We are neither shying away from correcting past mistakes nor from exploring new grounds… We are focusing on the digital transformation of our business model.
To those words from Mark Langer, CEO of luxury clothing retailer Hugo Boss, might be added - about time too! The firm has been slow to adjust to the changing nature of the retail market, even in the high end luxury part of the sector, and is now in need of an urgent course correct. In short, Hugo Boss has screwed up on digital to date - online sales fell 6% during 2016.
Now, admitting to your mistakes is the first step towards putting them right and Longer is in mea culpa mode when he says:
Where we have previously seen smooth sailing over calm seas for a long time, the going has gotten rough in the past 12 months. On the one hand, this was due to a recessionary market environment. According to Bain, the global luxury apparel market shrunk by 4% in 2016, making apparel one of the weakest segments in the overall luxury goods sector.
Yet, this was also due to mistakes we made in the past. Our brand portfolio has clearly become too complex for many consumers to understand. Some of our brands have strayed too far away from the core. Others are not sufficiently distinct, creating overlap in terms of our product lines and pricing architecture. This was exacerbated by a challenging underlying market in our attempt to capture greater share of the luxury goods market alienated a part of our core clientele.
All of this has been made all the worse for Hugo Boss thanks to the rise of omni-channel retail. Langer bluntly states:
The growing importance of digital channels in particular has made these imbalances unsustainable. Not only has the internet become a means of comparing product and prices among different markets, it has become an integral part of many consumers' lives, which we need to turn to our advantage going forward. This will require speed and agility, rather than the complex organizational structures and processes that slowed down our decision-making in the past.
Customer requirements have changed, he says:
A shopping trip for a new suit now starts online, whereas [consumers] once window shopped in the past. Brands unable to demonstrate a unique proposition will quickly get lost in the masses. Where customers used to accept limited selection available in stores, they now expect immediate access to the full range on offer whenever and wherever. And whereas before they were willing to browse through aisles and aisles of product, they now expect brands to identify the right product for them based on the relationship on equal footing.
While there has been digital investment, it’s not always been in the right places, he adds:
We underestimated the importance of the mobile site. Our focus was very much on the desktop solution. And there were other elements, starting with trivial elements you would think of, just loading time of the page, having the right depth and amount of merchandising at the relevant price point, so that we are still on. We have to be on a much steeper learning curve to be best practice asset from a branded retail space.
Getting digital right is now a priority for the management team, says Langer, but it’s not short-term fix that the company is after, but rather a long term solution:
We will not cut corners. We will not be excessively pouring market driving traffic to the page if it's not yet performing at the level that we expect. We will not turn our e-commerce site into a digital off-price channel where you find discounts that you will never find on any other pages. We know the quick and easy solution to drive e-commerce sales which has to be healthy. We want to return to a safe, sustainable, and profitable growth going forward.
To that end, actions have been taken, including insourcing the fulfilment of the online business in Europe, redesigning the online store, and launching a mobile app, as well as system enhancements in customer relationship management and digital communications.
On the front line for developing a more sustainable digital channel is Bernd Hake, Chief Sales Officer at Hugo Boss, who clearly doesn’t underestimate the scale of the task ahead. Crucially he also appreciates the need to strike the correct balance between online and offline worlds:
Regardless of the rise of digital and mobile, physical stores will not lose their relevance anytime soon. Their function as key consumer touchpoints is only going to become more important, but we need to make those stores more connected to the digital world. The introduction of omni-channel services, as well as the further development of our store concept are important steps in this regard.
We will continue to expand our omnichannel services, knowing that convenience is a key factor in customers' purchasing considerations, especially where the core customer of Boss is concerned. So, rollout of click and collect, order in store, and return in store in both Europe as well as in the US will be completed by the end of the year.
Hake also talks in terms of a new concept for the physical Hugo Boss retail outlets:
While it is still too early to go into details, one key element of the new store concept will be the expansion of digital elements, which we will not only use to tell the stories behind the product, but also to create an omni-channel distribution process.
Our online business builds on a solid foundation. Thanks to the insourcing of key elements of the value chain in previous years, we directly control the online front end as well as the back end. We are convinced that owning the interface with consumers will be an important competitive advantage over peers. This advantage we will only become magnified as we build up more and more online retailing expertise in house.
There are some positives to highlight, he insists, such as the fact that half of the hugoboss.com traffic is now coming from mobile devices, justifying mobile development as the single top priority for the future. But the wider problems are not going to be fixed overnight, he emphasises:
In the short-term, we are going through a learning curve, which puts the commercial performance of our online business under pressure. It is very important to understand that the challenges we face have nothing to do with a lack of resources. We have built good infrastructure, but we are not making enough out of it at the moment.
Certainly the investment looks to be there to make a difference. Langer points to an IT budget of over €30 million to deliver the digitization of its business model as well improved customer management capabilities:
With a much better CRM system hopefully in place in the course of 2017, we think that we'll use these digital resources rather to target customers very individually in their needs and interests when it comes to the brand, which accounts for digital marketing.
That IT spend will be fuelled by cost-disciplines elsewhere, but it’s a necessary approach to take, concludes Longer:
We have to keep our costs in this area and space, be it our wholesale distribution teams, be it our finance teams, be it our HR and backbone IT system and this discipline allows us to invest into certain parts of our business system, which are needed in a more digital world.
There are other elements in driving the digital transformation where we're willing and capable to do the investment, but it's rather a shift in composition than overall increase in the cost structure. This industry has been, for many years, almost in a state of denial, where we have grown our cost base quite excessively. Only as of 2016, we had our sobering moment to come back to a new normal. So, this is not starving an organization, but it's more re-sizing and re-focusing our resources where they are more needed to grow our business again.
A bold admission of a digital deficit to date. Whether Hugo Boss can find a way to evolve in the omni-channel age is unclear. The challenge for all luxury brands is that the business model to date has been built around the in-store experience - see also Burberry and Louis Vuitton. Replicating that customer experience online or finding some form of analog for it is a big ask.