countries that have now gone beyond lockdown, the sales per square foot are not going back in the majority of cases to pre-COVID numbers, because people want to avoid crowds, because people want contactless payments and sometimes they're not available, and they want a level of personalization and agility that makes shopping in a post-COVID world still enjoyable. 

This is what we've delivered to Chanel. Actually, the first thing we did with the Store of The Future team was gather everyone and say, ‘OK, how does our product suite work in a COVID world and a post-COVID world?’. We found that many of the functionalities that we had developed pre-COVID are extremely powerful and are, in fact, being used by Chanel, even as their flagship store in Rue Cambon [in Paris]  is closed, to stay, in a very personalized, elevated way, servicing and keeping that dialog between fashion advisers and customers.

This could, he argues, become the new normal for high-end retail:

We believe this digitization of physical retail was a distant innovation for many luxury brands and retailers that may now be promoted from ‘nice to have’ to ‘must have’ status.

My take

A digital retail success story already, but one that’s riding out the current upheaval in its market on the back of some sound technology investments in the past. Whether Neves confidence in the tipping point nature of the COVID-19 crisis on the digital mindset of some still ‘online suspicious’ brands remains to be seen - learned behavior plus in-built elitism is a heady mix and one that’s hard to shake off - but there are clear lessons in the Farfetch experience of others with e-commerce ambition.