In the wake of the Silicon Valley Bank failure and upheaval to the U.S. banking system, it’s time to reassess opportunities and challenges for the retail sector. Earlier this month, in an article on “premiumization,” The New York Times noted “a divide in the American economy” where the top 40 percent of earners are being seen as the pot at the end of the rainbow. Our new financial crisis has likely narrowed that group somewhat, which means retailers are looking at the still broad category known as “luxury consumers.”
The luxury consumer has long been a top target for legions of retailers. With their high-ticket tastes and disposable income, they tend to purchase items with larger profit margins while flaunting their willingness to engage in “conspicuous consumption.” This month, however, the wake-up call arrived and we’re about to see that behavior diminish.
Until the pandemic, retail recovery after the 2008/2009 recession moved steadily positive. The pandemic shook the growth out of that recovery, but until recently retailers were recovering their past sales levels. From a time when well-heeled shoppers flocked to expensive new brick-and-mortar stores for the luxury retail experience, the pandemic moved much of the shopping experience online. It’s estimated that the ease of comparative online shopping caused nearly three-quarters of Americans to switch brands. To the relief of retailers, COVID’s wane has brought them back into stores.
While the outcome of the banking debacle is still unknown, the pandemic, by itself, created a different landscape filled with divergent consumer behaviors. Once content to leave data collection and utilization to less-premium consumer brands, luxury retailers now need to face up to a market where a huge amount of consumer activity has shifted online. This comes at a time when premiumization has caused many companies to reposition themselves as luxury brands thereby growing the competition. They face challenges in successfully making this transition, but it’s a necessary and valuable move for any upscale brand to undertake.
The Challenges: Privacy and Utilization
The new era of luxury data utilization starts with collecting and understanding data about current customers. A 2022 survey by the Luxury Institute found that only 44 percent of luxury brands were satisfied or very satisfied with their customer data collection and utilization, while 72 percent reported that the goal of unifying a single customer view in one place for utilization across departments had been only “partially addressed.”
The slow uptake is likely to cost luxury brands countless missed opportunities as the market continues recovering from the pandemic. Moreover, evolving consumer expectations and top-down privacy regulations from global governments mean that third-party tracking and data won’t be as accessible to brands in the coming years.
That’s especially true when you consider that the typical luxury consumer uses an iPhone rather than an Android device, and Apple’s enhanced privacy protections for consumers mean that most premium shoppers are no longer content to have their every click and browsing history tracked and collected.
This means that brands wishing to connect with luxury consumers should emphasize relationships vs. emails to drive brand trial, retention and loyalty. However, technology-driven marketing communications platforms have trained marketers that “batch and blast” emailing combined with loyalty rewards discounting would yield high returns. That period appears to be ending as younger consumers are prioritizing a brand’s values over value.
The Opportunities: A New, Digital-First Generation
A recent report from Bain & Co found that younger consumers (millennials and Gen Z) made up nearly all of the growth across the luxury retail market in the past year, and those shoppers fall squarely into the demographic known as “digital natives.” Coming of age since the advent of the smartphone, these individuals expect their online lives to be curated, customized and pleasing.
The digital-first mindset of the younger luxury shopper represents a powerful incentive for luxury brands to take their digital transformation seriously. Moreover, by relying on true relationships and a transparent exchange of value rather than surreptitious tracking, luxury brands can turn their occasional shoppers into repeat customers and brand evangelists.
In order to successfully make the transition and meet this new generation of consumers where they are, brands need to ask questions and listen intently to their most crucial customers, rather than simply tracking their behavior. New marketing platforms need to offer a digital experience analogous to what takes place in a retail store. There, the salesperson and customer conversation educates the customer on what the brand offers that relates to their life experience and the salesperson learns enough to respond. The digital experience should do the same. The bottom line is that customers aren’t transactions; they’re an opportunity to build a relationship that offers rewards to the retailer.
With generational change upon us, millennial and Gen Z consumers haven’t yet established their behavior patterns. The idea of “high-income-not-rich-yet” (HENRYs) as a market says nothing about the perceptions and proclivities of this group, however desired it is by marketers. Real data is needed and data collection practices of the past aren’t going to work with emergent generations of consumers. We’re moving from an era of transactions to one of trust and that’s the challenge that all retailers must meet.
Jon Stamell is the CEO of Oomiji, the first predictive, conversation-enabled customer data platform.
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