Discussion of the ‘metaverse’ has gone from being a fringe topic to one that is now everywhere. What more vindication of the idea entering mainstream consciousness than Facebook, a near trillion-dollar company, changing its name to Meta? Luxury brands are dipping their toes into this new virtual world. GAM Investments’ Swetha Ramachandran recently discussed the topic with luxury expert Tom Meggle, a former Louis Vuitton and Cartier executive, who manages his own consulting business exploring the intersection of technology and luxury. In part one of their conversation, Swetha and Tom examine the luxury market’s response to the pandemic, the growth potential of virtual fashion and the characteristics of the Gen-Z consumer cohort.
Swetha: I am interested in the transition to digital fashion and luxury. It will be fascinating to see how luxury companies can benefit from this opportunity, or let it pass them by and potentially become extinct. For investors, it is really important to understand this so we can plan accordingly.
Tom: The topic is really exciting. The Covid-19 pandemic has accelerated trends that were already visible as the consumer is evolving radically and driving a transformation of business models. Corporates often struggle to accept the necessity of trial and error. The market is moving so fast that the leaders will likely be those who have the audacity to enter unknown territory without having the security of proof of concept.
Swetha: Luxury itself rests on notions of timelessness and permanence. That ‘fail fast, fail early’ mentality that exists in tech just does not exist in luxury. A failure can be very costly to repair. What is really interesting is the collision course between what a brand's DNA is telling them to do, and what the consumer wants them to do.
Tom: Luxury is about the sophistication, of course, as well as craftsmanship and everything that relates to that. But the most important part of the luxury goods industry is storytelling. Many brands underestimate the importance of this opportunity. The best way for a luxury brand of being sustainable is to be earning more from selling less physical product. In two decades from now a luxury brand could be earning more money from selling experiences and non-fungible tokens (NFTs) than from selling physical products.
Swetha: The revenues of the leaders in hard and soft luxury, Cartier and Louis Vuitton, for example, are each roughly a third bigger than in 2019. That is a great amount of growth in a very short and difficult time period. Has this surprised you?
Tom: No, not at all. A significant amount of low hanging fruit in recent decades, notably in the booming Asian market, led to a complacency in the industry. Covid-19 put brands in somewhat of a warlike situation. They were forced to focus on the only source of revenues –online and e-commerce. There has been a clear and radical shift of power, investment and focus and the Covid-19 affected most those brands who were not ready to switch gears to e-commerce and Asian markets quickly. Jointly with the Covid-19 impact on travel and consumption, the climate crisis is changing consumer behaviour towards buying less and more consciously, which is benefiting the luxury goods industry.
Swetha: Where do you think the industry is on the subject of digital and virtual fashion? What is the next frontier for them to cross?
Tom: There are great opportunities for luxury brands, especially with an emerging customer group, but they are only just dipping their toes into the ocean. Visionaries understand that this is going to be a game changer. In 2015, Alessandro Michele and Marco Bizzarri started turning things around at Gucci by tapping into the zeitgeist and within a few months, it became the most desirable brand in the luxury goods industry. The early adopters will have the advantage; once there is a path to success, the followers are numerous. Gucci has been strong in pioneering digital and sustainability. It was interesting to see the Gucci Garden and the Roblox handbag, which actually sold for more than the physical version. I also admire the Gucci Vault, a platform to promote pre-owned vintage Gucci creations and emerging designers. There is so much happening in this field, for example at The Dematerialised, founded by Karinna Grant (née Nobbs).
Swetha: The Fabricant as also doing some really interesting things with digital sneakers and NFTs, which is a good segue into the Gen-Z consumer. Currently this cohort is a relatively small proportion of total luxury spend because they have not reached peak earning potential. But a decade from now Gen-Z is expected to drive just less than half of total spend on luxury goods. It seems that this digitally-native generation has a very different mindset about what it means to own something.
Tom: To Gen-Z consumers, corporate authenticity is everything. Values, individuality and brand purpose are very important. Everybody wants to be sustainable these days, but this generation of consumers are looking behind the scenes. In our digital reality powered by blockchain and new technologies, there is nowhere for brands to hide. One cannot claim to be sustainable while hoarding dirty laundry in the cellar. We have seen how, within nanoseconds, the perception of a brand can shift. A good example is Cristiano Ronaldo removing Coca-Cola bottles placed in front of him at the UEFA European Football Championship. It must be quite intimidating for such a giant, established brand to realise that they are sitting on a fragile foundation. Although some brands have existed for many decades, heritage and tradition does not preserve them from loss of relevance or maybe even extinction. This generation has a very strong sense of community which is the next aspect. They grew up with video games and socialising through them, which is why everything that is gamified in the virtual world is a big opportunity. I believe the metaverse will shape the next phase of social media, because Instagram and TikTok clearly resonate for all generations. In a world where we have been faced with home isolation, the social connection through virtual communities is very important for Gen-Z consumers.
Swetha: In South Korea, so-called ‘with me’ videos have become extremely popular. The concept involves people watching videos of individuals going about their daily lives just to have a sense of connection with other people while they have been locked down. This is daunting for brands we have grown up with, which come from an environment where they have dictated to the consumer who they are.
Tom: Exactly. There was also dictatorship in how your brand had to be interpreted. There was one version, the hymn that was composed by the brand and then you had to sing it. Now, in my view, the brands that will win are those who engage in an open dialogue and empower their audience to become part of their journey. Clearly there are brands which still struggle adapting to this new world. When you run a multibillion-dollar business with thousands of employees and enormous investments, the first thing that naturally comes to your mind as a CEO or shareholder is on securing your assets and controlling everything. However, in this new world, being risk averse means missing opportunities that arise from a generation with a completely different way of consuming. Stockpiling Jimmy Choos or Manolo Blahniks in a cupboard was for a certain generation, my generation. This will not happen with Gen-Z consumers. They already have a solution: circularity. When they shop, they know exactly how to circulate products, how to rent products out, how to resell products. I believe the brands that incorporate this and have a fluidity in the way they integrate circularity into their offering will be the ones that pave the way forward.
Swetha: The point about control is especially interesting. The world we are entering, especially with younger consumers, is one where everything is decentralised. Blockchain is the opposite of control; it is very disintermediated. Everything is fluid and collaborative. That requires a radical shift on the part of the brands. Some seem to be doing a better job than others. Even a decision by Cartier to launch online on Tmall [in China] when they are not even on Net-A-Porter in the West is a surprising one. Do you agree?
Tom: Yes, although Cartier has also been collaborating. For example, it has partnered with LVMH on the AURA blockchain project. The company’s leadership is zeitgeist driven and anticipates opportunities. They also rejuvenated the brand; Cartier has a strong team in place and its brand purpose is continuously evolving while preserving the company’s DNA. This goes beyond the product. Cultural / social engagement is very important because it resonates for this younger generation. Brands are measured not on what they say, but what they do. It is about activism, not about promotion. It is about driving action, not just nice words.
Swetha: It would seem to me that Cartier’s digital opportunity or opportunity with NFTs is huge. The Fabricant is a digital-only fashion house, whose tagline is: “We waste nothing but data and exploit nothing but our imagination”. In hard luxury, why not create pieces of jewellery that could not exist in the physical world, but that can exist virtually and offer consumers a chance to have that experience? What is stopping companies from doing these things?
Tom: I believe this is actually already happening. But most luxury brands are beholden to their intellectual property and legal departments. Even if you are a visionary and an audacious CEO, there are so many control mechanisms. When it comes to intellectual property and new territory where there is no proof of concept yet, there is a reluctance. However, brands now understand the pandemic was a wake-up call and some really benefited from having done their homework already. There are others who realise they have four or five years to catch up. It is no secret that Louis Vuitton is the most envied luxury brand because it is the only mono-brand retailer that fully controls its distribution. The company has never done wholesale and never had discount in its vocabulary. It is a brand that has learned how to grow because ultimately, if you age with your clients, you die, by definition. The art for a brand to grow is to continuously engage with new emerging customers and retain them. This is where Louis Vuitton is extremely strong. The collaboration with Supreme, for example, instantly rejuvenated the busines in terms of the average customer age, globally. There are more and more brands open to collaborating with competitors, something previously unseen. A decade ago, it would have been hard to imagine a Gucci-Balenciaga crossover or that Bvlgari and Tiffany (as part of LVMH) would join Cartier in a blockchain project. But it is happening now because there are bigger things afoot. Conquering the territories of blockchain and NFTs are big opportunities but also challenges for brands.
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