Ecommerce Rewrites Luxury and Beauty Market

Undoubtedly, e-commerce increases in importance for all industries - from power tools to books, medical supplies to toys, e-commerce is a source of sales like never before. With advancements in technology, proliferation of portable internet devices and increased functionality of social networks, it is safe to assume this retail channel will continue to grow with force.

But two of the most important spaces for online retail are beauty and luxury. Take Estee Lauder Companies for example. In 2012 web sales increased worldwide, reporting 20% growth in the US, 34% in the UK, 40% in China and a whopping 55% in Germany. They've cultivated about 340 marketing and e-commerce sites in 50 countries since 2001. Total sales climbing 10.2% to $9.7 billion earned them the No. 58 spot on Top 500 list of internet retailers. Where those numbers only make up 5% of their total sales for the year, there is no question that web presence is becoming continually important for the sector.

This focus on e-commerce, however, could mean something quite different for luxury clothing brands. Online retail funding for custom-made clothes doubled last year to $328.7 million. Why are venture capitalists investing so much in this market? Because its booming. Custom clothing startups like J.Hilburn Inc., American Giant and Bonobos Inc. are gaining share in the US e-commerce market- winning customers because cutting stores from the supply chain allows for lower price points than department stores who often marked up 3x from factory to store. Putting it in perspective: a men's dress shirt from J.Hilburn sells around $125, the same shirt from Zegna on Neiman Marcus website sells for $325-$435, even though the fabric is sourced from the same Italian mill.

Lesson: Zegna and other lux brands need to differentiate themselves from this market to give (particularly Millennials) consumers a reason to spend the extra money since they are providing extremely similar services at fractions of the price. I say this is important particularly for the Millennial audience because, where they may be in school debt, they are the largest group purchasing apparel, spending 8% more than those ages 35-44. Millennials are willing to spend, sure, but are also aware of their debt and happy to find a deal, which is why sites like Gilt and Rue la la are so popular with this demographic.

Additionally, online sales are not limited to a computer. 41% of Millennials have made a purchase using their smartphone. We are seeing an influx of purchasing from tablets and smartphones across all demographics, and if companies aren't optimizing they are losing sales. And this is not just in the US- growing mobile device usage in emerging markets like China, India and South Africa create excellent opportunities for cutting edge luxury and beauty brands to increase sales and develop prefernce from Millennials, a fiercely loyal group.

How the International Political Economy Impacts Beauty and Luxury Brands

As the economies of China, Brazil, India and Russia have increasingly become more prominent players in international finance, so have their citizens enjoyed their rising affluence. The Brazilian middle class comprised 54% of the population as of 2011, which makes it the largest of all five official classes and has allowed for a 4.4% increase in purchasing power between February and March 2012. This is nowhere as prominent in China, where the average disposable income per capital of China's middle class rose $2,240. Since 1980 Chinese yearly earnings have multiplied 10 fold. The Brazilian middle class comprised 54% of the population as of 2011, which makes it the largest of all five official classes. 


This rise in disposable income enables people to spend more on leisure activities than ever before. One such activity that is on the rise is travel and tourism. When passenger volumes increase, like those we are seeing in emerging markets, travel retail grows. As of 2011 the largest airport retail market was located in Europe, but some estimate that the Asia-Pacific retail market could grow as much as 75% by 2015.


The global travel market as a whole is fastest growing retail channel for beauty, fashion and accessories. It is projected to grow 60% to $45 bilion by 2015, and beauty sales, in particular, will likely grow more than 80% over the next five years. As travel and spending from these regions increase, so do companies investment in airport stores. For example, Estee Lauder already has nearly 1,000 airport stores, featuring such respected brands as Aveda, Clinique and Bobbi Brown. Estee Lauder Companies are looking to add additional stores in domestic airports in China and Brazil. To stay ahead of the curve, they are currently scoping out locations that could one day become vacation hot spots in China. 


Sales are not only rising in airport retail locations, but also in destinations as well. For example, tourism in Italy rose by 22% and and their spending increased by 24%. It seems that the Euro's devaluation is the tourist's gain. The Chinese Yuan, for example, rose 17% against the Euro last year, often making it less expensive to purchase luxury goods abroad in Europe rather than in their home country. Overall luxury sales could also grow by 15% over the next five years, mostly in travel retail outlets, and luxury retailers are taking notice. High end fabric and suiting brand Ermenegildo Zegna is spending aggressively on marketing to tourists by working with tour operators to inform them of Zegna outlet locations, hiring multilingual staff and adjusting the sizes and products featured in store. Zegna believes they could see a 10% growth in store as a result. Cheif Executive Officer Patrizio Bertelli of Prada and Chief Financial Officer of PPR SA (PP) and French owner of Louis Vuitton both contributed first quarter growth to the contribution of tourist purchases. 


Luxury and beauty brands must understand the shifts in the world market to stay relevant to their clientele. There is no doubt that the international beauty and luxury market should value and cater to tourists from emerging countries to ensure their brand's stability and growth as former powerhouses continue to rebuild their economies.