Swetha Ramachandran, Investment Manager, Luxury Brands, lifts the lid on the fascinating world of digital luxury. As the expansion of the ‘metaverse’ blurs the boundaries between the physical and the virtual, investment opportunities are being created.
The pace of change is dramatically accelerating in an industry whose uniqueness has, until now, rested upon a notion of permanence and timelessness. Innovators are emerging, enabled by the convergence of the gaming, fashion and crypto worlds, to create a new mindset as well as ecosystem around the consumption of digital art, fashion and luxury collectibles. Whether this will exist in parallel, be subsumed within, or ultimately assert its dominance over the prevailing brand and retail paradigm, is the great question facing the luxury industry.
Consider the following;
- In 2019, Dutch fashion start-up The Fabricant sold the world’s first digital only dress ‘Iridescence’ on the blockchain for USD 9,500. The item exists solely online and is fully traceable and tradable. The brand’s founder Kerry Murphy has gone on record to state his belief that his company will be the first billion dollar digital fashion company. You can read more here.
- In May 2021, Italian luxury house Gucci, as part of its centenary year celebrations, made a foray onto gaming platform Roblox to create an immersive and virtual ‘Gucci Garden’ experience in the ‘metaverse’– which subsequently led to the resale of a digital collectible Queen Bee Dionysus handbag for the price of USD 4,115 – versus USD 3,400 for the ‘real life’ version.
- On 12 June, British-based digital couture brand Auroboros will debut its first ready-to-wear show as part of London Fashion Week with the exclusively digital 14-piece collection to be showcased in film, worn by a physical model.
Plus ça change…
Change, in the luxury industry, to paraphrase Hemingway, has a habit of occurring ‘gradually, then suddenly’. From its origins in quieter times, as luggage makers or jewellers to royalty and the well-heeled, the world of luxury has more recently had to contend with multiple revolutions: what Bain refers to as the ‘sortie du temple’ starting in the mid-90s with personal luxury brands largely leaving behind their rarefied atmosphere to appeal to a wider audience, consolidated with the ‘democratisation’ or broader accessibility phase of the early 2000s. This has been followed by the emergence of the Chinese middle class as a significant consumer from the early 2010s to the e-commerce revolution, which went from ‘nice to have’ to a new religion in the wake of the Covid-19 crisis.
This is not what your parents knew to be luxury
There is a palpable sense that it is the current transformation which may prove the most ‘revolutionary’ of all – that of a virtual terrain or metaverse (a more immersive, augmented and shared virtual space) for luxury brands to become rooted in. This would not merely involve brands marketing or selling their products, but communicating their brand identity, engaging with communities and creators, and fostering brand trust and loyalty through participation in the blockchain – the imperative being driven by digitally native (Generation Z) and digitally biased (millennial) consumers, who could account for two thirds of overall luxury spending by 2025.1
The revolution will be tokenised
According to a Deloitte survey on digital media trends, 87% of Gen Z consumers say they play video games on their smartphones, gaming consoles or computers at least weekly. Moreover, this generation is estimated to prefer playing video games relative to consuming video entertainment by a multiple of over two times. The consequent blurring of lines between younger consumers’ physical selves and virtual gamified avatars lends itself ideally to ‘tokenisation’ – a unit of data stored on a digital ledger, or blockchain, which facilitates the trading and ownership of (among a myriad of use cases) supply-constrained luxury collectibles, whether twinned with a physical purchase or online only. Digital sneaker brand RTFKT Studios and artist FEWOCiOUS’ non-fungible token (NFT) art resulted in USD 3.1 million of sales generated in just seven minutes on NFT marketplace Nifty Gateway. Each digital sneaker comes twinned with a physical version – the opportunity for brands to optimise their supply chains by selling a digital version of the coveted product while the consumer waits for the physical one is a game changer. For a discussion of NFTs from another perspective, click here to read a recent article by GAM Investments’ Mark Hawtin, titled ‘Crypto, NTFs and Blockchain’.
Brave new world
It is said by some on occasions that we tend to let hype dominate, and therefore overestimate how much and how quickly change can happen in the short term, while vastly underestimating the magnitude of transformation that can potentially occur in the long term. Well beyond the current frenzied interest in NFTs, the direction of travel towards a hybrid ‘phygital’ future for the luxury industry is emerging, with a wide variety of incumbent brands tentatively dipping their toe even as the digitally native start-ups charge full speed ahead. A collaborative approach, such as the design of the world’s first global luxury blockchain by LVMH, Prada and Richemont-owned brand Cartier, could pave the way for future industry-wide initiatives. In tandem, we may be less than a decade away from the world’s first digital-only luxury conglomerate. As active investors, we will continue to be vigilant to these fluid developments in order to best capture the luxury sector’s investment potential. What is clear is that this revolution is happening.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.