Sky-Is-Rising-Luxury-Goods

SPECIAL REPORTLUXURY GOODSNovember 2014Michael Masnick, Michael Ho, Joyce Hung

Published 2014 by CCIA

OVERVIEWThis is the third in our Sky is Rising series of papers, looking at data on specific industries that are being impacted by the internet.As with the previous two papers, which focused on various creative industries, this third paper looks at some industrieswhere the stories being told about the economic impact of the internet have been quite mixed. Specifically, this paper looks at theimpact on the luxury goods market. While, at first glance, this may seem like a shift from the previous papers, it fits in with the basictheme that a variety of industries are being impacted by the internet, and the full story about the impact is often not being told.When it comes to the luxury goods market, we’ve certainly seen a fair amount of disruption in the market. The luxury goodsmarket was traditionally defined by a small number of very high end players, who had tremendous control over their supply chainsall the way down to the retail level. The internet has definitely shaken up that space and created new challenges for the luxurygoods market, whether it was in allowing new entrants into the space, or breaking down some of the control over the supply chainand building up viable secondary markets.The main goal of this paper is to look at the internet’s impact on the luxury goods market, and whether or not it’s been beneficialor harmful. What we found is that, even with the global economic problems of the past few years, the luxury goods marketis thriving — especially for brands who embraced the internet, digital marketing and innovation. Traditional players in the spacewho have adapted have seen tremendous success, and the opening of new opportunities and markets. Many new entrants havebeen able to jump-start their own offerings as well, and build up markets that were previously nearly impossible to enter.On the whole, the luxury goods market has been growing worldwide. Even during the worst global recession in decades, themarket grew from €153 billion (about $201 billion) in 2009 to almost €217 billion (about $285 billion) in 2013, a 42% increase, ata CAGR of 9%. While it’s still a small portion of the total, direct online sales of luxury goods more than doubled from €2.5 billion(about $3.3 billion) in 2007 to €9 billion (about $11.8 billion) in 2013 at a CAGR of 24%.LUXURY GOODS MARKET» GLOBAL TOTAL€225-billionONLINE LUXURY GOODS SALES» GLOBAL TOTAL€9-billion€200b€6b€175b€3b€150b2009€153b2010€173b2011€192b2012€212b2013€217b2007€2.5b2008€2b 2009€3.6b2010€4.5b 2011€5.6b2012€7b 2013€9bThe Sky Is Rising: Luxury MarketsFloor643

Meanwhile there has been tremendous growth and opportunityin new markets. For example, the rise of China asa consumer of luxury goods has grown tremendously, nearlytripling from 2006 through 2010 — and online sales ofluxury goods in China are a large and growing part of thatmarket.In nearly every part of the market we looked at, we foundgrowth. The luxury fashion and accessories markets showedrapid growth over the past few years — with online sales aLUXURY GOODS MARKET» GLOBAL, BY SECTOR€320b€290b€260b€230bAUTOAPPARELACCESSORIESJEWELRYlarge and growing segment of the market. The jewelry markethas practically doubled in just the past few years, and despitethe depressed sales of cars during the recent recession,the luxury car market has seen solid growth as well.Much of this growth can be attributable to the internet.Internet companies that focus on luxury goods have seenrapid growth over the past few years. The amount of moneyspent online for luxury goods continues to grow at a rapidpace — and the majority of “newcomers” to the market nowbuy online.The role of the internet in the buying of luxury goods isalso complex, showing that the internet is a key part of theecosystem. Even when buyers purchase luxury goods offline,the vast majority use the internet to get information abouttheir purchase or to do comparison shopping.Innovative e-commerce platforms like Kickstarter, Etsy, IndieGoGo,Amazon, and eBay — while not considered “luxury”platforms themselves — have also introduced some interestingonline retail strategies that traditional luxury playerscould mimic, as they have enabled a growing number ofupstarts to compete directly with traditional retailers withouthaving to go through the long and involved process ofsetting up detailed retail networks and distribution partnerships.Overall, the report will show how successful the luxurygoods market has been over the past few years, and how theinternet has been a key component to that success — creatinggreater awareness, greater opportunities to buy, morecompetition, valued innovations and much, much more.€200b€60b€50b€40b€30bFor the luxurygoods market,the sky trulyis rising.2009 2010 2011 2012 20134 Floor64 The Sky Is Rising: Luxury Markets

MARKET TRENDSLuxury is a relative term whose definition depends onwhat the user considers to be luxury. For example, a Rolexwatch might be considered a high-end luxury item for theaverage consumer, while a wealthy consumer might considerit to be a normal everyday watch. However, most consumerstypically perceive luxury products as being expensive, desirable,and non-essential items that possess attributes such asrarity, exceptional quality and craftsmanship, and exclusivityto the individual.The total global luxury goods market has grown from €153billion (about $201 billion) in 2009 to €217 billion (about$285 billion) in 2013 — a 42% increase at a CAGR of 9% — experiencingdouble-digit growth three years in a row, despitethe economic recession. According to Bain & Co., the luxurygoods market outlook in 2014 remains positive, despite theeconomic uncertainty, with expected growth rates of 4-6%in the Americas, 2-4% in Europe, 9-11% in Japan, 3-5% in theAsia Pacific region, and 2-4% in Mainland China. Driving thegrowth of the luxury goods market are the emerging middleclass in developing markets and the growing number of millionaires.The aspirational masses in mature markets and therising middle class in emerging markets account for morethan half of the luxury market. Millionaires include “newmoney” and “old money” households, which make up 30-35%and 10-15% of the luxury market, respectively.However, the recession has created a new kind of luxuryconsumer – younger, web-savvy consumers who know theirway around the internet and are looking for good dealsonline. These newcomers make up 61% of luxury consumersand 36% of luxury spending, which is about the sameamount of spending by traditional luxury consumers beforethe recession. Many luxury brands have yet to fully embracean online sales strategy, and some have only been cautiouslytesting online sales, presumably to protect their brand prestigeand historical sales, and because it would be difficultto adequately market the sensory aspects of their productsonline. However, as it turns out, the ones that have embracedthe internet have been thriving.LUXURY GOODS MARKET2009€153b2013€217b42% CAGR 9%LUXURY NEWCOMERS» AN EMERGING CONSUMER TRENDLUXURY NEWCOMERSTRADITIONAL LUXURY CUSTOMERS61% 36%CUSTOMERSSPENDINGThe luxury buying experience is changing — luxury consumersnow care more about the product than the actualin-store buying experience, which in the past, was often consideredmore important than the product itself or the brandname. Today’s luxury consumers want convenient shoppingoptions and a product experience that feels upscale and exclusive.Luxury brands are finding that they need to adaptto consumers’ changing shopping habits and expectationsThe Sky Is Rising: Luxury MarketsFloor645

in order to stay competitive. According to a 2012 McKinseysurvey, there are five strong trends in how luxury consumersshop online: they want personalized offers; they expectexceptional service, such as fast and easy checkout andsame-day delivery; they look for trustworthy product information;they want instant gratification; and they want anONLINE LUXURY SALES2007€2.5bFAST FACTS & FIGURES2013€9b260% CAGR 24%year-over-year growth experienced by87% luxury pure-play online retailers in 2010of online luxury goods sales50% are for full-price productsof luxury consumers find online69% shopping more convenientof millionaires would prefer their91% favorite brands be onlineof wealthy consumers participate78% in social networking websitesof wealthy consumers use social50% networking to connect with a brand65%92%of wealthy consumers believebrands with no social networkingpresence are out of touch.of luxury consumers use the internetto search for information about aproduct before buyingonline shopping experience that compensates for the lackof human interaction and being able to touch and feel theproducts. It used to be that luxury consumers would dressup, walk into a store and buy things based on the trustedexpertise and advice of the sophisticated retail salespeople,but now consumers are turning to product reviews from unbiasedexperts online to help them decide what to buy – inthe comfort of their own home.A 2013 Google/Ipsos study found that luxury buyers findshopping online more convenient (69%), and they like thatit can be anywhere, anytime (60%). Other reasons for whyconsumers are increasingly turning to online shopping includeweb exclusives, online-only deals, more inventory,more product options, and no sales taxes. Furthermore, sinceshoppers can often return online purchases to physical retaillocations, or return them for free by mail, there is less of abarrier to buying online. In fact, many online retailers, suchas Nordstrom, Zappos, and Amazon, typically have very liberalreturn policies to encourage otherwise hesitant shoppersto buy online. However, brick-and-mortar stores are still relevant,since they provide immediate delivery and account fora significant portion of luxury sales, and because many shoppersstill want to touch and feel the products before buying.While shoppers are increasingly choosing to buy online insteadof in-store, luxury brands now have the opportunity toengage consumers through digital channels to inform themabout their brand and products, offer personalized services,and provide a convenient way for consumers to buy exactlywhat they want without the hassle of the traditional luxurybuying experience.U.S. retail online sales increased at a CAGR of 30%, from$5 billion in 1998, to $135 billion in 2007, to $256 billionin 2013. Global online sales of luxury goods almost tripledfrom €2.5 billion (about $3.3 billion) in 2007 to €9 billion(about $11.8 billion) in 2013 at a CAGR of 24%, withluxury pure-play online retailers experiencing 87% yearover-yeargrowth in 2010. In fact, more than 50% of onlineluxury goods sales were for full-price products, refutingthe long-held belief that most online sales would be fordiscounted goods. Contrary to some expectations, 94% ofmillionaires say that selling luxury goods online wouldn’taffect their opinion of the product or brand, and 91% saythat they would like to have their preferred luxury brandsavailable online.6 Floor64 The Sky Is Rising: Luxury Markets

It’s becoming increasingly important, if not essential, forluxury brands to establish a powerful online presence in orderto remain competitive. About 70% of households in theU.S. have broadband access, with more possibly using internetat work, and others using their mobile phones instead toaccess the internet. The global online population, which was1.6 billion in 2009, will be 2.3 billion by 2014. Luxury shoppersspend a lot of time online. According to L2 Think Tank,78% of wealthy consumers (those with an annual householdincome of at least $150,000) participate in social networkingsites, with more than 50% using social media to connectwith a brand, and 65% believing that brands that have nopresence on social networking sites are out of touch. A 2013Google/Ipsos study found that more than 90% of luxury buyersresearch products both online and offline before makinga purchase. In particular, in the new markets, 92% of luxuryconsumers used the internet to search for informationabout a product before buying. The study also found that98% of affluent consumers use the internet every day, andthat they use an average of three connected devices (e.g.,laptop, smartphone, tablet) to do online research. They evenmultitask, researching products using their connected deviceswhile watching TV or reading a magazine. While 82% ofluxury purchases still happen in-store — 69% of shopperswant to touch and feel products before buying — 78% of affluentconsumers research products online before going toa physical store to make a purchase. These Research OnlineResearch Offline (ROPO) sales are often overlooked. In fact,U.S. online retail sales totaled $252 billion in 2010, whileROPO sales totaled $482 billion. Online luxury goods salesthrough Rakuten LinkShare UK increased 96% from 2011 to2012, and clicks across the network were also up 37%, suggestingthat consumers are spending more time researchingproducts online before buying.» CONSUMER TRENDSWHY PEOPLE BUY ONLINEstudy from the first quarter of 2013 by Martini MediaA showed that affluent consumers were 47% more likelyto buy online, compared to consumers with a household incomeof less than $100,000 a year, and they were 74% morelikely to buy products from a luxury retailer’s website. Thefindings further reinforce previous data showing that beingdigitally connected is important to affluent consumers. Infact, affluent consumers like to buy all sorts of goods online– even ordinary things, such as event and movie tickets.So, why do people choose to buy online instead of at brickand-mortarstores? A recent survey of more than 25,000 consumersby Shopper Approved, conducted right after they madea purchase online, asked them “What key factor influenced youto buy online instead of locally?” The top three reasons whypeople preferred to buy online: larger selection (25.4%), betterpricing (25.0%), and more convenient (24.7%). Similar resultswere also found in a recent study by Shullman ResearchCenter, which reported that affluent consumers cited betterprices (30%) and convenience (27%) as their top reasons forshopping online. Another recent study by Simon-Kucher &Partners also found that lower prices, better selection, andfast shipping were the primary motivators for buying online.Consumers in the Shopper Approved survey also chose thefollowing reasons for buying online: other (10.7%), time savings(7.2%), easy to compare (3.6%), and no sales tax (3.3%).Surprisingly, “no sales tax” was the least important reason forpeople’s decision to buy online, debunking the claims — byproponents of legislation that would require internet retailersin the U.S. to collect sales taxes on online purchases —that shoppers buy online mainly to avoid sales tax. It turnsout that 83% of online purchases are made from Big Boxstores, which already collect sales tax on online purchasesbecause they have a physical presence in many, if not all, U.S.states. Considering online sales make up less than 6% of allU.S. retail purchases, that means only about 1% of all retailsales are made without collecting tax online.It’s clear that most consumers are comfortable researchingand purchasing products online, so luxury brands shouldcontinue to increase their digital presence and marketing efforts,focusing on improving in the areas of selection, pricing,and convenience to attract more customers and encouragemore online purchases.The Sky Is Rising: Luxury MarketsFloor647

Mobile commerce is also becoming more popular. Accordingto ABI Research, more than a third (35.4%) of theconsumers it surveyed in 2011 owned three or more mobiledevices, including smartphones, tablets, and portable mediaplayers. In 2012, 15 million consumers made purchaseson their mobile phones each week. According to BrandingBrand, 39% of traffic to the Top 500 e-retailers came fromsmartphones in 2013, and smartphone use is growing sorapidly that by 2014, more than half of traffic to these onlinestores will be coming from mobile phones. Accordingto Forrester Research, retail sales in the U.S. made fromsmartphones reached $8 billion in 2012 (3% of total e-commercesales), and they’re expected to continue increasing inthe next five years. eMarketer reports that mobile commercesales (smartphone and tablet) were up 82% in 2012 to $24.8billion (11% of total e-commerce) and continued to increasein 2013. Rakuten was already reporting that 19% of its saleswere coming from mobile devices in late 2009. Accordingto comScore, some of the major reasons consumers buy viamobile commerce include: on-the-go convenience (63%);special offers/coupons (52%); easy to compare prices, findCHINESE LUXURY SPENDINGFAST FACTS & FIGURES78%2006$12.8b2013$102b697% CAGR 35%of Chinese consumers spent more than49% 11% of their salary online in 2010of Chinese luxury consumers saidthey shop online to avoid salespeople,compared to 46% of Americans and56% of Europeansthe best deal (48%); and they’re in the store and the productisn’t available (41%). PayPal reports that consumers aren’tjust buying ordinary things like books and CDs from theirsmartphones, they’re also buying more expensive items likediamond jewelry.According to a study by the Luxury Institute, 76% of wealthyconsumers compare prices using mobile devices, and 27%have actually made purchases using a mobile device. Additionally,21% will look up product information while shoppingin stores. Mobile can enhance the traditional shoppingexperience. For example, department store chain Bloomingdale’screated a mobile application that allows consumers toview additional product information and read reviews withan in-store bar code scanner. According to Jordan Phillips,the founder of Lure of Luxe, consumers don’t think of mobileshopping as a different experience from e-commerce – it’sjust a different way of buying. In the future, “mobile” won’tbe just a buzzword, it’s just going to be another importantway for people to buy things. This is especially relevant inemerging markets where mobile phones are bridging thedigital divide, providing internet connectivity to people whootherwise wouldn’t have access, and giving them the abilityto conduct financial transactions using their mobile phones.China is set to become the world’s largest consumer marketfor luxury goods. The Chinese gross domestic product isgrowing at a rate of almost 10% per year, and the number ofbillionaires in China doubled from 2009 to 2010. Accordingto Boston Consulting Group, there are 700,000 householdsin China with assets worth more than $1 million, and theycontrol 48% of the country’s wealth. As incomes continue torise in China, the demand for luxury goods in the country willalso increase. Total retail spending on luxury goods in Chinahas increased almost eightfold from $12.8 billion in 2006 to$102 billion in 2013, at a CAGR of 35%. In 2010, 49% of Chineseconsumers spent more than 11% of their salary on onlinepurchases. In response to a survey question about whythey shop online, 78% of Chinese luxury consumers said theyshop online to avoid salespeople, compared to 46% of Americansand 56% of Europeans. A majority of Chinese luxurybuyers (78%) like to research online – particularly throughblogs and social media — before making a purchase in-store,as evidenced by ROPO sales which totaled $96 billion in 2010,compared to online sales which totaled only $10 billion. China’sonline luxury sales are estimated to be worth $27 billion8 Floor64 The Sky Is Rising: Luxury Markets

in 2013, which is still only a fraction of the total e-commercemarket in China ($296 billion in 2013). As a consequence,new companies are emerging to cater to Chinese luxury consumers.For example, New York-based Bomoda curates contentabout luxury goods and lifestyle in Mandarin Chinese.Curated shopping sites are growing in popularity as luxuryconsumers seek personalized product recommendationsfrom expert stylists, trendsetting celebrities, and thesocial web community, instead of spending hours searchingthrough an endless selection of products. As Fashionising.com puts it, in a world where the average consumer can afforda massive yet fashionable wardrobe, curated productsare the new luxury. Luxury brands can benefit greatly fromsocial sites that curate luxury goods to make meaningfulconnections with consumers that will ultimately lead to agreater consumption of luxury goods.» CONSUMER TRENDSCHINESE LUXURY CUSTOMERS WANT THE REAL THINGSince luxury goods can be up to 40% more expensive inChina, many Chinese luxury consumers are buying fromtheir favorite brands abroad, according to McKinsey’s 2012Chinese Luxury Consumer Survey. In fact, more than 50% ofChinese luxury spending takes place outside of China. Eventhough every major luxury brand has a brick-and-mortarstore in China, it appears that the convenience of having aphysical store near to where they live and work just isn’t asmuch of a draw as it used to be.Meanwhile, online sales of luxury goods in China increasedby 71% from 2011 to 2012. Bain & Company reports thatChina’s e-commerce market has grown at an average rate of71% from 2009 to 2012 (compared to 13% for the U.S.), andis expected to exceed $500 billion by 2015. However, consideringChina is well-known for counterfeiting luxury goods,it’s not surprising that Chinese consumers themselves arewary of buying luxury goods when they can’t be sure of theirauthenticity. A 2011 survey by China Market Research foundthat 95% of young Chinese women would be embarrassedto own a counterfeit handbag. While the counterfeit marketstill exists – Chinese authorities seized over $800 million incounterfeit goods in 2011 – Chinese consumers are increasinglyunwilling to buy fake products. Women’s luxury fashiongroup Escada found a significant decrease in Chinese consumerwillingness to buy fake goods, from 31% in 2008 to12% in 2010.Chinese consumers do a lot of research on luxury goodsonline, and those who do shop online (70% of them) arelooking to find better prices on luxury items — closer to whatthey would pay overseas — reporting average savings of 32%on bags, 58% on suits, 36% on shoes, 37% on jewelry, and47% on watches. It’s also clear that Chinese consumers arewilling to make big-ticket purchases online. For example, in2012, Chinese consumers snapped up 300 limited editionSmart cars (priced at around $24,000) in just 1.5 hours, aspart of an exclusive online flash sale. Simply building brickand-mortarstores just isn’t cost effective and doesn’t takeinto account China’s changing commercial landscape. Accordingto iResearch and Bain & Company, China becamethe largest e-commerce market in the world in 2013, with amarket size of $215 billion. In order to continue to grow andreach all Chinese consumers (not just those in big cities likeBeijing and Shanghai), luxury brands need to embrace theonline sales channel and deliver exceptional and meaningfulcustomer experiences to further distinguish their products.ONLINE SAVINGS IN CHINA60%40%20%BAGS SUITS SHOES JEWELRY WATCHESThe Sky Is Rising: Luxury MarketsFloor649

LUXURY FASHIONLUXURY FASHION MARKETSThe global luxury apparel market grew from €41.3 billion(about $54.3 billion) in 2009 to €54.3 billion (about$71.4 billion) in 2013, a 31% increase at a CAGR of 7%, whilethe global luxury accessories market grew from €36.7 billion(about $48.3 billion) in 2009 to €60.8 billion (about $80billion) in 2013, a nearly 66% increase at a CAGR of 13%.Consumers are not only researching luxury fashion online,they’re also buying more online. U.S. retail online sales ofall apparel and accessories have grown from $28 billionin 2010 to $44.7 billion in 2013, a 60% increase at a CAGRof 17%.2009€36.7b€41.3bACCESSORIES2013€60.8b66% CAGR 13%€54.3b31% CAGR 7%APPARELEuromonitor predicts that 40% of the world’s populationwill be online in 2020 – that includes 281 millioninternet users in the United States and 711 million internetusers in China. Today, luxury goods companies thatare embracing the internet, digital marketing, and innovationare thriving despite the recession. As consumersare increasingly willing to buy even the most expensiveproducts online, from the convenience of their homes, traditionalluxury brands are beginning to change their attitudes,and those that have adapted are doing better thanthey could have imagined.Oscar de la Renta CEO Alexander Bolen has expressedsurprise at the success of their online experiments. In one instance,a new customer bought an $80,000 sable coat online,and customers are regularly buying the brand’s core productonline — $4,000 cocktail dresses. Bolen says the companysees creativity as a competitive tool and isn’t afraid to innovateor experiment or fail. It was one of the first brands touse Facebook commerce with its exclusive product-of-themonthoffers. In one experiment, Oscar de la Renta had anexclusive deal with social photo sharing webstore TheFancy.com(sometimes referred to as “Pinterest for shopping”),where Fancy took advance orders for a $2,490 sweater thatwould be showcased at an upcoming fashion show. Within24 hours of the show, more than 500 people had clicked ona photo of the sweater on Fancy, and five of the sweatershad been sold. Oscar de la Renta now has its own dedicatedteam to handle all things digital, and has big plans for futureonline sales.Gucci saw a 30% increase in online sales from 2011 to2012 despite the economic uncertainty, and its InterbrandBrand Value has more than doubled from $4.7 billion in2004 to $10.1 billion in 2013. The Interbrand Brand Valueis the estimated value of a brand based on the financialperformance of the brand, the role of brand in the purchasedecision process, and the strength of the brand, as determinedby Interbrand, the world’s largest brand consultancy.In 2011, Gucci launched its first click-to-buy video whereviewers could scroll over products in the video and click tobuy them, satisfying the luxury consumer’s desire for instantgratification through digital sales channels. The brand operatesits e-commerce site in 27 countries, and in early 2013,it launched its first mobile site. Half of Gucci.com’s trafficcomes from people on mobile devices. Twice as many luxuryconsumers are using their smartphones to shop, comparedto regular consumers, and they’re using the mobile sitesto enhance their in-store shopping experience. Since thelaunch of the new mobile site, Gucci’s revenue has grown10 Floor64 The Sky Is Rising: Luxury Markets

y almost a factor of four. The mobile site, which already accountsfor 13% of total online revenue, was created to meetthe growing demand for customers being able to browseand purchase the brand’s products anytime, anywhere ontheir mobile devices.Louis Vuitton has been doing exceptionally well. It’s oneof the few luxury brands that offers nearly all of its productsonline, and it has created a successful luxury shoppingexperience through Facebook with its Mon Monogram app,demonstrating that luxury brands can indeed preserve thefeel of an exclusive shopping experience and their aspirationalbrand image online. The Mon Monogram app allowsusers to fully customize a bag with hand-painted personalinitials and stripes in various colors and directions, then itprompts them to visit the Louis Vuitton online store to buytheir customized bag. According to the brand’s communicationsdirector Antoine Arnault, online sales bring in as muchmoney as one of its largest physical stores. Its InterbrandBrand Value has more than tripled from $6.6 billion in 2004to $24.9 billion in 2013.» CHANGING MARKETSTHE ETSY ECONOMYEtsy, the online marketplace for unique handmade andvintage goods, has been growing at an impressive ratesince it launched in 2005 as a small, niche startup. WhileEtsy isn’t considered a luxury platform, it has the potentialto change the way consumers think about luxury and exclusivity.It has already helped generate many opportunitiesfor new online businesses, some of which do specialize inselling luxury items, such as handcrafted leather handbags,as well as others that sell high-quality, exclusive, and custom-designedproducts that consumers won’t find at a store.Founder Rob Kalin was an artist who was looking for aplace to sell his own works, after he tried eBay and realizedhis art wasn’t a good fit there. So he created Etsy as an onlineplace for others like himself to sell their own creativeworks. It has since turned into a leading social commercecompany, with its 22 million members selling $1.35 billionin merchandise in 2013, up from $895 million in 2012 (a51% increase). Jewelry remained the top selling category in2012, but other products like clothing, wedding goods, andhome decor are also growing strongly, with furniture beingthe fastest-growing category.Part of Etsy’s growth can be attributed to sellers promotingtheir shops on social media -- Etsy is now the top pinnedsite on Pinterest -- but also, consumers are looking for morepersonal shopping experiences, which giant e-commercesites like Amazon.com just can’t provide. Etsy has also benefitedfrom eBay’s loss of focus on smaller sellers, as it operatesas kind of a “niche eBay” for arts, crafts, furniture, andETSY MERCHANDISE SALES2012$895mdesign. Etsy makes it easy for entrepreneurs to start a smallbusiness. Compared to eBay, there’s a much lower cost of entry– sellers pay $0.20 to list an item in their shop, and if itsells, Etsy takes a 3.5% cut. However, eBay recently rolled outa new fee plan, giving sellers 50 free item listing per month,but taking a 10% cut on the sale price if an item sells.According to CEO Chad Dickerson, the company wants tocreate an “Etsy economy” – a people-powered economy withperson-to-person commerce -- where online shopping feelsmore like a farmer’s market than a supermarket. Going forward,Etsy is increasing its efforts to support new businessowners, such as teaching entrepreneurship skills to residentsof local communities, and connecting its members with buyersfrom brick-and-mortar retailers, such as Nordstrom, tohelp them sell wholesale. By focusing on helping small,niche sellers succeed, Etsy is quickly growing to become themarketplace for selling exclusive goods.2013$1.35b51%The Sky Is Rising: Luxury MarketsFloor6411

LUXURY BRAND VALUE» AS DETERMINED BY INTERBRANDBURBERRYGUCCILOUISVUITTON$5b $15b$10b20042013$20bBritish fashion house Burberry has been ranked at thetop of L2 Think Tank’s Digital IQ Index, which ranks fashionbrands based on their online competence. Burberry’sonline sales increased by 30% from 2010 to 2011. In 2012,it opened a technologically-advanced store in London thatwas designed to be a physical expression of its website,Burberry.com, combining bricks-and-mortar retailing withdigital technology. In an effort to create a more customerfriendly shopping experience, Burberry’s new store promotesa less intimidating retail environment than is typical for luxurygoods stores. Its Interbrand Brand Value has almost doubledfrom $2.8 billion in 2006 to $5.2 billion in 2013.$25bThere have also been many innovative luxury fashionstartups that have emerged to take advantage of the onlinesales channel. NET-A-PORTER, an online luxury retailerowned by Swiss luxury conglomerate Richemont, has seenits annual sales grow from £11.8 million (about $18.4 million)in 2005 to £368 million (about $575 million) in 2012,a 20-fold increase at a CAGR of 53%. In 2011, it acquired theChinese discount online retailer Shouke, and relaunched itin 2012 as the Chinese version of designer discount storethe Outnet, marking its first entry into China’s luxury market.Most recently, it set up new automated distribution centersin Britain, the U.S., and Hong Kong, and launched French,German, and Mandarin Chinese versions of its website. Asianonline shoppers make up one third of NET-A-PORTER’s customers.Yoox, an Italian online luxury fashion retailer, has seen itsrevenues grow from €291 million (about $383 million) in2009 to €456 million (about $600 million) in 2013, a 57%increase at a CAGR of 12%, with growth strongest in Asiaand North America, its top market. Yoox designs and managesonline stores for more than 30 fashion and luxury goodsbrands. In 2013, the average number of unique monthly visitorsto the company’s websites increased more than 25%to 13.2 million, the number of orders increased more than13% to 2.8 million, and the average order value increasedmore than 15% to €215 ($283). It also reported that 25% ofholiday traffic to its website came from mobile devices. TheChinese version of Yoox.com was also launched in 2012.Aided by the recession, flash sales sites have grownsignificantly in the past few years, helping luxury brandsmove excess inventory at discounted prices, and catering toweb-savvy luxury newcomers. There’s an addictive quality tothese sites that makes shopping more exciting, as they offerdeals on high-end or rare items for only a limited time —shoppers feel the need to act on the purchase right awayand then enjoy a feeling of euphoria when they snap up agreat deal. Founded in 2001, Vente Privee was one of thevery first members-only luxury flash sales sites on the web,inspiring a whole generation of similar exclusive luxuryflash sales sites like Gilt Groupe, One Kings Lane, and RueLa La. Gilt Groupe has seen its revenues grow from $25 millionin 2008 to $580 million in 2012, a 23-fold increase at aCAGR of almost 120%. Five years ago, the New York startuptransformed the online retail market for fashion by offeringlimited-time, members-only “private sales” for designerfashion at significantly discounted prices. It rose to dominatethe American private sales landscape, capitalizing onthe huge inventory surplus of designer goods following theonset of the recession. However, these days luxury flash salessites aren’t doing quite as well as they used to due to anover-saturation of players in this market. Nevertheless, companieslike Gilt are continuing to innovate, experimentingwith technology to make their limited-time-only offers moreeffective. For example, Gilt has started offering exclusivemobile-only sales, which create an extra level of excitementthat gets customers returning at a very high rate. Now 40%12 Floor64 The Sky Is Rising: Luxury Markets

of Gilt’s total revenue comes from mobile commerce. It hasalso launched a personalization feature called Your PersonalSale, where members are offered a unique new sale everyday that’s curated with their favorite brands and styles,based on their shopping behavior, personal preferences, andbrowsing history. Both the Gilt website and the mobile appfeature “Your Personal Sale” badges to highlight the specialoffering among the other sales.Going forward, luxury fashion brands are not only improvingtheir online presence and digital marketing efforts, theyare also increasingly diversifying into hard luxury (jewelry,watches) to capitalize on untapped opportunities, with thegoal of penetrating all luxury goods categories at all pricepoints.» CHANGING MARKETSTHE DISRUPTION THAT IS CROWDFUNDINGIt would be difficult to write a report about the impact ofthe internet on luxury goods without looking more closelyat the meteoric rise of crowdfunding as a means for raisingmoney, verifying demand and drawing marketing attentionto new products. While there were a few earlier attempts atcrowdfunding and even some very similar platforms, mostpeople recognize that crowdfunding really began to “catchon” with the rise of Kickstarter, which launched in the springof 2009. While Kickstarter is the most recognized crowdfundingplatform in the market, there are many other players,with IndieGoGo often being discussed as a popular alternative.There are also numerous smaller players, some ofwhom are targeted towards specific verticals or styles.The basics of crowdfunding are well-known at this point.Someone with a project they’re working on launches a campaign,in which they describe what they’re working on andthen offers various “tiers” at which supporters can providemoney to the project creator, in exchange for something ofvalue. With many (though not all) crowdfunding projects,a “target” total is set, and if the project fails to reach thatamount of pledged money, no funds are given, so the risk forsupporters is lower. Some platforms, like IndieGoGo also doallow campaigns that will collect all money pledged, whetheror not it reaches the goal.The different rewards can vary greatly depending on thetype of project, but when it comes to hard goods, most of therewards tend to focus on getting the actual good. Usually,the funds are used to cover the costs of supplies and manufacturing,so there is frequently a time lag (sometimes asignificant one) between people paying and the product actuallybeing delivered. In many ways, people are signing upto pre-purchase the goods being offered. There is, of course,some risk associated with this (the product might never bedelivered, for example), and Kickstarter has tried to be increasinglyexplicit that it is “not a store,” but rather a way tosupport a project.While neither Kickstarter nor IndieGoGo directly break out“luxury” goods, it’s quite clear that luxury goods have founda home on these platforms, often allowing new entrants andupstarts to get word out about their product -- and also toconduct a form of real-time market research prior to actuallyspending on supplies and production. In fact, it’s been reasonablyargued that projects that don’t reach their targetedpledges should not be seen as “failed campaigns,” sinceit would be a much larger failure if the creators had spentmoney on supplies, production, and distribution only to findout later that there was insufficient demand.Both Kickstarter and IndieGoGo have extremely busy andsuccessful “design” categories, in which many luxury goodsare offered. Kickstarter’s statistics show that design projectshave successfully raised nearly $100 million dollars across5,000 projects, with nearly 40% meeting their goals. About200 projects have raised over $100,000 (and six have raisedover $1 million). In the technology category, approximately3,000 projects have been launched, with about 35% reachingtheir goal, bringing in over $80 million. Nearly 200 projectshave raised over $100,000, and around 10 have broken $1million. The fashion category has also seen over 4,000 projects,with about 30% reaching the target amount, bringing ina bit over $20 million. About 25 have raised over $100,000,and just one (so far) has broken $1 million.IndieGoGo doesn’t break out its stats, though some re-The Sky Is Rising: Luxury MarketsFloor6413

KICKSTARTER SUCCESS» LIFETIME FUNDING TOTALS AS OF Q3 2014TECHDESIGNFASHIONports suggest much lower rates of projects meeting theirgoals. As IndieGoGo notes, such comparisons are not quitefair, given the very different nature of the platforms, the factthat some IndieGoGo users run plenty of “test campaigns” tosee what resonates, and, importantly, the fact that IndieGoGoallows campaigns that don’t reach the target amount to stillget the money.While the numbers may look small compared to some traditionalluxury brands that will blow millions of dollars ona marketing campaign for a new product, it’s important torecognize that all of this has sprung up in just a few years,and the rate of growth has been incredible. Kickstarter wentfrom $27 million raised in 2010 to $283 million in 2012, and$480 million in 2013.SUCCESSFULFAILED$50m $100m $150m $200mAmong other things, what Kickstarter has demonstratedis that it’s possible to launch a new product with much lessfunding than was traditionally necessary. This is, in part, becausecrowdfunding removes a large element of risk. Youdon’t necessarily need to spend the resources if the demandisn’t there. That allows companies to more accurately projectnecessary resources and expenses, and allows for many moreniche products to exist and thrive within the right context.One example is the Pebble smartwatch. While some mightnot consider the Pebble smartwatch to be a true “luxury”good, the success of its crowdfunding campaign on Kickstarteris instructive in how a previously unknown upstart cancatapult into being a leader in the field. For years, the smartwatchmarket had been predicted with frequent regularity,only to flop when products were actually introduced. Microsoft,famously, had entered the market in a big way in 2004with SPOT (Smart Personal Object Technology) smartwatchesonly to find that the demand for their offerings was minimal.That effort was shuttered in 2008, having failed to catch on.Given that, it’s quite impressive that when the Pebblelaunched on Kickstarter, it wasn’t even clear that there wasa significant market for such a product. In fact, Pebble’sfounder admitted that venture capitalists had refused tofund the company. However, support on Kickstarter pouredin at a record rate, as something about the basic simplicityof the watch, combined with the somewhat viral nature ofKickstarter itself, quickly turned the Pebble into Kickstarter’smost funded project ever -- a title it still holds today,nearly two years after the campaign. The campaign reached$100,000 in 2 hours, $1 million in 28 hours, and stoppedtaking new orders when there was still a week left in thecampaign period. They had so many orders that they worriedabout meeting the demand (and, in fact, production andshipping of Pebbles ended up being delayed several times,much to the chagrin of some buyers).Overall, though, the story of the Pebble showed how apreviously unknown upstart, which couldn’t secure traditionalfunding, was able to jump into a market and raise$10,266,844 from 68,928 supporters, thereby guaranteeingdemand for the product, as well as creating a form of a marketing“event” that got people excited to contribute money,even though the product wasn’t ready yet. It’s become clearthat new crowdfunding platforms have helped to open upopportunities for upstarts to create a strong focus that can allowthem to leapfrog into the public consciousness with premiumproducts, even ahead of giant traditional companies.However, crowdfunding isn’t the only new business modelthat has appeared online -- the rise of person-to-personsales, flash sales, group buying, 3D printing, and a variety ofother new ways of hard goods sales and production are reinventingwhat it means to be a producer and seller of hardgoods today, and it seems likely that we’ll see many othermodels and concepts in the years and decades to come.Nevertheless, the rapid success of crowdfunding is an importanttrend to watch, in seeing how new concepts can becomereality where they almost certainly would never havegone beyond the mental drawing board in the past.14 Floor64 The Sky Is Rising: Luxury Markets

HARD LUXURIESThe global market for luxury watches and jewelry grewfrom €29.1 billion (about $38.3 billion) in 2009 to €49.9billion (about $65.6 billion) in 2013, a 71% increase at aCAGR of 14%. In particular, the global diamond jewelry markethas grown from $56 billion in 2000 to $72 billion in 2012,a 28% increase at a CAGR of 2%. According to data from theAntwerp World Diamond Center, the average price for a 1Carat D Loupe Clean wholesale diamond has increased 10-fold from $2,700 in 1960 to $28,400 in 2013. Despite therecession, the diamond industry has been doing very well,and overall demand for diamond jewelry has been growing.Demand for diamonds is growing fastest in China and India,as wealth increases in both countries. China, which isnow the world’s second largest diamond jewelry market afterthe United States (U.S. market was $26.9 billion in 2011), hasseen it grow more than 30% per year, from about $2 billionin 2005 to $9.2 billion in 2011. Internet sales of diamonds inChina are still only a small percentage (2%) of total diamondsales, but they’re expected to take off in the next five yearsas companies like vertical B2C diamond retailer Kela.cn investheavily in e-commerce efforts. CEO of Kela, Guo Feng,has said that he expects giant online diamond resellers toemerge in China in the next 3-5 years, with some of thempossibly even surpassing traditional sales channels. Kelareported more than $96 million in sales in 2011, and thecompany has grown more than 220% each year since it wasfounded in 2007.The U.S. diamond market makes up 40% of global demand,largely due to the marketing efforts of De Beers, withits unforgettable “A diamond is forever” slogan, which convincedAmericans that diamonds were the ultimate symbolof love. More than 80% of American women now receive diamondrings when they get engaged. De Beers has continuedto stimulate consumer demand for diamonds by comingup with innovative ring designs, such as the “Eternity Ring”in 1970, or more recently in 2012, the “Center of My Universe”ring. De Beers created De Beers Diamond Jewellers,a joint venture with Louis Vuitton Moet Hennessy (LVMH),WATCH & JEWELRY MARKET2009€29.1bWHOLESALE COST OF A DIAMOND» BASED ON A 1-CARAT D LOUPE CLEAN1960$2,700DIAMOND JEWELRY MARKET2000$56b2013€49.9b71% CAGR 14%2013$28,4002012$72b28% CAGR 2%The Sky Is Rising: Luxury MarketsFloor6415

in 2001 to sell diamond jewelry. De Beers opened its firstonline store in the U.S. in 2007, offering a wide range of itsproduct line, with the goal of generating revenue online andincreasing visits to its retail locations. Diamond sales in theU.S. have slumped since the recession, but they’re recovering,and diamonds still rule the U.S. jewelry market, accountingfor about 50% of revenues.Tiffany & Co., one of the largest online jewelry retailers,has seen its online sales grow from $140 million in 2009to $242 million in 2013, a 73% increase at a CAGR of 15%.The company has also been recognized by Internet Retaileras having one of the most innovative e-commerce sites. TheTIFFANY & CO. ONLINE SALES2009$140mFAST FACTS & FIGURES2013$242m73% CAGR 15%of global demand for diamonds comes40% from the U.S. marketof American women receive diamond80% rings when they get engagedof Tiffany & Co.’s worldwide sales6% of $3.79-billion are now onlineY.O.Y increase of Amazon.com’s100% jewelry and watch sales in 2006Y.O.Y increase of Amazon.com’s254% custom-built ring sales in 2006increase in Amazon.com retail100% diamond sales in Q1 2008internet is becoming a growing priority for the company. Italready operates e-commerce sites in 13 countries, and onlinesales make up about 6% of its worldwide sales of $3.79billion, growing 4% in the past year. Soon, Tiffany plans tolaunch a redesigned website that will take advantage of recentchanges in the digital landscape, including social mediaand the increased use of mobile devices. Tiffany’s InterbrandBrand Value has increased 50%, from $3.6 billion in 2004 to$5.4 billion in 2013.Cartier, which has been stepping up its efforts to incorporatedigital elements into its marketing strategy, has exceededthe expectations of analysts, making $2.65 billionin annual profits despite the economic downturn. Part of itssuccess has been in creating an experience around the brandthat combines both the physical and the digital. For example,it has been using videos to create unique, immersiveexperiences alongside displays of iconic and new jewelrydesigns. It has also launched a new e-catalog that engagescustomers with its rich storytelling in a modern form. Cartier’sInterbrand Brand Value has more than doubled, from$2.7 billion in 2004 to $6.9 billion in 2013.While Amazon.com isn’t a luxury retailer, it has been successfullyselling diamond jewelry online, experimenting withdifferent ways to engage its customers. In 2006, Amazon’ssales of jewelry and watches increased more than 100% yearover-year.Its “Create Your Own Ring” feature proved popularwith consumers, as its custom-built engagement ring salesincreased 254% year-over-year. In 2008, Amazon reportedthat its retail diamond sales increased more than 100% inthe first quarter, noting that its customers were increasinglybuying luxury goods, such as diamonds. In 2011, Amazonmade an estimated $350 million in watch and jewelry sales,up from $300 million in 2010. Gucci has even made Amazon.com its official authorized online retailer.Luxury jewelry brands and retailers that have expandedtheir online sales and marketing efforts, tying together thedigital and physical brand experience, have weathered therecession quite well and are seeing positive effects on theirrevenues. Going forward, they should continue innovating,using the internet to distinguish themselves and engagetheir customers, as luxury fashion brands are increasinglyexpanding into the luxury jewelry and watch market.16 Floor64 The Sky Is Rising: Luxury Markets

LUXURY CARSThe global market for luxury cars has grown from €210billion (about $276 billion) in 2009 to €320 billion(about $421 billion) in 2013, a 52% increase at a CAGR of11%. According to Digital Luxury Group, cars made up 48%of more than 470 million luxury brand Google searches inthe U.S. in 2011, with automakers BMW and Audi being thefirst- and second-most searched luxury brands, respectively.These two automakers are also the top two automotivebrands that dominate social media channels, such as Facebookand Twitter. Despite the recession, high unemployment,and expensive gas prices, it seems that Americans still spentmany hours online researching luxury vehicles that oftencost more than the median U.S. household income.According to L2 Think Tank, 80% of Americans use theinternet to research vehicles before making their purchase,and a 2012 study by mobile advertising company Briabe indicatesthat 87% of prospective car buyers will use mobiledevices to research vehicles. A majority of automakers (86%)have already created mobile-optimized sites with advancedfunctionality, and they’re beginning to challenge third-partyreference sites, with customer service features, such as detailedFAQs, live chat, and prompt followup on dealershipreferrals.Consumers are also buying cars from their mobile devices.While companies like eBay, Carvana, or Amazon aren’t sellingnew luxury vehicles, their online sales experiments havedemonstrated that consumers are willing to buy big ticketitems such as vehicles directly from their phones. eBay, whichsells more than 11,000 pre-owned vehicles through its onlineauctions each week, has created its own eBay Motors appto handle the high traffic from mobile shoppers. Carvana, astartup that buys cars at auctions and then sells them online,uses high-definition photo technology to give shoppers theability to zoom in on the actual vehicle (not a stock image)to see everything in detail, including imperfections that carbuyers may not notice on the lot. Carvana is using technologyto change a very old and established industry, and hasLUXURY AUTO MARKET2009€210bFAST FACTS & FIGURES2013€320b52% CAGR 11%of 470-million luxury brand Google48% searched were for cars in 2011of Americans use the internet to research80% vehicles before making their purchaseof prospective car buyers will use87% mobile devices to research vehiclesof automakers have created mobile-86% optimized sites with advanced functionsshown that people will buy vehicles with their phones. Amazon.comsells practically everything, but it doesn’t sell cars.However, it recently partnered with Nissan to promote the2014 Nissan Versa Note through a product page on its website.While the Versa Note product page on Amazon.com isn’tas visually appealing as Nissan’s official one, it does providelots of information about the car for shoppers who are researchingthe vehicle. Instead of the usual Amazon “Add tocart” button, there’s one that says “Visit Versa Note,” whichtakes shoppers to the official Nissan Versa Note page. Shopperscan then enter their ZIP code to find offers from localNissan dealers. As part of the promotion, the first 100 VersaNote buyers who initiated their purchase through AmazonThe Sky Is Rising: Luxury MarketsFloor6417

eceived a $1,000 Amazon gift card, and three lucky buyersgot their cars delivered to their door in a giant Amazon box.While the collaboration between Amazon and Nissan wasa one-off marketing experiment, it showed that consumersare using the internet to research and initiate large purchases.Now, even Gilt Groupe is experimenting with sellingluxury vehicles through its website. Working with Infiniti,Gilt is offering two all-new 2014 Q50 luxury sports sedans,one designed by Thom Browne and the other by Zac Posen.While the U.S. is currently the top market for luxury vehicles,China is expected to take over the number one spotwithin the next seven years, according to Digital LuxuryGroup. The luxury car market in China has been growing atan annual rate of 36% in the past ten years. In comparison,the overall Chinese passenger vehicle market has increasedLUXURY AUTOMAKER REVENUES» AMONG 3 DIGITALLY ACTIVE BRANDS€52.4b2013 BRAND GROWTH IN CHINA20%15%10%5%2007 2013€33.6b€53.8bMERCEDES-BENZMERCEDES-BENZAUDI€64.3b€49.9bAUDI€76.1bBMWBMWat an annual rate of 26% during the same time period. Whilethe older generation of Chinese consumers bought luxurycars to show off their social status, the newer generation isbuying them for a variety of different reasons. In a McKinseysurvey of middle class Chinese consumers, some of the reasonsgiven for buying a luxury car included: it’s a reflectionof social status; self-indulgence; the car is a “business card”for credibility; they’re attracted to the sophisticated functionsand innovative designs; the car is a source of fun inlife; and because they demand excellent service. Cars are themost searched for luxury items in China, which is alreadythe top market for some luxury auto brands, like Jaguar. Thetop three luxury vehicle brands in China are Audi, BMW, andLexus, with German automakers accounting for 80% of theChinese luxury auto market.The top two luxury automotive brands that have investeda lot in digital marketing – BMW and Audi – have been doingvery well. BMW, which overtook Lexus in 2011, has becomethe best-selling luxury vehicle brand in the U.S. and has remainedat the top ever since. BMW Group’s revenues grewfrom €53.8 billion (about $70.8 billion) in 2007 to €76.1billion (about $100 billion) in 2013, a 41% increase at aCAGR of 6%. BMW’s innovative approach to online marketingincludes: their website; special feature web sections, suchas bmwfilms.com and an online racing game; personalizede-mails; e-magazines and virtual brochures; special eventwebcasts; online advertising; a mobile website; Facebookapps; and a YouTube channel. One example of BMW’s digitalmarketing efforts was the “X3 Matchup” campaign, whichthe automaker launched in 2011 to engage its Facebookcommunity of 7 million fans, challenging them to customizethe exact same car that appeared in a BMW X3 commercial.That year, working with 50,000feet, an independent creativeagency, BMW also launched BMW Aftersales Online Marketingtools (e-commerce, search engine marketing, e-mail marketing,digital assets, and social media), which helped BMWdealers generate millions more in revenue.Audi’s revenues increased from €33.6 billion (about $44.2billion) in 2007 to €49.9 billion (about $65.6 billion) in 2013,a 48% increase at a CAGR of 7%. Audi has conducted severalsuccessful viral marketing campaigns to increase awarenessof its brand worldwide. Campaigns like the “Stolen Audi”miniseries and “Meet the Beckers” videos became instanthits both online and offline, and have increased Audi’s brand18 Floor64 The Sky Is Rising: Luxury Markets

awareness over its competition. A study by marketing andconsulting company Phoenix Automotive recently namedAudi a top advertising performer in the luxury category becauseof its ability to use effective story-telling and humor todemonstrate a specific vehicle feature in its ads. Audi was alsorecognized as a brand that generates much more online conversationscompared to its competitors. In an effort to allowtech-savvy consumers experience the brand both physicallyand digitally, Audi opened its first Audi City digital showroomin London in 2012, where shoppers can customize their owncars by selecting vehicle options from a digital media system,and then view it on a 1:1 scale on a large screen. Thereare also “Customer Relationship Managers” there to helpshoppers if they decide they want to buy a car on the spot.According to a 2011 L2 Think Tank study of the top 20luxury brands in China, Audi and BMW ranked No. 1 andNo. 3, respectively. The brands were ranked based on theirwebsite, social media efforts, digital marketing, and mobileefforts, taking into account factors like website load time,translation efforts, Chinese search engine optimization, mobileadoption, and presence on the top seven Chinese socialmedia sites. Aside from being present on six of the top sevensocial media sites, and having more than 250,000 videos onYouKu (the Chinese version of YouTube), one of the main reasonsfor Audi’s high rating is its multi-language, multi-platformmobile application, which is increasingly relevant consideringmany Chinese consumers are going from having nointernet, to having mobile internet. In both 2012 and 2013,Audi and BMW were also the top two most-searched for luxurybrands in China, based on Digital Luxury Group’s analysisof more than 150 million searches on Baidu (the leadingsearch engine in China) and Google.While Mercedes-Benz has seen its revenues increase from€52.4 billion (about $68.9 billion) in 2007 to €64.3 billion(about $84.6 billion) in 2013, a 22% increase at a CAGR of3%, it has been lagging behind BMW and Audi, especiallyin China. In 2013, Mercedes saw a 11% increase in vehiclesales in China, while Audi and BMW reported an increaseof 21% and 20%, respectively. However, the automaker hasa new growth strategy – “Mercedes-Benz 2020” – whichaims to provide customers with a consistent luxury brandexperience whenever they interact with Mercedes. The newmarketing and sales strategy includes a variety of approaches,including greater use of digital presentation tools at itsTESLA MOTORS REVENUE2008$14.7m2013$2.01b13573% CAGR 130%showrooms, increased online activities, and online stores.Recently, in an effort to get Gen Y fans excited about its newentry luxury CLA-class four-door coupe, it launched a newsocial media campaign where five top Instagram photographerswere given a CLA for one week, during which theyposted photos of their experience with the car. Instagramphotos were also cross-posted on Mercedes-Benz’s Facebookpage for greater exposure. The photographer with the greatestnumber of “Likes” on their photos from that week won athree-year lease on the CLA, while fans could also try to wina lease on the car by submitting their own Instagram feedto the CLA contest website. Mercedes-Benz also launched its“Mercedes-Benz Connection Online” stores, where customerscan order and finance vehicles anytime, anywhere. Mercedeshopes the experiment will provide it with some insight onhow customers react to this kind of online sales channel.While Tesla Motors – probably the most successful Americanstartup car company in the last 50 years – doesn’t liketo be called a luxury car company, insisting its goal is tocreate an affordable mass-market electric car, it continues tobe compared to luxury brands. Tesla calls its vehicles “premium”rather than “luxury,” and says it’s focused on deliveringperformance rather than trying to establish itself as a luxuryautomaker. Nevertheless, its vehicles are attracting luxuryconsumers, and it has been outselling the likes of Mercedes,BMW, and Audi – with a marketing strategy that doesn’t includeany advertising, ad agencies, chief marketing officer,or dealer network. Tesla has seen its revenues grow from$14.7 million in 2008 to $2.01 billion in 2013, an impressive137-fold increase at a CAGR of 167%. Disrupting theestablished dealership franchise system in the U.S., TeslaThe Sky Is Rising: Luxury MarketsFloor6419

promotes its vehicles through “stores” in upscale shoppingmalls, where shoppers can ask questions without having todeal with high-pressure sales tactics, and then if they decideto purchase, they can order their car directly through Tesla’swebsite (see sidebar). Tesla already has 35 retail locations inthe U.S., Europe, and Asia, and plans to expand to 50 storesover the next few years, but it’s currently in a legal fight withdealer associations in several U.S. states over the right tosell cars directly to consumers.Whether or not buying vehicles online eventually becomesmainstream, luxury vehicle brands should continue to experimentand engage with customers online, since most car buyersthese days will use the internet to conduct research or eveninitiate a purchase before actually stepping into a dealership.» CONSUMER TRENDSBUYING A PREMIUM ELECTRIC CAR FROM TESLAYear after year, consumer surveys show that people rankbuying a car as one of their least favorite experiences.This sentiment is closely associated with the typical car-buyingprocess in the US that is deeply entrenched in a franchisesystem — where car manufacturers are legally prohibitedfrom selling their own cars directly to consumers. The firstcar dealership was created in 1898 to sell steam-poweredautomobiles made by the General Motors Corporation. However,the franchise system of car dealerships was far fromestablished at that time, and for the first two decades of the1900s, “virtually every type of distribution was tried in theautomobile industry. Manufacturers sold vehicles directlythrough factory stores, and by mail order and consignmentarrangements, and indirectly through retail departmentstores, traveling salesmen, and wholesale distributors.”Over a century later, Tesla isn’t the first company to try tosell cars through an online dealership. In the 1990s, ScottPainter wanted to launch a virtual dealership online, but hequickly discovered that none of the major car manufacturerswould even consider the concept of an online dealership.Across the US, various state laws make it extremely difficultto change the traditional relationships between car makersand brick-and-mortar dealerships, effectively preventing anonline marketplace that would supplant traditional dealerships.Painter still founded CarsDirect.com to facilitate thepurchase of cars online, but the venture worked with dealershipsinstead of circumventing them.The typical process for buying a new car online, even aluxury brand vehicle, is unlike the process for buying otherexpensive items on the internet. A luxury car buyer mightthink that he/she should be able to select any model online,customize it with any desired options, pay for the vehicle byentering in some numbers and making a few clicks, and expectto be able to pick up the car when it is ready. The actualprocess allows a buyer to customize a vehicle online with amultitude of factory-installed options, but when it comes topaying, the buyer is told to request a price quote from a localdealership. Requesting a quote from a dealership is not exactlya 1-click shopping experience, but it is a legal requirementof the franchise system for automakers. Perhaps surprisingly,buying a used car can be done completely onlinewithout “requesting a quote” from a dealership, so it’s a bitpuzzling how the new car market tolerates a more convolutedbuying experience — especially for new luxury vehicles.For a luxury — or premium — car brand, it is essential tomaintain an excellent buying experience, and Tesla has decidedto keep its retail business in-house, instead of relyingon franchises. The resulting retail experience has been describedas Apple-like, after the strategy Apple employs to sellits electronics in its own high end stores. This retail strategyaims to enhance the feel of exclusivity for Tesla’s products, asTesla’s dozens of physical sales locations are dwarfed by thetens of thousands of other car dealerships in North America.Tesla’s salespeople don’t work on commision, and the companyboasts that its buying experience is simple, no-haggle,and reassuring. Additionally, Tesla’s website creates a virtualdealership that allows anyone to purchase directly without“requesting a quote” as other car dealers do. Tesla doesn’thave that many different models, but its website still allowsbuyers to customize the vehicle with a variety of options.Tesla’s prices are made clearly available, and not surprisingly,customers can conveniently pay using Paypal.20 Floor64 The Sky Is Rising: Luxury Markets

CONCLUSIONWhat we’ve seen throughout this report is that, as withmany other industries, the internet has transformedthe luxury goods market in all sorts of ways -- some of whichcan’t be easily summarized as “good” or “bad.” However, whathas become clear is that the internet has enabled all sortsof new and useful ways for luxury markets to develop, whilealso enabling consumers and brands new ways to connect,build relationships and to buy and sell the luxury goods thatmatter to them most.This has created new opportunities and tremendous businessgrowth in both established and new areas, while alsoallowing consumers better ways to learn about and purchaseluxury goods.Furthermore, the rise of e-commerce in general, and a varietyof specific innovations in and around e-commerce, hasalso helped luxury brands go global, finding audiences inplaces where it might not have seemed worth it to explorepreviously. As with many other industries, the luxury goodsindustry has discovered that the internet has created not justthe ability to sell goods through the web, but more, different(and often better) ways to promote and connect withbuyers and aficionados. This has opened up all sorts of newpossibilities, with many brands and retailers embracing whatthese opportunities enable.Given the paceof growth andinnovation inthese markets,we expect thateven greateropportunitiesfor growth lieahead.The Sky Is Rising: Luxury MarketsFloor6421

THE LUXURY MARKET» GLOBAL, KEY SECTORSGLOBAL MARKET (EUROS)AUTO APPAREL ACCESSORIES JEWELRY€320b€290b€260b€230b€200b€60b€50b€40b€30b2009 2010 2011 2012 2013ONLINE LUXURY» GLOBAL MARKET SIZEGLOBAL MARKET (EUROS)€9b€6b€3b2007 2008 2009 2010 2011 2012 2013» ONLINE CONSUMER TRENDS69%91%65%92%of luxury consumers find online shopping more convenientof millionaires would prefer their favourite brands be onlineof wealthy consumers believe brands with no socialnetworking presence are out of touch.of luxury consumers use the internet to search forinformation about a product before buyingLUXURY FASHION JEWELRY&WATCHES LUXURY AUTO» BRAND VALUE IS GROWING » DIAMONDS ARE BOOMING » ONLINE RESEARCH IS KINGBURBERRYGUCCI28%325%1052%growth of the internationaldiamond market, 2000-12growth of the Chinesediamond market, 2005-11increase in price of a 1KD Loupe Clean, 1960-201380%87%86%of Americans use the internet toresearch vehicle purchasesof prospective buyers will usemobile devices to research vehiclesof automakers have built mobilesites with advanced functionalityLOUISVUITTON$5b $15b $25bINTERBRAND VALUE2004 2013» TIFFANY & CO. ONLINE SALES2009$140M2013$242M» CHINA EMBRACES LUXURYannual luxury auto market growthin China over the past 10 years36%7years until China replaces the U.S. asthe top luxury auto market in the world.