Key View: Offering experiences is key for luxury brands to maintain relevance among younger generations. These experiences can either be within the store (e.g. pop-up events, incorporating new technology into the shopping experience) or outside of the traditional retail environment, for example by increasing exposure to the fast-growing tourism and hospitality sector (e.g. opening hotels, restaurants).
Millennial and Gen Z consumers are redefining retail. They value experiences over material goods, and care more about personal well-being and self-expression than status. A shopping trip or ‘day at the mall’, which retailers and department stores previously benefitted from, no longer hold the same appeal as they did for previous generations. Instead today’s consumption preferences are increasingly based on travel, health and dining out, encouraged by a broader ‘experience economy’ made popular by peer-to-peer oriented app services such as Instagram, Snapchat, Uber and AirBnB. Luxury brands must embrace this desire among consumers for unique, share-worthy experiences if they are to maintain relevance and continue to grow.
The need to tap into experiences can be conceived of in two ways, firstly in terms of re-envisioning the in-store environment via new technologies, events and product lines, and secondly out-of-store, by increasing exposure to the leisure and hospitality industry in order to capitalise on growing demand for luxury experiences in hotels and restaurants.
5 Ways to Target Consumer Desire For Experiences
Source: Fitch Solutions
Experiences In-Store: Technology and ‘Retailtainment’
The luxury sector has traditionally relied on brand prestige and exclusivity to sell products. However, consumers are increasingly more discerning and companies now need to do more to convince the customer of a product’s worth. In many ways, creating a ‘buzz’ around a particular brand is more important than the product itself. Experiences are a crucial means to achieve this, giving people a reason to engage with a brand and visit a store when perhaps ordinarily they would not. As shown by the examples listed in the table below, these experiences can take different forms, but typically require a combination of new technologies, social media, and entertainment to create a unique space that attracts the attention of Millennials/Gen Z.
New Technologies – allow customers to physically and/or virtually experience products. This could involve augmented/virtual reality, interactive smart mirrors, or artificial intelligence software that offers personalised product recommendations via a mobile app.
Events and ‘retailtainment’ – The aim here is to create a retail destination that sells a lifestyle. This is less to do with the product and more about adding value and connecting with consumers in an immersive environment. For example offering complementary drinks in a relaxing setting, hosting a live music event or teaching a new skill in a pop-up workshop. These experiences will not necessarily drive sales straight away, but when done right, they will sell a lifestyle that positions the brand at the forefront of consumer mindsets when they are ready to make a purchase, invaluable in what is a crowded global luxury market.
Social Media – Another goal of bringing experiences to the store is to generate social media content. Consumers want to create their own memorable moments, and be able to share those experiences with their peers, helping luxury brands reach new audiences. According to a 2018 study by Digimind, 40% of luxury purchases are influenced by what consumers see on online platforms such as Instagram.
|Canada Goose||Opened its largest store in Montreal, featuring a ‘cold room’ where customers can test parkas in temperatures as low as -25 degrees Celsius||Nov-18|
|Hermès||Opened “Carré Club” (carré means “scarf”) pop-ups in New York, Toronto, Singapore, Los Angeles and Milan. Customers can get their photos taken, sing karaoke, enjoy complimentary refreshments from a café and watch designers work in an on-set atelier||Nov-18|
|Ralph Lauren||Installing RFID-enabled interactive mirrors in dressing rooms which allow shoppers to read more details about items and request alternate colours or sizes||Ongoing|
|Chanel||Chanel’s New York flagship on 57th Street received a makeover designed by architect Peter Marino. The store features sculptures and art installations, and also has the top floor reserved for private shopping experiences. Also launched Coco Café, a pop-up café with signature pink coffee cups with the chanel logo, with customers encouraged to take a photo with it and share on social media.||2018|
|Swarovksi||Testing a new store format in London called ‘forerunner’ which includes an interactive selfie wall and augmented reality app to allow customers to ‘try on’ jewellery.||Ongoing|
|Source: Fitch Solutions|
Experiences Beyond The Store: Opportunities In Hospitality
We also see opportunities for luxury brands to tap into consumers’ love for experiences beyond the store environment, by increasing their exposure to the fast-growing tourism and hospitality sector. Restaurant and hotel spending is one of our outperforming consumer spending categories for 2019 and beyond, with spending set to average 5.9% annual growth globally over our five-year forecast period, reaching over USD3.9trn by 2023, on the back of the growing consumer preference for travel and dining out. In 2019, we project international expenditure abroad globally will rise by 7.4% in 2019 to USD1.7trn, a slight slowing from 7.8% y-o-y in 2018, but still solid growth by historical standards. This will be driven by higher spending on premium hotels, food, drinks and leisure activities for tourists abroad, a positive signal for the hospitality sector.
There are plenty of synergies between luxury brands and the hospitality industry in terms of conveying an aspirational lifestyle. Consumers capable of spending USD1,000 on a luxury handbag are also likely to splash out USD1,000-a night on a hotel in the Caribbean. Moreover, as more global consumers become more mobile and worldly, we expect spending on luxury branded experiences to become increasingly sought after, opening up opportunities for luxury brands to target hotels, high-end restaurants and other tourist attractions as an alternative channel to promote and sell the luxury concept. We explore these opportunities in more detail below:
‘Experience Economy’ Driving Tourism
International tourist expenditure and number of hotel rooms globally
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
1. Buy/Operate Hotels
Hotels provide luxury brands with a physical space beyond a conventional retail store that not only offers opportunities to showcase existing and new product categories, such as furniture, but also helps bring a brand to to life and highlight a particular lifestyle or design philosophy. In April 2019, luxury conglomerate LVMH completed its acquisition of the Belmond group for USD3.1bn. Belmond owns or has stakes in over 40 luxury hotels, restaurants, trains and river cruises globally. While it is not LVMH’s first foray into hospitality, as the company also operates its own brand of hotels called Cheval Blanc, the scale of the acquisition marks out the company’s ambition in luxury experiences and signals the growing trend of luxury brands/fashion houses showing interest in hospitality.
- Bulgari has six hotels, including one in Shanghai that opened in July 2018, with plans to open new hotels in Moscow, Paris and Tokyo by the end of 2022.
- Luxury Swiss watchmaker Audemars Piguet is set to open a 50-room hotel in Switzerland in 2020.
- Premium lifestyle brands in the US including West Elm (furniture and homeware), Equinox (luxury gyms and fitness) and Shinola (watches and jewellery) are all in the process of opening boutique hotels.
Partnerships are key to the success of luxury brands expanding into hotels. Running a hotel requires specific knowledge and expertise, which is why potential partnerships with other hotel groups is a sensible move. Luxury brands therefore lend their name or branded concept but the handling of the day-to-day operations stands with the hotel group. Bulgari for example hosts a joint venture with the Marriott group to run the Bulgari Hotels & Resorts brand.
2. Targeting Tourist Spots
A cheaper, less risky alternative for luxury brands is to sponsor popular tourist attractions that resonate with a luxury experience. In 2018, the ‘Matterhorn Glacier Paradise Ride’ was unveiled in Zermatt, Switzerland, a state-of-the-art cable car that takes visitors to the top of the mountain. Four of the cable cars, known as the ‘Crystal Cabins’, are embedded with 280,000 Swarovski crystals and glass floor panels. For Swarovski, the luxury cable car experience presents a lucrative opportunity to target millennial travellers, including the 1.5mn Chinese tourists who visit Switzerland each year, with the brand able to capitalise on the spectacular nature of the cable car from an experiential marketing perspective, as well as the fact that the Glacier Ride is highly ‘Instagrammable’, meaning that Swarovski is also able to benefit from user-generated content on social media too.
3. Gastronomic Experiences
We expect to see luxury labels move into haute cuisine over the coming years, as another way of reducing reliance on bricks-and-mortar retail and boosting experience-based offerings. Dining out is increasingly preferred to cooking at home, a trend driven by rising disposable incomes, convenience, and the ‘experience’ culture of creating memories that are then shared via social media.
Investments in opening restaurants and cafes would, at least initially, be for marketing purposes, increasing brand awareness/loyalty. The high costs involved in running a high-end restaurant mean profitability would be more of a longer-term prospect, but given that restaurant and hotel spending is projected to grow at a faster rate than clothing and footwear globally over our five-year forecast period, averaging 6.0% compared to 5.2%, financial benefits can be realised (see chart below). That said, luxury firms must ensure that the service and quality of food provided is the same high standard associated with their other goods, otherwise it could dilute their brand.
Restaurant Spending Outpacing Fashion
Global household spending by category growth, %
f = Fitch Solutions forecast. Source: National Statistics, Fitch Solutions
- Gucci opened a 50-seat restaurant, Gucci Osteria, in Florence in January 2018, where a three-Michelin-star chef serves up high-end dishes.
- LVMH plans to open its first Louis Vuitton cafe in London by 2020 as part of its Cheval Blanc development, which will create a luxury hub combining high-end retail, accommodation, spa, and restaurants.
- Tiffany & Co will open a pop-up version of its Blue Box Cafe in California in May 2019, following success with its cafe concept in New York.