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Luxury’s online boom(ers)

14 October 2020

GAM Investments’ Swetha Ramachandran believes the increased uptake of online shopping by the boomer generation – particularly in the US and China – could unleash a new wave of growth for luxury e-commerce.

Over the past decade the luxury industry has been successful at redefining itself and its relevance to younger consumers globally, so much so that the typical luxury consumer is now often perceived to be anyone from a younger generation. Following the global financial crisis (GFC), many companies pivoted their product and marketing strategies to target millennials (those born between 1981 and 1996), many of whom were just coming into adulthood. Millennials have now overtaken baby boomers as the largest population segment and are forecast to increase their per capita spending by more than 10% over the next five years1 . While defining a winning post-pandemic marketing strategy for millennial consumers and Gen Z (people born from 1995 to 2010) will also be crucial, these generational cohorts are of special interest with or without a crisis, given their increasing spending power in the coming years. Covid-19 has also precipitated a further shift in spending patterns, and brands would be wise not to ignore the accelerated adoption of technology growth among older generations as a result.

Lockdowns, social distancing and business closures have led to many baby boomers (those aged 55-74) realising that online shopping is not only an increasingly viable option for many of their needs, but also convenient and safe. With seniors utilising the technology at much higher than expected rates, the trajectory for e-commerce's growth now looks quite different than it did just a few months ago. The increased uptake of online shopping by the boomer generation – particularly in both the US and China – could unleash a new wave of growth for luxury e-commerce as consumers become ever more comfortable buying high-priced items online, with older consumers in the US especially contributing significantly to high-priced luxury product sales. Diageo, the world’s largest spirits manufacturer, has estimated that consumers aged 50+ spend more on spirits than any other demographic cohort.

In the US, digital e-commerce research firm eMarketer estimates that this year more than 204 million people aged 14 and older will make an online purchase, two-thirds of whom will be 45 and above. A forecast factoring in the pandemic's effects (see Chart 1) anticipates a 5.8% increase in the number of digital buyers in this latter bracket, up from 3.2%. This equates to nearly five million new users. While some shopping habits may well return to normal post-pandemic, it is also likely that consumers who have tried online shopping for the first time will stick with it, at least for occasional purchases.

Chart 1: US digital buyers ages 45+ (2019-2023) millions, % change and % of internet users

 
Source: eMarketer, June 2020. Note: Ages 45+; digital buyers are internet users who have made one purchase via any digital channel during the calendar year, including online, mobile and tablet purchases.

Those consumers who first came to e-commerce during Covid-19 by way of purchases that were necessities (mainly grocery e-commerce during restrictions) quickly extended their digital footprint to more discretionary purchases. According to the National Retail Federation (NRF), boomers typically made fewer than half of their purchases online pre-Covid, but roughly 70% now say accelerated adoption of technology such as buy online, pick up in-store and curbside pickup (allowing customers to buy online and then drive to a pickup location) has improved their shopping experience. Interestingly, older consumers are using these hybrid e-commerce and omnichannel services more compared to younger generations due not least to their higher risk of contracting Covid-19 and their resulting need to minimise interaction. A similar picture is emerging in China, already the world’s largest online retail market driven by millennial and Gen Z consumers. Covid-19 has been a catalyst for older consumers in China to increase their adoption of online shopping habits, which, once acquired, tend to prove sticky – which is why many brands are seeing little deceleration in their online sales, even as physical stores re-open.

In China, it is important to note that the value of e-commerce consumption by the older generation was already growing at a rapid rate pre-Covid. According to a report released jointly by JD.com and other e-commerce majors in June 2019, e-commerce consumption by older people in China increased 65% year-on-year in 2018. Older consumers are more likely to access e-commerce sites from mobile devices and the number of mobile payment users is also increasing rapidly. As such, this consumer group appears to have strong potential as a growth area in China’s e-commerce market. The products they buy are varied, ranging from health foods to cosmetics and mobile phones. The popularity of sportswear and speakers to play music for dancing in open spaces also indicates that older people are focusing on their appearance and sports, and many are quite active in social activities.

What does this mean for luxury brands?

One advantage for luxury brands of having boomer consumers is that although these luxury consumers are increasingly adopting what consulting firm Bain has described as a “millennial state of mind” in terms of digital adoption, they are typically more brand-loyal and respond well to traditional brand communications versus younger generations. It is well known that in a time of crisis and uncertainty consumers flock to what they know well and trust; luxury brands, because of the moat around them and the significant investment they have made in communicating their credentials and purpose to the consumer, are very much at the forefront of brands that are trusted and loved by consumers. Therefore they feel comfortable spending their money on luxury brands at this uncertain time. Another factor is sustainability. At this time consumers across all generations are taking a step back with their spending patterns and what is and is not essential. People are realising that actually ‘buy less, buy better’ is essentially the essence of the luxury sector.

The other major positive of the boomer demographic is, of course, their spending power. With accumulated wealth and a long life expectancy, these consumers are ideal full-price customers for luxury brands across a range of industries. This has implications for categories that may benefit, such as wines and spirits, given older consumers spend more than three times per capita on premium spirits than younger consumers, as noted by Diageo. It is also relevant for driving new business models, for example subscription-led models for areas such as skincare, where older consumers tend to be more loyal to their known and loved brands and have a regular usage routine. Estée Lauder noted that during the period of store closures in the US, its online customer growth of +195% during April-June comprised largely older consumers versus the prior average. Brands will need to market in a specific way to draw older consumers online, as well as to build trust in purchasing high-ticket items online for a group that is relatively new to this type of shopping. We remain vigilant in trying to identify which brands are investing to most effectively recruit new consumers in this new era.

 

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