retail evolution 2018 - fondazione altagamma · digital luxury distribution is at an inflection...

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RETAIL EVOLUTION 2018

Luca Solca (+41) 22 7186536 [email protected]

Melania Grippo (+39) 02 89 63 1724 [email protected]

Guido Lucarelli (+39) 02 89 63 1726 [email protected]

20 FEBRUARY 2018

February 20th 2018, Milan

Luca Solca, Managing Director, Global Luxury Goods

Exane BNP Paribas

Digital Luxury distribution is at an Inflection Point:

The Last of the Mohicans are on the Bandwagon

Exane BNP Paribas | RETAIL EVOLUTION 2018 2

“[..] We want to invest heavily in the digital program.”

(Patrizio Bertelli, Prada CEO -12/04/2017)

“What we want to do with this big cash flow is mostly self-

fund our growth activities and development activities in an

industry we are not fully familiar with yet, i.e., digital, but

it certainly requires a big investment in human resources and

consulting and development.” (Patrizio Bertelli, Prada CEO -

12/04/2017)

“We all now understand that consumers tend to buy

through both channels at the same time, so through both

retail physical stores and through e-commerce channels.”

(Patrizio Bertelli, Prada CEO – 08/09/2017)

“Our digital strategy, which is based on 3 pillars: first,

driving online sales through our e-commerce platform as

Mr. Bertelli was telling you before; second, developing a

seamless omnichannel shopping experience; and third,

increasing our investments in digital communications.”

(Chiara Tosato, General Manager and Digital Director, Prada

08/09/2017)


Luxury brands are embracing digital in China


Source: Luxury daily, ecommercechina.agency.com, digiday


We record a sharp ecommerce acceleration in the USA


Digital luxury accounted for 9% of the market in 2017 – It is projected to exceed 25% in 2025E

Styles available for purchase online (including Pre-Order, US, FW17/18 vs. FW16/17)

Source: Contactlab analysis, Exane BNP Paribas

FW16/17 FW17/18 y/y chg (%) Group Deltaas % of

total

as % of

total

Dolce & Gabbana 737 2,235 203% 1,498 25%

Prada 876 1,846 111% 970 16%

Fendi 764 1,182 55% 418 7%

Brunello Cucinelli 292 818 180% 526 9%

Tod's 259 424 64% 165 3%

Hermes 2,863 3,876 35% 1,013 17%

Gucci 2,502 3,477 39% 975 16%

Burberry 1,778 2,182 23% 404 7%

Saint Laurent 1,270 1,622 28% 352 6%

Bottega Veneta 817 971 19% 154 3%

Moncler 682 700 3% 18 0%

Valentino 528 568 8% 40 1%

Zegna 478 531 11% 53 1%

Balenciaga 390 419 7% 29 0%

Louis Vuitton 1,814 1,333 -27% -481 -8%

Ferragamo 1,160 1,040 -10% -120 -2%

TOTAL 17,210 23,224 35% 6,014 100% 100%

Catching

up59%

-10%Bucking

the trend

Extending

the lead

Surfing

48%

2%

The rise of digital distribution has a number of strategic implications


1. Digital distribution grows faster than the

market Physical Retail and Wholesale distribution has to

shrink

2. If you know exactly what you want, you will

buy it online

The store as a “point of physical distribution” is

yesterday’s story

3. If you don’t know what you want, you may

go to a store The future store will be a “point of discovery”

4. The risk of “discovery” and “purchase”

decoupling rises

Long term winners need to build a “closed

distribution circuit”

5. The internet works as a major “magnifying

lens” of brand management shortcomings

Luxury brands need to clean up their physical

distribution, if they want to retain perceived

exclusivity and safeguard brand equity long-term

6. Brands and categories with high wholesale

exposure will be under increasing pressure

Wholesale dependent brands / categories need to

invent a new distribution paradigm

Physical Retail and Wholesale distribution has to shrink


Abercrombie

Kingfisher

GAP

Foot Locker

Inditex

Primark

Next

R² = 73%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

200 300 400 500 600

RO

CE

(In

cl. G

ross G

oo

dw

ill a

nd

le

ase

ad

juste

d)

Sales / Sq Foot (EUR)

ROCE (Incl. Gross Goodwill and Lease adj.) vs Sales / Sq Foot

Source: Exane BNP Paribas estimates, Company reports

Note: On the latest Annual Report published – Year end differ

ROCE improvement (Incl. Gross Goodwill) vs TSR

Source: Exane BNP Paribas estimates, Company reports, Factset

Note: Prada from 2011

HER

KER

LVMHLUX

BRBY

UHR TODS

CFR

BOSS

PRA

R² = 85%

(100%)

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

(15%) (10%) (5%) 0% 5% 10% 15% 20%

TS

R (

20

05

-20

17

)

ROCE (inc. Gross Goodwill) improvement (2005-2017)

In fact, physical retail has already started to shrink


Source: Exane BNP Paribas Proprietary POS Database, RE-Analytics

Note: Excluding Outlets; Not adjusted for multiple locations in shop in shop / department stores

2013 2015 20172013-2015

CAGR

2015-2017

CAGR

2015-2017 %

GROWTH

Tory Burch 59 123 149 44% 10% 11%

Michael Kors 248 482 566 39% 8% 34%

Coach 744 712 786 -2% 5% 30%

Lancel 145 91 74 -21% -10% -7%

TOTAL ASPIRATIONAL 1,196 1,408 1,575 9% 6% 68%

Céline 104 161 257 24% 26% 39%

Saint Laurent 100 156 188 25% 10% 13%

Bottega Veneta 220 285 316 14% 5% 13%

Dior 216 200 197 -4% -1% -1%

Hermès 305 315 308 2% -1% -3%

Chanel 331 361 338 4% -3% -9%

TOTAL HIGH-END 1,276 1,478 1,604 8% 4% 51%

Prada 264 375 382 19% 1% 3%

Gucci 420 503 505 9% 0% 1%

Louis Vuitton 475 473 473 0% 0% 0%

Burberry 444 466 461 2% -1% -2%

TOTAL MEGA-BRAND 1,603 1,817 1,821 6% 0% 2%

Balenciaga 91 97 125 3% 14% 11%

Chloé 135 141 168 2% 9% 11%

Fendi 210 221 227 3% 1% 2%

Dunhill 162 122 126 -13% 2% 2%

Miu Miu 125 183 176 21% -2% -3%

Shanghai Tang 41 43 30 2% -16% -5%

Marc Jacobs 215 246 149 7% -22% -40%

TOTAL CHALLENGERS 979 1,053 1,001 4% -3% -21%

TOTAL SOFT-LUXURY 5,054 5,756 6,001 7% 2% 100%

Retail network evolution (# of POS)

The store as a point of physical distribution is yesterday’s story


4%

5%

6%

7%

8%

9%

10%

11%

12%

199

9

200

0

200

1

200

2

200

3

200

4

200

5

2006

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

2015

201

6

201

7

Vacancy Rates in US Shopping Malls

Source: Reis, Datastream

0%

5%

10%

15%

20%

25%

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

China US

Online Sales as a % of Total Retail Sales

Source: Euromonitor

The future store will be a point of discovery (1)

Monobrand – Retail as DNA


Starbucks Roastery in Shanghai

The future store will be a point of discovery (2)

Multi-brand – The Department Store / Shopping Mall as Curator


Harrods

A “closed distribution loop” becomes vital

Showrooming is OK, if you then capture purchases online


Wise luxury brands will work to build mono-brand

website traffic and sales


Source: Exane BNP Paribas

1) Luxury brands need to have e-commerce capabilities - there is no Plan B

Hence the investments are already in the BS and the P&L

2) SG&A cost of digital retail are lower than those of physical retail

Hence, if brands can operate direct physical retail

they will be all the more capable of operating direct digital retail

1) As a temporary solution - when they have too much fish to fry

2) If they want to achieve rapid online growth [and are late in their direct digital capabilities]

3) In markets where traffic is highly concentrated - e.g. China with Tencent and Alibaba

100 80-85 40-50

Operating cost is really a non-issue in this calculation

Then, why would luxury brands use concessions or wholesale online ?

Revenue for the Brand

Direct Retail

Mono-brand Website

Digital Concession

e.g. Farfetch

Digital Wholesale

e.g. NAP

The jury is out on multi-brand full price digital luxury retail –

e.g. YNAP


Structural

Competitive

Advantage

First Mover

Competitive

Advantage

FUTURE SCENARIO 1

Net-à-Porter will continue to grow faster than the

market and its competitors. NAP's market share of

full-price digital luxury retail will therefore continue to

go up. In five years Net-à-Porter will be THE

dominant player - a sort of Amazon of luxury goods

online. All brands will have to go to it, and will

depend on it.

FUTURE SCENARIO 2

Full-price digital luxury retail will be more and more

crowded. Luxury brands will build up their mono-

brand direct retail operations. Traditional department

stores will scramble to grow in ecommerce. Chinese

players will rise. New entrants will continue to pour in

- Farfetch, Matches, Moda Operandi, Orchard Mile,

etc. NAP's market share will decline.

Luxury brands need to clean up their physical distribution

– Wholesale (1/2)



– Wholesale (2/2)


Company Website Chrono 24 Website

-27%


– Grey Market


Source: Company website

ISA store on Nathan Road – Hong Kong ISA Website

Eyewear & Watches - In need of a new distribution paradigm


Consolidated

Fragmented

Capital

Intensity

HighLow

Retail

Structure

Virtual Integration

e.g. Luxottica / STARS

Sell-Out Control

e.g. Rolex / Product Card

Digital Bypass

Digitally Native New Entrants

e.g. Allbirds - Sneakers

Downstream

Retail Integration

=> M&A

e.g. Luxottica / Lens Crafters

Downstream

Retail Integration

=> Organic

e.g. Swatch / Hour Passion

e.g. Daniel Wellington - Watches

Strategic options to increase retail control in a multi-brand category environment


RTW - Lack of viable retail model weakens long-term "designer

fashion" brand equity prospects



+ Large flagships in prime locations

+ High dependence on seasonality

+ High dependence on sizes

= poor space productivity and poor full price sell-through

High engagement with off-price destroys perceived value

High dependence on licenses increases ubiquity perception

High dependence on Wholesale brings low price discipline

Engagement with grey market further weakens point of purchase control

Traditional department stores are going down

Traditional mom & pop retailers are going down

Retail driven mass fashion brands - Zara, H&M, etc.

Retail driven mid-price brands - Sandro, Maje, The Kooples, Liu Jo, etc.

Digitally native fashion retailers and brands - Boohoo, Everlane, etc.

Absence of sustainable retail model prevents tight distribution control

Shrinking

Customer Base

Shrinking customer base reduces discretionary brand resources

LONG-TERM BRAND EQUITY?

Value

Competitors

Highest cost per use of all luxury categories invites value competition

Poor

Distribution Control

Poor distribution control weakens percevived brand exclusivity

Loss-making

Retail Model

In conclusion

19

We are on the verge

of further significant

acceleration of digital

luxury distribution

This has a number

of strategic

implications for

luxury goods players

– as it forces them to

Players and brands

with high structural

wholesale exposure

see their challenges

multiply

All major luxury brands are on the bandwagon

Legitimate digital luxury in China is taking off

Digital luxury in the USA is accelerating

Trim their physical retail and above all wholesale exposure

Make their stores more relevant and different

Build a physical and digital distribution “closed circuit”

Reconsider their wholesale, grey market, and off-price activity

Ensure tighter price discipline and brand deployment

Higher risk of brand trivialisation

Higher exposure to digitally native new entrants

More pressing need to develop a viable distribution stratagem

Exane BNP Paribas | RETAIL EVOLUTION 2018


Extensive Research and Coverage of Luxury Goods (1/2)

LUXURY GOODS:

The Counter-

standardisation of

Luxury Retail

LUXURY GOODS: Digital and

Physical Integration: Luxury

Retail's Holy Grail

LUXURY GOODS: Online

Offer Dive & Pricing

Landscape FW17/18 Sharp

Ecommerce Acceleration

LUXURY GOODS:

Year of the Dog in

China? Only in Name

LUXURY GOODS: The

Strategic Perspective on

Luxury Goods

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DISCLOSURES

Exane BNP Paribas 22

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Melania Grippo (Exane SA), Guido Lucarelli (Exane SA), Luca Solca (Exane SA)

Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Ltd is authorised and regulated by the Financial Conduct Authority in the United Kingdom, and Exane Inc. is regulated

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