For the Luxury Industry, Nothing Is Going Right — and Its Fate No Longer Seems to Be in Its Own Hands | 2016: Big Companies Go Digital ③

New channels, new ways of communicating, and new consumers arrived long ago. The sluggish luxury industry is only now catching on.

Traditional big companies are still working hard to reach younger consumers — and that goes doubly for the multinationals that once led the industry.

Brand messaging, products, services: the path to the consumer is no longer smooth. In 2016, going digital became the key to keeping up.

Some companies allied with internet-service providers, holding or even growing their market share but giving up the chance for direct contact with consumers. McDonald's is one example.

Some companies moved themselves online, but did so with constant second-guessing. Luxury brands are a case in point.

Some industries were thought to be the ripest for cutting out the middleman and delivering more efficient service — yet instead they stalled. The long-term rental market is one example.

Some companies thought they had beaten the traditional channels, but had not. Xiaomi is one example.

Through all of this, established incumbents may watch helplessly as new entrants rewrite the rules of the game while they run themselves ragged trying to keep up. But the most common story is the shift in where the profit sits along the value chain.

Take telecom: ten years ago its most important companies were the carriers, and they took the largest share of the profit. Then companies led by Apple gained the power to set phone-replacement cycles and decide how data traffic was generated, giving them an ever-louder voice across the whole value chain.

Or take fast-moving consumer goods, where channel has always been king and the fiercest competition has always been fought. E-commerce rewrote those rules, and in doing so rewrote the value chain.

Where traditional companies can still take heart is this: before digitization has fully remade the value chain and the structure of business, the scale-service capacity they spent years building and the steadiness of market demand still leave them room to live — even if their margin for error is now thin.

This is why QDaily is launching a year-end 2016 series on digitization. Over one month, in ten articles, it looks at what big companies have gained and lost in going digital. This is the third installment.

"To all those bloggers who change from head to toe into a different sponsored outfit every hour: please stop. Find another job. You are killing fashion."

It was September 27, and Milan Fashion Week had just ended. Vogue.com's creative digital director Sally Singer published a review on the site under the headline Ciao, Milano! Vogue.com's Editors Discuss the Week That Was. After praising Gucci creative director Alessandro Michele's new collection as "timeless and modern" and Bottega Veneta's 50th-anniversary show as "lovely and exciting," she wrote those opening words.

Singer was not alone. In the same piece, lead writer Sarah Mower, Vogue Runway director Nicole Phelps, and fashion news editor Alessandra Codinha all took aim at "fashion bloggers," reaching for the words "pathetic," "desperate," "sad," and "embarrassing."

Open warfare between fashion editors and fashion bloggers is nothing new — it broke out in 2006, 2009, and 2013 — but the bluntness of this year's salvo may have no precedent.

Their bitterness has a basis. If in 2011 it was still a talking point that fifteen-year-old fashion blogger Tavi Gevinson shared the front row with Vogue editor-in-chief Anna Wintour, by this year bloggers booking out the front row had become too routine to be news. Tommy Hilfiger carved out an "InstaPit" at his show just for social-media stars; LVMH opened more than 50 of its ateliers to Instagram opinion leaders; and Dolce & Gabbana gave front-row seats to Swedish singer Zara Larsson, model Sarah Snyder, and blogger Luka Sabbat, whose Instagram followings stand at 1.9 million, 900,000, and 247,000.

By contrast, the advertising money luxury brands gave to fashion media kept shrinking. Camille Bidault-Waddington, a freelance stylist who once worked for Another magazine, told Vestoj: "Every time, they hand me a very clear brand list — all the brands that advertise in their magazine need to appear in the shoot... But recently they've started telling stylists how many centimeters of an advertiser's product have to show... You have to make sure enough fabric is visible to keep your advertiser happy... To me, this isn't fashion — it's page invasion."

In this fight, Susie Bubble — a blogger with 277,000 Twitter followers, 302,000 Instagram followers, and 140 shows a season to her name — put her finger most directly on the heart of the matter: "First of all, don't pretend to forget one thing: fashion editors and stylists also eat at the brands' table. It's never spelled out, but the 'credits' you see everywhere in the publications that pay your salary are tied to paid advertising."

At bottom, what fashion media and bloggers are fighting over is each side's place in the luxury marketing hierarchy. But that is only the surface.

Ever since Louis XVI drew the center of fashion from Spain to France, set a twice-yearly calendar of new collections to consolidate economic power and political authority, and gave rise to names like Vogue and Marie Claire — all French in origin — the luxury industry, with dream-making at its core, has always gathered the people most skilled at spending money to make dreams and most gifted at telling stories.

Yet the industry's clientele is changing fast. The old wealthy class is steadily swelling into a more budget-minded middle class, and among the older European and American consumers who once formed the core market, a new cohort of young nouveaux riches from emerging economies, around twenty-five years old, has begun to appear.

Holding on to past glory while keeping up with the internet has made luxury's digital turn look more hesitant and more halting than that of an ordinary industry. But it has happened all the same, and nothing will stop it.

1. Both the market and the sales channels have changed

"Over the past eighteen months, as luxury brands' physical-store sales have declined in China, digital has all but replaced 'China' as the new growth engine people in this industry talk about. Many brands are adjusting accordingly, because they understand they need a new driver of sales growth." So said Chris Morton, co-founder and CEO of the fashion e-commerce platform Lyst, at Viva Technology Paris in June.

This year has again been a hard one for luxury brands. According to Bain & Company's figures, the global personal luxury goods market totaled 249 billion euros, down 1 percent. Europe alone saw four major terrorist attacks in the first half of the year — the Brussels bombings, the Nice truck attack, the Würzburg train attack, and the Munich shooting — costing France and Germany large numbers of tourists. Britain drew some spending back thanks to Brexit-driven sterling depreciation, and European domestic consumption picked up a little, but none of it was enough to offset the losses.

China, the industry's savior between 2010 and 2015, is now normalizing. Chinese consumers' contribution to the global market fell for the first time ever (down only 1 percent, though they still account for 30 percent of demand), while China's domestic market — flat for three years — grew 4 percent at constant exchange rates. Even so, that domestic gain could not fill the gap left by the drop in global contribution.

Bain remains optimistic about China's future spending power, projecting 32 million new luxury consumers by 2030. But in demographics and demand, this is no longer the same market. The urban middle class is growing at five times the rate of the overall population, yet it sits at the very bottom of the luxury pyramid and is far more price-conscious. The share of traditional households will fall 5 percent before 2030, tilting consumption toward individuality and experience. And before 2025 the consumer age distribution will cluster into two bands — thirty to forty and fifty to sixty — splitting into two poles.

In the United States, the world's largest luxury market at 33 percent of global demand, consumers grew more cautious in an election year, but the deeper problem is the continued struggle of the all-important department store channel. Same-store sales at Sears, Macy's, Nordstrom, and J.C. Penney all kept falling by varying degrees, and store counts kept shrinking. According to the consulting firm Green Street Advisors, the country needs to close another 800 stores — about 20 percent of the total — to bring the department store sector back from oversaturation to something healthier.

To quote Bain's annual report: "Department stores are undergoing a structural adjustment."

All of this means that the traditional channels through which luxury reaches consumers have changed. Brands can no longer lean on Chinese tourists, department store expansion, and outlet discounts to make money the easy way.

2. Top luxury brands think e-commerce can't move product — but it's fine for visibility

So what about e-commerce?

In 2014, Yoox Net-a-Porter (YNAP), the world's largest luxury e-commerce platform, eagerly grew the technology teams at its Bologna and London offices from 500 people to 700. To push into the Middle Eastern luxury market, this platform — 50 percent owned by Richemont — sold 100 million euros' worth of shares in April this year to Alabbar Enterprises LLC, a Dubai-based international brand franchisor. In July it released a five-year plan targeting 17–20 percent net-revenue growth every year; in October it opened a new technology center in London and then announced that in future it would sell luxury goods only on mobile. Its first-quarter earnings, released in May, showed strong results — sales up 13.8 percent to 446 million euros.

Even Farfetch, which has expanded far more slowly, reached a valuation of 1.5 billion dollars in its latest round and plans to go public next year.

In practice, though, even a platform like YNAP — seen as having reasonably good taste — has found that most top luxury brands are still reluctant to take part. True, Gucci did a capsule collection with it this year, and Prada began selling accessories from its autumn-winter line there, and both sold well. But those two words, "capsule collection" and "accessories," give the game away: the aim is promotion more than sales.

You will not find LV or Hermès — the top two names in the 2016 BrandZ Luxury Brand Value Rankings — on any e-commerce platform. Indeed, at an analyst call in October, LVMH CFO Jean-Jacques Guiony had just said that for the group "e-commerce is not a big opportunity, but it does confirm the role of online channels in getting consumers into the store. So the group will strengthen the way consumers move between the website and physical stores."

Guiony's stance on Amazon made LVMH's position even clearer. Despite Amazon's persistent overtures, he argued that it lets in too many third-party sellers, causing counterfeits to multiply fast and putting the group's brands at risk. Moreover, "Amazon fits neither the group's positioning in the luxury market nor the group's brand positioning."

In other words, luxury brands believe that the truly committed online shoppers are few. Rich consumers do not enjoy crowding onto one platform with everyone else — not offline, and not online either. They will pay only for "rarity" and "individuality."

3. Why have KOLs become more important than ever?

Luxury consumers are not people cut off from information.

In both hardware and software, luxury consumers are far better connected to the internet than the average consumer. According to a 2015 survey of 7,000 luxury consumers worldwide by the Altagamma–McKinsey Digital Luxury Experience observatory, 80 percent use Instagram, Facebook, Twitter, or WeChat at least monthly; 50 percent at least weekly; and 15 percent daily.

Yet luxury consumers differ from other groups: they dislike interacting online. Most will search for information or share something offhand, but they are reluctant to post or comment. As a McKinsey report puts it, only 30 percent will review luxury goods online, and even they do so less than once a month. The tricks mass-market brands use to spur sharing, interaction, and buzz simply do not work on this audience.

Reviewing luxury is also a different matter from reviewing other consumer goods. Fashion and luxury consultant Jean-Jacques Picart told Vestoj: "The language of fashion shows is aimed at the fashion industry. These professionals know how to decode the messages designers send in their shows and translate them for ordinary people. If you put on a fashion show open to the public, most people will wonder what occasion they could possibly wear these clothes to... They will panic; they will not understand."

That goes some way to explaining why you find the runway baffling and mainstream fashion criticism just as opaque.

But with KOLs, everything changes. They face all consumers directly, so putting content in the plainest possible language is simply their job. In that situation, hiring a third party who already has authority on social media and also understands fashion to do the explaining and engaging is, for a brand, a convenient and dignified option.

An Instagram blogger's large following may well include potential buyers, but — much like luxury's "trial run" deals with e-commerce platforms — followers are probably not the main reason brands pick a given blogger. All those enviable likes, shares, and comments are ultimately a show for the consumers who account for the real bulk of sales: "Look, our brand is still sought after — but only someone like you can afford it."

The fashion-blogger profession appeared around 2005. Next to fashion magazines, with their five-to-eight-week production cycle, bloggers are faster, more individual, and free. They speak independently of the fashion world, breaking the top-down tradition of brand communication and becoming another bridge between brands and consumers — a "democratizing" breeze through an industry built on rank. The best-known early examples are Scott Schuman of thesartorialist.com and Tommy Ton of jakandjil.com.

But it was only in the last few years, when luxury brands suddenly woke up to social media, that a real money-making opening appeared for these figures, and "fashion blogger" went from hobby to viable career. In 2009, the first wave of street-style bloggers became official partners on fashion-week documentaries and campaign shoots. That year Burberry approached Scott Schuman to photograph 100 people in classic trench coats, in a project called "Art of the Trench."

Still, the Vogue.com editors' charges are not baseless. Because there is money in it, more and more people have poured into the field, the level of professionalism has grown uneven, and the commercial pressure has mounted.

When it comes to the price of being "bought" by a brand, institutions hold out far better than individuals. The reason is simple: an institution costs a brand more. A spot on a magazine cover alone carries a hefty price tag. By comparison, a sponsored post on an official account is far cheaper — and, to be clear, this does not mean KOLs have no independence, only that their independence is easier to lose than an institution's.

4. See-now-buy-now: who gets the better deal?

Even though luxury brands have, for now, chosen to work with Instagram for marketing, no one can yet say whether it actually works.

Burberry is the clearest example. Years of diligent investment in digital communications could not stop the company from losing the numbers it deserved to lose when its management strategy and product went wrong. What's more, this very year Burberry stated plainly that it did not know how to make money from its 40 million social-media followers.

The relationship between luxury and Instagram may resemble its relationship with fashion magazines: water that can carry the boat and also capsize it. If fast fashion's supply-chain speed put pressure on luxury brands, Instagram — through faster, more transparent information — changed the whole value chain. For brands, consumer demand and standing have shifted; for fashion media, the "information asymmetry" that once fed them has evaporated.

"If the basic flow of the whole value chain is design, presentation, ordering, production, and sales — five stages — fashion week used to sit at the 'presentation' stage. Now it is moving to 'sales.' This is largely because social media like Instagram lets people see what's on the runway at once and feel an immediate urge to buy — that's 'see-now-buy-now.' Everyone is talking about Instagram; it has changed everything." So Simon Locke, founder of the online buying platform order.com, told QDaily during Shanghai Fashion Week.

Selling goods is not the same as putting on a show. Consumer impulse is fleeting, and see-now-buy-now is simply an attempt to turn that impulse into a sale the moment it strikes. Making it happen takes an enormous effort.

Take the supply-chain overhaul for Burberry's 2017 spring-summer collection (for the full details, see BoF's in-depth report):

• Designing: before, design began in May, the show was in September, and factories were contacted afterward; now design begins in January, the show is still in September, but in between the brand has already started talking to the supply chain.
• Sampling: samples must be finished by June, not September.
• Campaign shoot: filming begins in June or July.
• Buyers and media: buyers and media used to wait until after the show to review and place orders in the showroom. This time Burberry held a private showroom in London in July; the media and buyers who attended had to sign non-disclosure agreements, and the images they received were watermarked with their own names to prevent leaks.
• Production: not disclosed — though it is certain the first batch of goods was largely finished and shipped to partner stores before the show.
• Marketing: photos and video clips released on Facebook, Twitter, and Instagram before the show; media coverage and advertising rolled out afterward.
• Showcasing and selling: livestreamed on Facebook Live, with sales channels opened through Facebook Messenger, Snapchat, WeChat, and Kakao. The clothes could be bought at flagship stores, on the official website, and at selected partner retailers — Barneys New York, Colette, and DFS Group in Hong Kong — while the show venue, Makers House in London, kept the runway looks on display for sale from September 21 to 27.

The result: everything runs faster.

Not everyone met the change without worry. On one hand, more than twenty creative directors left or were reassigned this year, and the line that "the new fashion-week calendar is crushing designers" was everywhere. On the other hand, once the immediate audience for fashion week shifts from professionals to consumers, the content and form of the shows are bound to change too.

Fashion and luxury consultant Jean-Jacques Picart told Vestoj: "The fashion industry has gotten much worse since Tom Ford joined Gucci in 1994. From then on, we developed two separate strands in fashion — business and spectacle, catalogue and editorial. We ended up with two different languages of fashion, or two ways of looking at it. The red carpet became extraordinarily important, and fashion became a form of mass entertainment as it never had been before."

Luxury has always sold "time" — this is an industry that prizes patience and accumulation. To be pushed into spending every day gauging mass taste, chasing a "win the comments section, win the world" logic, is an awkward spot for anyone to be in.

5. Why has the industry rediscovered its passion for fragrance?

Among luxury brands, one that has scored on both reputation and sales the way Gucci has is a rare thing. One theory holds that Gucci has grasped, very well, "what modernity means." Before Alessandro Michele, labels like Celine were claiming the runway with spare, restrained "normcore," but for consumers conditioned by the internet to crave novelty and stimulation, that look was not expressive enough.

Like Vetements creative director Demna Gvasalia, Michele's aesthetic also reads as a real gamble. No one had seen a Gucci this gaudy — frenzied embroidery piled onto clothes, shoes, coats, and bags, with nerd glasses on lavishly dressed models.

But a few details reveal the calculation behind it. The bees, coral snakes, and butterflies in the embroidery, and the double-tiger-head motif on the Dionysus bag's clasp, both fit the "return to nature" trend that has run through sport, food, and dress in recent years and lend themselves to a Greek-mythology narrative for "storytelling." Adding white sneakers at just the right moment fused sneaker mania, streetwear, and the personalization craze in one gesture. And on product strategy, bags were promoted to the main line, taking the place once held by menswear. In the collaboration with graffiti artist Gucci Ghost, Michele even introduced a Pandora-style "bracelet plus charm" format — a single charm costs "only" a thousand-odd yuan.

Clearly, most luxury brands are still unwilling to take that kind of risk. LV, Dior, and others have chosen instead to build out the fragrance lines they previously lacked, while Hermès has put its marketing focus on the silk scarves that performed worst in its financial results. After all, as Bain's report puts it, "as the middle class grows and the base of the luxury pyramid widens, entry-level products will draw ever more attention."

Given all this, fragrance has become the perfect choice.

Fragrance faces a higher production barrier than handbags. There are far more experienced bag-makers than skilled perfumers. The reason is simple: over the decades when commercial fragrance ran rampant, the industry built up little talent of its own — everything was handed to outsourcing companies like Coty. Now that niche artisan fragrances are having their moment and consumers are rejecting the homogeneous, the big conglomerates that did not prepare in advance can only build their edge in fragrance quickly through acquisitions.

It is rather amusing that it was the internet that gave rise to niche fragrance and the long tail — and it is KOLs who have spread these brands.

That said, luxury brands need to remember: what sustains this industry will be neither fragrance nor KOLs.

Robin Schulie, director of brand economics and buying for Maria Luisa, put it well in a comment on the industry's current state: "When an industry makes its money not from the products it ought to be selling but from other, peripheral products, it is bound to be seen as a failing industry. As far as I'm concerned, what we are in now is not the 'fashion industry' — it's more like the 'illusion industry.'"

What an ancient business can possibly mean to the consumers of the future — that, perhaps, is the most basic question of all.

Cover image from wallpaper.com