The future of luxury retailing post-pandemic

The future of luxury retailing post-pandemic

Mark Beresford
March 1, 2021

Edgar, Dunn & Company (EDC) has built up a unique knowledge pool of payment optimisation scenarios, which has been applied to different retail verticals – including the luxury sector. Over the last decade, we have worked with some of the world’s leading luxury brands, and we believe we have the formula for success, by turning what is commonly a payment pain point, into an enriched and happy customer journey.

We have found that luxury will prioritise bricks-and-mortar and physical interaction with consumers over online sales. Increasingly, the luxury sector is being reshaped and this is characterised not only by the growth of online sales as a result of the pandemic but also by the digitalisation of the consumers’ entire shopping journey, regardless of the channel.

Amid the Covid-19 pandemic, the luxury sector has incurred a significant fall in revenues. As non-essential merchants have been forced to close their physical stores to help stop the spread of the virus, e-commerce emerged as the only channel for luxury brands to ensure sales. As such, online sales for personal luxury goods have been estimated to reach $49Bn in 2020, a 48 percent increase compared to the previous year.  Moreover, we can expect a future increase of luxury e-commerce at the expense of brick-and-mortar, with online sales for personal luxury goods expected to reach 25 percent by 2025, as opposed to 8 percent in 2018.  To help high-end brands shed the excess inventory they built up during lockdown and facilitate their growth, Alibaba has launched a new luxury platform in May 2020. The platform also aims to connect with China’s Generation Z shoppers, who are said to dominate the luxury spending in the future. Luxury brands such as Cartier and Gucci have already seized the opportunity to meet their clients digitally by launching flagship stores on Alibaba’s platform. Similarly, in September 2020, Amazon Fashion launched Luxury Stores, featuring the brand Oscar de la Renta. The Amazon mobile app aims to make online luxury shopping easier and more engaging by allowing customers to explore styles in 360-degree detail.

At the same time, with the global luxury goods market slowly but surely moving more towards online retailing, digital-native luxury companies such as Warby Parker, Bonobos and Glossier have increasingly started opening up physical stores. While some may regard it as a counterintuitive move, this physical presence allows them to increase traffic to their e-commerce stores, enhance brand legitimacy, provide the touch-and-feel lacking in an online store and improve the local community engagement, which is a paramount aspect within luxury. Therefore, stores are critical to the luxury experience, whereas e-commerce in luxury is more about storytelling rather than selling.

Enhancing customer experience through payment optimisation

Regardless of the channel, payment is a key part of the luxury experience. At EDC, we believe that by focusing on four metrics, luxury retail brands can optimise their customer experience through payment efficiency improvements:

Source: EDC Four Focus Framework for Payment Experience Optimisation

1. Increase sales revenue through customer experience design

The first step to building a comprehensive understanding of how to increase sales revenues is to examine conversion and design the most effective customer journey. Regardless of the channel or the payment method, converting a potential customer into a successful sale will directly lead to increased revenues. Conversion rate is directly related to the return on investment of a company’s marketing spend, but it also comes from a clear payment acceptance strategy.

Farfetch, a luxury fashion brand, is an e-commerce portal for luxury boutiques. It has successfully positioned itself as a technology provider for brands, combining technology and fashion to provide unique in-store customer experiences. Starting from humble beginnings in 2007, Farfetch now serves diverse customer segments across 190 countries. Its latest revenue was announced as $437.7Mn for the third quarter of 2020, representing a 71.3 percent growth. Farfetch has recently announced a global partnership with Alibaba and Richemont to accelerate the digitisation of the luxury industry. These strategic partners are expected to invest $1.15Bn in Farfetch and the new Farfetch China joint venture. Farfetch is bucking the trend when compared with other luxury brands.

There has been a transformational change in consumer behaviour as a result of the pandemic. Shifting customer behaviour can take years, and in some cases, it can take a generation to change. What we have seen in the last 12 months is a change in consumer behaviour, and the new normal is digital transformation. Customers are now increasingly expecting a digital-first and mobile-first shopping experience, from product search to self-service checkout. Social commerce is expected to develop at a spectacular pace, as more consumers subscribe to new platforms, such as TikTok, which has reportedly been downloaded by 34 percent of the world’s population. Luxury brands should keep an eye on such trends, as digital platforms can generate entirely new customer behaviours and customer journeys in a world of connected commerce.

2. Reduce payment friction by increasing the use of data

Frictionless payments or frictionless commerce is a method of using data from POS devices, apps and websites to integrate buying opportunities as seamlessly as possible into the consumers' everyday activities and natural environments. More art than science, but reducing payment friction at any point of interaction for the consumer is a key component of omnichannel commerce or connected commerce. The maturity of online and the importance of the smartphone sales channels, alongside an increasingly sophisticated ecosystem of connected devices and apps, has disrupted business models, as well as how consumers transact. Huda Beauty, one of the world’s fastest-growing beauty brands, ran an immersive retail experience pop-up right in the centre of Covent Garden, London, to launch a new product range and reach new customers. These innovative luxury brands are creating a high-performing user experience across this constantly evolving set of channels. Success requires a sound understanding of different technologies, market trends and customer behaviours. Nowadays, data is driving how to price and promote products or services to generate more revenue, and how to optimise inventory management and the supply chain from a click or a contactless transaction through to home delivery.

3. Automate reconciliation

One of the common themes that the EDC Retail Practice comes across in all our client engagements with leading luxury retailers is the challenges that they have with financial reconciliation. Proper end-to-end reconciliation involves analysing and comparing transaction records from the point of origin – which for most retailers, not just luxury retailers, is the point of sale (POS) – to the third-party provider involved in that transaction. This is further complicated when the retailer operates a variety of sales channels – in-store, online, over the telephone, or via mobile. This aims to provide the most accurate view of what really took place, along with information on the financial obligations that exist between the key stakeholders – the merchant bank, the acquirer, the payment gateway, the payment scheme, the consumer’s bank, and so on. Fully automated or semi-automated reconciliation processes are essential to all retailers, as they not only put an end to manual, labour-intensive processes, but they have the potential to save unnecessary costs significantly. We have seen savings as much as 15 percent just in the operational costs of a financial team, realised through automation or semi-automaton of reconciliation processes. Luxury is no exception – there are a number of best practices that the financial team could deploy. EDC has seen that the more traditional the retailer, the more likely they are to operate a legacy back-end system and technology that simply cannot cope with the new developments in payment processing and payment methods. Too many manual workarounds exist.

The one area of focus that luxury retailers must consider is exception processing. A reconciliation and settlement solution that has been built for end-to-end reconciliation, easy exception management, and simplified reporting is not necessarily available out of the box. Numerous merchants have built in-house solutions that fail to incorporate the modern processes required to cope with dispute management, fraud prevention, returns, refunds, and effective define chargeback claims. The luxury sector is shipping inventory, which makes handling exceptions meticulously within a frictionless process even more crucial. Any exceptions to the norm can lead to potentially unhappy customers and damage the brand’s reputation.    

4. Reduce cost with smart use of payment information

EDC uses a proprietary methodology called the 360° Payments Diagnostic, which assesses the payments strategy of retailers to identify and prioritise cost reduction and revenue enhancement opportunities. The 360° Payments Diagnostic encourages the smart use of payment information as a valuable tool and is a proven process to reduce operational costs, improve revenues, and engage customers across all channels, regardless of their preferred payment method.

One of our clients sold luxury goods across 17 different European markets through standalone boutiques, high-end department stores, and its own e-commerce website. The merchant operated twelve different acquiring relationships with a total sales turnover close to $1.6 Bn. EDC conducted a 360° Payments Diagnostic on the acceptance of payments, both for card and alternative payment methods, across the client’s entire acquiring contracts. Based on our experience and knowledge of the markets where the client operated, EDC modelled distinctive payment acceptance scenarios using the data collected to categorise the electronic payments traffic more efficiently. EDC created business requirements and conducted a request for proposal to optimise the acquirers more effectively based on the payment scenario that reduced the number of acquiring contracts. As a result of this engagement, we identified around $10 Mn of savings over a 3-year period, representing 11 percent Cost of Payment Acceptance (CoPA) savings.

Conclusion: A post-pandemic future for luxury retailing

Luxury brands and retailers are now increasingly using digital technologies to capture emerging customer preferences and enhance customer relationship. While the pandemic has reinforced the growth of luxury e-commerce at the expense of physical retail, the importance of brick-and-mortar within luxury remains undisputed. Both channels thus require luxury brands to create smooth customer journeys – which includes optimising payment processes – something for which we believe might just have the key.

Beatrice Sava, a Business Analyst based in the London office, provided additional research and analysis for this article.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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