Luxury players may be more resistant to recession, but they are feeling the impact of rapidly shifting shopping patterns, and the need to intensify efforts to win over consumers, convince existing shoppers to shop more and innovate.
Those themes rang out at this week’s National Retail Federation “Big Show” convention and expo at Manhattan’s Jacob K. Javits Center, which attracted close to 40,000 attendees, scores of heads of leading retailers and brands, including many in the luxury sector.
“There’s no such thing as being immune from a recession,” said Anish Melwani, chairman and chief executive of LVMH North America, during a session at the Big Show. “Remember, our product portfolio isn’t exclusively at the ultra high-end. We have Sephora; we have many brands that certainly are more democratic in their pricing. I don’t think that any company is immune.
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“Thanks to our leadership in Paris, we’re a very conservatively financed company, and so we have the financial wherewithal to withstand economic shocks,” Melwani added.
He suggested that based on what he’s been hearing in the media and elsewhere, if a recession occurs, the impact won’t be as bad as the COVID-19 pandemic or the Great Recession of 2008. “Time will tell what this next period brings,” he said. “To the extent that there is a softening in the economy, the main preparation we have is our financial strength.”
There have been reports that aside from a few luxury brands, such as Hermès and Chanel, the luxury sector is slowing after several seasons of incredible growth, partly because consumers are shifting their dollars to experiences and away from buying stuff, and Chinese tourism has dried up due to a weakened economy and COVID-19 crisis.
But Melwani characterized luxury as “sticky” for two fundamental reasons. “Like all things related to fashion, it’s very connected to identity. And so once you adopt luxury, once you start wearing luxury, it’s part of your identity. Most people don’t want to go backward.”
Luxury’s stickiness also has to do with its “genuine scarcity” and incorporation of “only the best materials and the best techniques,” he said. “Once you experience that, again, it’s difficult to go back.”
He said the LVMH luxury business “continues to see strength” and LVMH “thrived” during the COVID-19 period.
Melwani characterized 2022 as the year of travel. “Call it revenge travel, call it a new normal, and we’re still waiting to see how all that plays. There’s no question that we saw demand rise dramatically from a travel perspective.” He said LVMH’s hotels, Belmond and Cheval Blanc, saw a spike in business after having difficulty earlier in the pandemic.
“If anyone’s taken any holiday recently, you know that the inflation in airfares and hotels is not the 6, 7, 8 percent that you’ve seen in the CPI. It’s 60, 70, 80 percent.
“The other big factor is how many Americans have been shopping in Europe,” Melwani said. “On some weeks last summer, for example, at a boutique in Paris, 30 percent of the businesses came from American tourists. So that’s a phenomenon that we certainly hadn’t seen before.” Currency exchanges favoring the dollar helped that trend.
In terms of innovation, he said LVMH takes Web3 “very seriously,” and has hired several people to work in the metaverse. “But like with any innovation, we are looking at in a way of how it actually reinforces the characteristic DNA of LVMH brands.”
In 2021, LVMH became one of the founding members of the Aura Blockchain Consortium, along with Prada Group, Mercedes-Benz, OTB and Richemont. The consortium promotes the use of a single global blockchain solution for luxury brands to provide consumers with additional transparency and traceability. “If you’re purchasing a product, you actually have a certificate that the item has been tracked from the time it was mined, all the way to where it was cut, polished and sent. And you can be completely confident that it hasn’t been tainted along the way by any illicit practices,” Melwani said. “We believe that, going forward, especially younger consumers will care more about the raw materials that go into the things they invest in. And we believe this consortium will provide an industry standard that across luxury brands can be used to give consumers that confidence.”
In another session, Geoffroy van Raemdonck, CEO of the Neiman Marcus Group, discussed the luxury retailer’s approach in a challenging economy. “What’s next is really to continue to grow the relationship and to reach more people,” he said. “It’s great that we have 2 percent of our customers who [generate] 40 percent of our revenue. The big focus we have is how do we recruit more people who have that potential? And then even more pressing is when we look at the customers we have today, how do we migrate them to become their destination of choice and more of their share of wallet. So today, as much as we are happy with the results we had last year…in fiscal year 2023, I’m asking the team to really focus on how we operate in a volatile environment to strengthen the relationships [with customers] because we can invest in the business.”
There are reports that Louis Vuitton and other brands have been pulling away from their distribution in department stores in favor of their own stores and websites. But van Raemdonck said, “The question is always are they going to go direct. Are we going to be dis-intermediated. And right now what we’re seeing is just the opposite.”
Top luxury brands have increased their distribution with Neiman Marcus stores as a means to access their customers, he added.
Aside from striving to increase, rather than lose, points of distribution with luxury brands, NMG is planning to take bergdorfgoodman.com internationally through its partnership with Farfetch, which invested $200 million in NMG last year.
Van Raemdonck said bergdorfgoodman.com “could be and should be global. And so it’s going on the Farfetch platform,” which will help with currency conversions, translations, call center and other operations. “And that allows us to scale to as many countries as we want, up to 200.”
For NMG, online- and store-generated revenues, “I actually don’t believe that it will be 50-50. Today it’s less than 20 percent,” online. Ultimately, “it might be 25 percent to a third online.…What we’re clearly seeing is when we migrate someone from online to the store, the average order value increases.” He said people are “social creatures,” meaning they want human interactions from stores, and want to touch and feel products. “There are some products that you don’t buy online,” he added.
In another NRF session, Michael Ward, managing director of Harrods, said his company opted to work with the technology arm of Farfetch, called Farfetch Platform Solutions, rather than spend “an obscene amount of money” to independently revamp its website. He likened the situation to a chimpanzee battling a gorilla and decided it made more sense to work with the gorilla than fight it.
He looked into his crystal ball and said he believes traditional wholesaling in the luxury arena will “gradually disappear” and be replaced by an e-concession model where brands have more control over their future.
But Harrods is not about to give up without a fight, so it too turned instead to Farfetch to help it navigate this evolving situation.
“The future of online luxury commerce is about a connected retail experience,” said Kelly Kowal, chief platform officer of Farfetch Platform Solutions. As the pandemic eased around the world, physical stores regained their footing, so the trick is to find a way to “holistically” blend online and offline.
For Harrods, this translates into not only offering shoppers an extraordinary in-store experience but also work to recreate that same feeling online as much as possible.
“Crusty old Harrods has to be more flexible,” Ward said.
Having a strong technological base can also help retailers better service their customers in each channel. Harrods invested heavily in algorithms that provide data, which allows it to personalize the customer experience. Ward said the store will quadruple the size of its private shopping area this year and will use the data it captures from these algorithms to better predict what customers will be attracted to when they arrive in the store.
But he cautioned that technology is not the be-all-and-end-all. Buyers still need to have the flexibility to purchase items that are new and intriguing and may open up a whole new stream of sales.
With contributions from Jean E. Palmieri