Two years of on and off restrictions in response to the Covid-19 pandemic have left retailers – particularly those operating in the luxury sector – grappling with many challenges. The economic downturn in 2020 led to a shrinkage in purchasing power and willingness to buy luxury goods, prompting customers to rethink how they consume ‘luxury’. As a result, the overall global luxury market contracted by nearly 12 per cent that year, its first contraction in more than ten years. (see our Global Powers of Luxury Goods 2021 report).
The traditional ‘luxury customer’ is also changing. Millennials (those born between 1981 and 1996) now make up 35 per cent of the luxury market and are predicted to make up more than 50 per cent by 2025 according to research by Statista. This hyper-connected client base comes with different expectations and demands, particularly around the online shopping experience. This generation of consumers want a superior connected and bespoke service as well as their sustainability considerations to be part of the offering. Indeed, when luxury consumers emerge on the other side of the pandemic, they are more likely to look further into whether luxury brand values and purpose match their own. As a result, it is important for luxury retailers to welcome and adapt to that change to remain relevant, desirable, and ultimately thrive.
In response, the luxury retail sector is seeing the emergence of two key trends: rapid digitisation, and the rise of circularity. What are the legal implications of these trends?
Digitisation of luxury retail
It is often assumed that customers prefer to purchase luxury items in high-end physical stores, with the best customer service and experience. However, the combination of retail closures triggered by the pandemic, together with high levels of smartphone penetration, have led to increased online luxury goods sales and demand for more digital offerings. Some of the most famous household names in retail who do not necessarily have physical stores, have built their success on there being a strong market for online luxury retail. Meanwhile, many more traditional luxury retailers, with a long-standing physical retail presence, have had to adapt their strategy rapidly and ramp up their digitisation capabilities.
For many of these incumbent luxury fashion houses, the key has been to combine technology with the in-store experience. In addition to the highly-publicised moves into the metaverse and the use of non-fungible tokens (NFTs), luxury brands are adopting a variety of interactive displays, immersive and virtual reality experiences, QR-code-based images, video sharing, to bring high-end products to life in non-traditional ways. Augmented reality is also being employed to replicate in-store experiences at home. However, human interaction remains a fundamental part of the luxury retail experience, even when shopping online. The luxury customer relies on a retailer that can connect on a personal level and respond to their specific individual needs. For example, ‘digital personal shopping’, which is done entirely virtually, is able to retain the human and one to one elements customers want.
Digitisation often requires contracting with third party suppliers, such as software developers. Contracting for digital services implies a number of further considerations including: the right contracting model for the software whether as a subscription service or as a one-off build, the intellectual property rights (IP) ownership model, the need to comply with the applicable regulations, or ensuring the requisite data protection measures and consents are in place. The more ambitious the project, the more complex addressing these considerations will be.
With new technologies or content being developed, new IP rights are created. While many such IP rights arise automatically – such as copyright in software, or confidential information in new pre-launch ideas – others require more proactive legal support and engagement. Luxury businesses are often well-versed in protecting the IP in their designs but may be less aware how to patent opportunities in their digital innovations. These legal opportunities are best considered at the outset of a development project.
The different circular business models
Historically, the focus of the luxury retail market has always been on selling new goods, also known as the ‘primary market’. However, our Shifting sands: Are consumers still embracing sustainability? research, found that at the time they were surveyed, 39 per cent of UK consumers had reduced the number of new products and goods they bought in the last 12 months as they focus on second-hand or buying less. Of this same group, 68 per cent said they had reduced the amount of new clothing and footwear they bought.
The luxury revolution is being driven by affluent millennial and Gen Z (those born between 1997 and 2012) shoppers. According to the same research, 50 per cent of those shoppers reduced how much they buy and 45 per cent stopped purchasing certain brands because of ethical or sustainability concerns. In response, many luxury retailers are embracing new business models, including making goods more circular, whether via resale, repair or through rental as opposed to sale.
The luxury resale market involves the sale of second-hand luxury clothing, bags, footwear and accessories. Initially made popular by third party e-commerce sites, the second-hand market is now worth an estimated $36 billion and that figure is projected to double in the next five years. Moreover, in 2020, 33 million customers bought second-hand apparel for the first time, and 76 per cent of those first-time buyers plan to increase their spend on second-hand purchases in the next five years. With the resale market expected to grow 11 times faster than the retail clothing market over the next five years, it is therefore no surprise that traditional luxury retailers are getting in on setting up their second-hand resale capabilities.
The resale model is not a ‘one size fits all’, and there are various structures and models available. For example, platforms are now available which allow customers to buy and sell their pre-loved luxury goods in return for store credits. This is a great way to ensure customers continue to shop with the relevant retailer, thereby retaining the revenue and perpetuating the circular model. Other platforms work differently, with a more traditional ‘cash-for-goods’ focus.
Some luxury retailers may express doubts about the resale market, with concerns around cannibalising sales of new products or diluting the exclusivity of the brand. However, the resale value of luxury goods can have a positive impact on the primary market, by encouraging customers to make ‘investment’ purchases in the first place. There is also a sustainability angle: by encouraging the re-use and longevity of products, luxury businesses can prove themselves to be more conscious and sustainability-minded.
The luxury rental market is where designer clothing, bags, footwear or accessories are rented by consumers for a set period of time, in return for a fee. The goods are returned at the end of the rental period and the cycle is repeated. Some retailers are offering this service directly, whereas others are collaborating with dedicated online platforms. While the rental market is less popular with consumers than the more established resale market, according to research by ResearchandMarkets.com this market is estimated it will be worth $2.08 billion by 2025.
Luxury rental enables retailers to tap into a whole new market: customers which aspire to experience the brand, but perhaps cannot, or do not wish to, invest in buying the items outright. While some of the same concerns exist around rental, the rentability of a luxury item arguably solidifies and confirms its cachet and desirability. From the brand’s perspective, it can mean significant repeat revenues, with reduced supply chain costs, together with the additional ability to reach a new audience of customers. Encouraging rental as opposed to purchasing items outright offers similar benefits to the resale model.
To further promote sustainability and extend the life of luxury goods as well as to demonstrate their ‘forever’ credentials, some retailers are offering repair services to restore luxury pieces back to their former glory. The impact of repairing goods can be huge, with research carried out by Wrap, concluding that extending the life of clothing by an extra nine months could reduce carbon, waste and water footprints by around 20 to 30 per cent each.
Luxury goods dedicated aftercare specialists are starting to emerge in the UK. They can offer their services independently or alongside luxury retailers as selected partners. Repair services show a futurist mindset for luxury brands and arguably increase the length of the brand’s relationship with the customer.
Retailers should be aware of at least the following issues when considering adopting one or more of the circular business models:
- Counterfeits are a particular problem for the luxury sector, with some of the most prestigious brands also being some of the most counterfeited ones, according to World Trade Mark Review's Global Brand Counterfeiting Report 2018. It is critical for retailers to be aware of the risks associated with counterfeits especially when it comes to renting and reselling luxury goods. These new channels are opening up new and probably less traceable markets to counterfeiters. Customers buying vintage, or renting, will still demand goods be authentic. The solution might come from the use of technology such as blockchain, which increases the traceability and reliability of information in supply chains. There are also more traditional legal measures, like ensuring contracts include suitable protections such as indemnities, in the unfortunate event things go wrong.
- Parallel imports are branded goods imported into a market and sold without the brand owner’s consent. They are also known as ‘grey goods’. Parallel imports are always a potential problem for big luxury brands. In theory, an increase in retail channels i.e. digital sales, as well as new rental markets, could increase the chances that goods not yet put on the market by the brand-owner somehow make their way into an unauthorised country. Limited edition styles or seasonal drops are particularly high risk for this. Luxury brands, and the retailers which sell them, need to take proactive steps to avoid trade mark infringement disputes. These risks can be minimised by employing a thorough due diligence process prior to buying goods.
- Robust, fair and clear contracts are also key tools for retailers to manage and apportion risk. In the context of the rental market, agreements between the retailer, the owner of the luxury goods and the renter should contain clauses relating to the apportionment of liability in the event of damage to, or loss of, a rented product, rental fees (including late fees and commission arrangements) and provisions regarding cleaning, delivery and returns. For repair works, the retailer’s terms should set out clearly what happens in the event of damage or loss to the goods being repaired, or in the event of a dispute arising as to the quality of the repair work carried out. More generally, contracts can also ensure that materials used in products, packaging or in the supply chain are sustainable. While contracts cannot prevent all disputes from arising, they can help to reduce the likelihood of a dispute progressing to litigation, if the terms of the contract are unequivocal. This is particularly the case where luxury brands are collaborating with third parties, which is increasingly being acknowledged as necessary in order to move the needle on creating a more sustainable luxury industry.
While this is a period of significant change for the luxury sector, it also presents a real opportunity for luxury retailers to innovate and devise new ways to appeal and engage with new customers. With aggregate luxury goods sales being valued at US$252 billion in FY2020, those retailers that embrace change and exploit the new opportunities available are likely to be rewarded with continued financial success, strong brand value and business longevity. However, in focussing on diversifying delivery models and engagement structures, brands should not lose sight of the core legal structures and activities which will support and underpin their businesses.