Thursday 8 October 2009

Can Luxury Goods Survive in the Online Environment?

Finding business models that work for the on-line sale of goods continues to be work-in-progress. Perhaps the best-known attempt to propose an appropriate model is Chris Anderson's (editor of Wired magazine) notion of "the long tail." As set out in his book of the same name, the idea is that bricks-and-mortar distribution is characterized by severe limitations on space and the like -- such as a limited shelf space -- that have the effect of limiting the number of goods that can be reasonably offered. Liberated from the physical restriction of space, niche products -- the long tail -- can enjoy commercial success via online sale and distribution.

Different views have been expressed on just how generalizable is the notion of the long tail. I thought about this question in reading an article entitled "When Cheap is exclusive: Selling designer goods online, "that appeared in the September 5th issue of The Economist. The gist of the article is that a number of online sites have sprung up (in the current jargon--"e-tailers") devoted to the sale of so-called luxury goods online at discount prices. While the bricks-and-mortar luxury good stores, such as Bloomingdale's and Sax Fifth Avenue, are finding themselves stuck with increasingly large stock of unsold merchandise, the e-tail business for luxury is thriving, in large part as a discount price distribution alternative to dispose of this unsold inventory.

What is interesting is that the attraction of these sites (such Gilt Groupe, HauteLook, Rue La La and is in fact a combination of discounted prices together with a customer structure that seeks to preserve the sense of exclusivity that is so important for the sale of luxury goods. Thus these sites may be used only by members, who themselves have been asked to join only another member. As well, the sites frequently run 24-hour sales on a frequent basis, thereby attempting to maintain a high level of interest by customer members.

According to the article, the same designers and purveyors of luxury goods who would resist widescale discounting of their luxury products in the traditional stores are prepared to do so in an online environment. The key to success of an e-tailer site selling luxury goods is how well the site creates a "theatrical environment", despite the discounting of the luxury brand.

So what is one to make of this development? Several thoughts come to mind.
1. A major ingredient of the sale of luxury items in a bricks and mortar world is the ability to manage selective distribution of the product, which thereby serves to support a premium price level. Customer exclusivity is a function of the drawing power of the luxury goods being sold, and of the ability of the brand owner to get the customer to pay the premium price.

2. However, selective distribution seems light years from this approach to selling luxury goods online. In the e-tailing experience described in the article, exclusivity becomes a direct function of limited access to membership at the site. This sense of customer exclusivity is reinforced by the fact that the goods at sale bear luxury labels, even if these goods are being discounted. This is no minor accomplishment. Try to count the number of discount retailers that you know where exclusivity is accompanied by material price discounting of luxury goods.

3. Given this seemingly unnatural combination of exclusivity, luxury goods, and price discounting, how will the discounting affect the long-term aura of the luxury brand? It is difficult to believe that a luxury good can maintain its upscale reputation in the face of a continuing public perception that the luxury product is being sold at a discount.

4. It is true that customer exclusivity could have the effect of softening any such blow, because the relevant public is thereby limited in scope. Nevertheless, assuming that the on-line customer base is roughly similar to the typical customer for the luxury product in the bricks and mortar environment, the word will get out to the relevant consumer population. This cannot be a very positive result for the brand owner.

5. Assuming that e-tailing of luxury goods online threatens the long-term value of the brand, perhaps the answer to the question raised in (3) is that the luxury goods industry is prepared to tolerate the discounting of its products online only for a limited period of time. Under this view, these e-tailer sellers of luxury goods serve to provide another channel of sales only as long as the economy remains sluggish and the exuberance of customers to pay a premium price for luxury goods is diminished. Once the economy recovers, the luxury goods industry will take dead aim at these online distributors.
The upshot is that the long-term relationship between luxury goods and the online environment remains unclear, whether long tail, no tail, or fairy tail. It is a saga worth following.

Pray for the Luxury Good

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