Euromonitor’s Interview Series: Luxury Institute

As part of Euromonitor International’s interview series, I had the pleasure of speaking with Milton Pedraza, CEO of the Luxury Institute, LLC.  In his role as CEO, Milton advises and coaches luxury CEOs and advises and serves on the boards of top-tier luxury and premium brands, as well as luxury and premium start-ups. Below is an excerpt from our discussion on the changes taking place within the consumer base of the American luxury market.

Changing influencer relationships provide new opportunities for brands to connect with consumers.

By 2019, Generation Z will represent 32% of the global population, and millennials will represent 31.5%. How are these groups impacting the luxury market?

Millennials and generation Z are having a tremendous impact in terms of influence. In the past, older generations often passed luxury products down to younger generations. Now, however, the younger generations are influencing older, advising their elders on what to buy for both themselves and their families. Kids are far more aware than their parents as to what is happening in terms of fashion and jewelry. While they may not have the money to purchase themselves, kids are influencing their parents and playing an increasingly impactful role in helping them determine where they are going to travel, how they are going to spend their money, and what they are going to buy themselves and their families.

Recently, there has been a lot of attention given to bloggers and other paid influencers. Are you seeing this in the luxury space as well?

Definitely, and there have been a few different trends. One is mega influencers. While they influence purchase decisions across generations, they are most influential to younger consumers as they are the ones who are most attuned to social media, and are paying more attention to fashion trends. While mega influencers often do not influence older consumers directly, they do by way of the younger generation, who then go on to influence their parents.

We’re also seeing companies beginning to think about a fourth channel. With the first three channels being retail, online, and wholesale, the fourth channel will be consumer-to-consumer. As an individual can have influence within a small town or a local community, brands are beginning to equip individuals with applications and other technologies that enable them to be local influencers and sell to their family and friends, earning commission when they make a sale. This is spreading as a new way for people and brands to connect, as brands can use local influencers as authentic advocates, encouraging their friends and family to buy luxury products. While not everyone is going to be selling to their friends and family, there will be hubs of it, and being influenced by your friends and family will be widely accepted. Word-of-mouth has always been influential, and it is only going to become more prolific and structured with the use of this technology.

Shifting consumer preferences are influencing brand performance and strategy.

What are the main trends impacting the consumer base for luxury goods? 

One clear trend is a preference toward services and experiential products like beauty. You see this in the popularity of Ulta, Sephora, Glamsquad, Drybar, and their imitators.

Men are caring more about beauty, skin care, and their overall outward appearance than they have in the past, leading to investments in men’s products in categories that used to be only for women. Chanel just launched make-up for men, looking to get ahead of an upcoming trend.

Companies are offering more services, and luxury services are rising faster than luxury goods. They are all personal services, and while the companies may still offer a product, they are also doing something for you. Everybody now is not just productizing but service-izing as well.

How have changing preferences impacted luxury sales?

Consumers are less interested in buying apparel and accessories and would rather spend money on experiences including travel, electronics, food, and wine. There has also been a tremendous focus on consumer spending for the home, and as consumers become increasingly enthralled with things like HGTV and Architectural Digest, there will be a trend away from apparel and accessories and more toward those types of products.

For these reasons, many of the recent challenges for brands were consumer behavior-driven as spending preferences changed. It didn’t help that some brands had been beaten up by the fact that their product was widely available and highly discounted, which was the case of Michael Kors, Kate Spade, Ralph Lauren, and to a large degree Burberry. A lot of these brands wounds were self-inflicted, but some can be attributed to changing consumer trends and behaviors as well.

As the ecommerce playing field is increasingly leveled, a focus on product, service, and relationships provides a competitive advantage.

Is there anything specific that brands are doing to adapt to ecommerce growth?

There are several things that they have now had to adopt, including free and fast shipping. Having a website that is easy to navigate, fast, friction-free, and features an easy payment process used to be a competitive advantage. Many more companies, albeit not all of them, have upped their game in technologies and processes for ecommerce, so a website is no longer enough to stand out.

You have probably heard that Farfetch recently filed for an IPO. I think that platforms are doing a better job at bringing in and supporting brands than ever before. For that reason, many luxury and premium brands are outsourcing a lot of their online needs to experts. By partnering with the Farfetches, Apple Pays, and Masterpasses of the world, brands can immediately have a great online presence and distribution capabilities. Platforms in particular have upped their game in terms of storytelling and product curation, and they make it easy for brands to present their entire inventories online.

As a result, being an expert in ecommerce is now no longer a competitive advantage. The playing field has been leveled pretty well – although at a higher plane, but still leveled. Everybody is upping their game, but I don’t see ecommerce as a unique competitive advantage as brands can partner with platforms and other service providers to obtain full online capabilities. Competitive advantage now comes back down to the product and the services provided.

How can brands provide a competitive advantage through service?

In terms of the way people are being treated in stores and the service level provided, today you need to train the salesforce to have knowledge, expertise, and emotional intelligence. You don’t train them to sell and you don’t train them to push hard. A lot of brands have trouble with this, but emotional intelligence is a skill that can be developed. In terms of service, you are seeing a lot more companies map and begin to understand the customer experience, but brands cannot be successful without overlaying sheer humanity into these experiences

When it comes to luxury goods and services, it’s especially important that brands develop these relationships with customers. Currently, we are seeing companies like Stitch Fix try and fail to do so by going about personalization in a roundabout way by using machine learning and AI as opposed to knowledgeable and empathetic humans. Companies that will depend primarily on AI and only a little bit on human interaction to make recommendations for customers aren’t going to work in the long run. Instead, brands need educated, expert humans who are both enhanced by the AI and who can also override the AI when needed. There are lots of nuances to fashion and algorithms can be wrong extremely often. To add the level of personalization required to serve luxury customers, humans are needed to help curate or just to put in a kind word to customers. In the luxury industry, the growing trend for success is transforming customer experiences through humanization aided by AI, and it looks more like what Moda Operandi is doing than what Stitch Fix is doing.