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Altagamma: Retail Integration Is Key

The Italian luxury goods association presented new market research at its annual retail insight summit in Milan on Monday.

MILAN — Retail integration is the winning formula for luxury brands, according to Italy’s Fondazione Altagamma — a strategy that covers all distribution channels, from directly operated boutiques to online stores, shops-in-shop and outlets in both traditional and emerging markets.

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And size matters, said Armando Branchini, executive director of the luxury goods association, at the Altagamma Retail Insight 2012 summit held here Monday.

“Big players have a competitive advantage in terms of visibility, awareness, growth of sales points, profitability and contractual power,” said Branchini.

So much so that small players must turn to alternative solutions to face retail’s fixed costs. “Click and mortar,” the integration between physical and online stores, offers a way to reduce costs with smaller spaces and inventories and increase productivity, he said, pointing to the first Altagamma Retail Evolution study.

“Smaller stores can be the first steps to engage customers to have them go through the shopping experience with smaller assortments, reduced space and better service, and even have an Internet connection from the store to order from there,” said Branchini.

The research shows how the development of retail was the main driver for luxury goods brands over the past 20 years, in particular in emerging markets, and how it also allows tighter control of image and a direct relation with shoppers. “Retail has helped promote globalization, and it has been fundamental, especially in China, where there are mainly shopping malls,” said senior luxury analyst Luca Solca. “Retail, though, is a double-edged sword, as it must submit to the tyranny of sales productivity.”

According to the Digital Luxury Experience study by Altagamma and McKinsey & Co., based on a survey of more than 300 firms in the luxury segment, the online channel is the one that is growing the fastest, as shown by companies’ significant increases in investments.

Online sales of luxury goods are increasingly significant in the sector, totaling 6.2 billion euros, or $8.6 billion at average exchange rates, in 2011, or 3.2 percent of the industry’s revenues, up 20 percent compared with 2010, growth that is three times faster than the entire industry. Online sales are expected to grow 20 percent annually and reach 15 billion euros, or $19.7 billion at current exchange, in 2016.

“If you consider the indirect effect — purchases made in stores but generated by online decisions, the digital market increases by 17.5 billion euros, or $23 billion — or 10 percent of total luxury sales in 2011,” said Marco Mazzù, a McKinsey partner.

Mazzù predicted that, in the next 10 years, the digital channel will be, together with Asia and South America, the most promising “geographic” market for the growth of the luxury goods sector.

That said, companies are challenged by increasingly sophisticated online shoppers who rely on information from an average of four different sources — but less from social media and bloggers — and demand increasing service, such as faster deliveries and dedicated offers.

According to the Altagamma Index of Best Performers in the Luxury Digital World study, based on an analysis of 300 brands around the world, there were 154 top performers, of which 39 are Italian brands. The best performers on the Customer Decision Journey in fashion apparel were Burberry for awareness, Loro Piana for consideration and Moncler for loyalty. In Fashion Accessories, they were Louis Vuitton for awareness, Gucci for consideration and Jimmy Choo for loyalty. Other charts focus on a brand’s performance on Facebook, Twitter and YouTube.

Service remains a top priority for brick-and-mortar, too, noted Salvatore Ferragamo chief executive officer Michele Norsa.

“Customers are traveling more, and we must have the ability to innovate and improve the quality of space and lighting,” he said. “Retail means capital expenditures. Also in light of the evolution of markets, there is a need now to renovate stores faster, compared to the past when [a store concept] could last even 20 years.”

The executive believes retail needs to account for two thirds of a brand’s total sales.