Retailers see potential for growth — especially in luxury — in the promised land of e- and m-commerce, but it’s not without a downside.

The same retailers yearning for store traffic are racking up sales gains online.

This story first appeared in the April 13, 2016 issue of WWD. Subscribe Today.

It’s particularly pronounced in the luxury sector, where companies such as Saks Fifth Avenue and Neiman Marcus are personalizing their dot-coms; making transactions faster and easier; enhancing the assortments and visuals; beefing up editorial content and social media, and getting consumers at ease shopping the Web.

“Thirty percent of the business at the Neiman Marcus Group is online,” Karen Katz, president and chief executive officer, told WWD. Asked how Neiman’s got to that high level, Katz replied, “We started 17 years ago and became the first luxury store online. We’ve invested in the business over the years and we have a terrific lineup of vendors and categories online. We are making sure customers have an easy, seamless, very memorable kind of experience.”

“Without a doubt, digital is a growth engine for luxury,” said Marc Metrick, president of Saks Fifth Avenue. “At Saks, we see our digital presence interdependent with our stores. We believe each channel has some inherent advantages — experience and entertainment in stores, great, detailed product information online — that are made more powerful when considered holistically.”

As Metrick suggested, digital operations are a hook to attract younger customers, which many luxury brands need to a greater extent. “We know Millennials are highly engaged online and our digital offering plays an important role in helping them understand our brand and how we can play a role in their lives.”

Last year, at Hudson’s Bay Co., parent of Saks, Lord & Taylor, Hudson’s Bay, Galeria Kaufhof and Saks Off 5th, digital sales gained 23.2 percent on a constant-currency comparable basis.

How much can e-commerce grow? Nobody knows for sure, and most retailers and pundits don’t care to predict. “We talk about this all the time,” Katz said. “If somebody asked me 10 years ago whether we would get to 30 percent, I would have said, ‘Are you crazy?’ But we never had the skepticism others had.”

What has become clearer to retailers is that digital selling, while burgeoning as the performance at brick-and-mortar drags, does have limits to profitability. Returns of 30 percent or more, rising fulfillment and shipping costs, and wear and tear on merchandise all gnaw at the bottom line. Luxury returns are greater than those in other categories because customers paying high prices for products are more discerning.

Additionally, with returns, the more time it takes from fulfillment to consumers getting the item back to a store or warehouse, the harder it is to sell again. As time passes, the merchandise loses value, especially in this age of fast fashion.

There’s also evidence that the rate of digital sales growth is slowing. Digital’s share of consumer discretionary spending, which peaks in colder months, reached an all-time high in the fourth quarter of 2015 at 15 percent, and seems to be spurred by the impact of mobile, according to Comscore, which measures consumer behavior in the digital world. Online retail grew 14 percent last year, though the fourth quarter saw “a material slowdown in the growth rate” partly due to a tough comparison to a strong fourth quarter in 2014, Comscore said.

The fastest-growing products online are inexpensive and less complicated. Comscore listed computer hardware as the number-one category in digital commerce, but cited increasing strength in apparel and accessories in large part due to mobile commerce.

According to one marketing executive who requested anonymity, the majority of what luxury retailers sell online is accessories and cosmetics — products that are easy to replenish. “There’s money to be made there in the luxury sector,” the source said. “Consumers have gotten very comfortable with shopping online, especially with trusted brands. I don’t think there is such a huge obstacle to buying something expensive online anymore. Will they all switch from stores to online? I don’t think so.”

“In a high-touch business, there is a limit to how much you can handle profitably on an e-commerce basis, given a luxury customer’s propensity for experiencing the fabrication, the fit and the feel,” observed Arnold Aronson, partner and managing director of retail strategies at Kurt Salmon. “You don’t get the full experience. It’s limited in terms of choice. There is less suggestive selling, no real human contact, and overall, limits to the degree of customer satisfaction that can be achieved, which reduces the profit potential. The higher the price and complexity of the merchandise, the greater the chance of a return and of a consumer feeling unsatisfied by the experience. In the store environment, there is much greater certainty of closing the sale. The environment, particularly with designer and luxury stores, is built to sell.”

“Pure-play retailers are not making money,” added Tom McGee, chairman and ceo of the International Council of Shopping Centers. “They’re not a threat. They are going to have to adopt a physical strategy. With consumers, it’s likely that the higher the price, the more they will want to touch it and feel it and feel confident in the luxury nature of it. Think of Tesla — they are leasing space in shopping centers to showcase luxury cars.”

“Well, I certainly am struggling to override eMarketer, Forrester and Luxury Daily’s predictions in the 12-15 percent range, but what’s missing is the truth and discovery of how much consumer behavior is changing,” said Chris Paradysz, ceo of PM Digital. “Looking at numbers according to ‘e-commerce’ kind of misses the point of being an omnichannel marketer and seeing the impact of the millions of dollars spent investing in technology and marketing to get out of silos. What really matters is that brands have now seen the fact that their customers are browsing, shopping and buying from everywhere, at any time, and across multiple screens….If we know a multiple-channel customer is worth 50 to 100 percent more in value over time, then we ought to be accelerating our investments in digital to store and in-store digital marketing. I attended a ceo conference for fashion execs recently, and many were saying that they were going to move more dollars back to the stores and cut down on their digital spend. Why is it either or? It needs to be both.”

“Our customers don’t see us as mobile, desktop, or in store, they see us as Saks,” Metrick said. “As each customer engages with the various facets of each channel differently, I view our role as making sure that she has a truly ‘Saks’ experience, no matter where she engages with the brand.”

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