Trade wars and Brexit also creating challenges for luxury sector, Hogan Lovells web seminar hears
The Covid-19 pandemic has forced luxury brands to embrace e-commerce more rapidly and rethink how they can provide an exclusive and personalised experience online, according to entertainment and fashion law expert Pamela Weinstock.
Weinstock – speaking at a web seminar hosted by the Luxury Law Alliance and Hogan Lovells – said that brands should take note of developments in China, where e-commerce retailers have focused on engaging consumers through apps, gamification elements, rewards, and innovations such as augmented reality, digital mirrors and virtual try-ons.
“The shopping experience in Asia has always tended towards a focus on interactivity and their tech often has live chat as a very central element before you make any purchasing decision,” said Weinstock. “That lends very well to the luxury experience because you’re providing the personalised, bespoke service that luxury is seeking.”
The panel, which was moderated by Sahira Khwaja, head of the London brands practice and co-head of the fashion and luxury brands group, agreed that luxury brands were already using technology to change the way they sell goods online.
LVMH, for example, has co-developed a system using blockchain tech that helps to combat counterfeiting by allowing customers to check if their products are genuine, with brands including Prada and Cartier also signing up to the project.
While the pandemic has accelerated the shift to online, traditional brick-and-mortar stores were already facing an uncertain future before the virus hit with many shopping malls and large department stores closing down in recent years.
“Brands are moving to an omni-channel approach, with more activity moving online,” said Weinstock. “Stores might have a smaller footprint, they may be more of a showroom, more of a brand experience where there is ‘retailtainment’. Often there may be cafes or partnerships not necessarily traditionally associated with apparel retail luxury channels.”
The shift to online is also changing how luxury brands need to approach advertising, with many starting to use influencers to promote their products via social media.
“That has been a little bit of a challenge because you may give up some creative control when you have influencers creating content, so what we’re seeing in that space is more use of micro influencers who may have an audience in the arts, whose aesthetic is in keeping with the brand positioning and there’s more a feeling of authenticity,” said Weinstock. “There are a lot of interesting developments in China where we’re seeing virtual influencers as well as KOLs [key opinion leaders], who are starting to have their own product lines or actually sharing in profits as opposed to just receiving a flat fee.”
In this new world, there are a number of things luxury brand GCs should be doing to protect their businesses, said Weinstock. For those that might have started producing masks or other protective clothing during the pandemic, brands need to be on top of what IP protections they have in place. Brands also need to review their contingency policies, such as looking at supply chains and vendors for potential disruptions, as well as beefing up IT security to handle the growth in e-commerce and to protect against cyber hackers.
It is not just the pandemic that is causing luxury brand GCs headaches. Ongoing trade tensions between the US and China and to a lesser extent the US and the European Union, as well as the uncertainty around Brexit, is weighing on the global luxury sector, said Aline Doussin, head of the UK trade team at Hogan Lovells.
“The trade wars and the ratcheting up of both rhetoric and retaliatory tariffs is restricting imports and exports and has significantly impacted all sellers and buyers, and e-commerce as well,” said Doussin. “The US has imposed tariffs on more than $360bn of Chinese goods and China has retaliated with tariffs on more than $110bn worth of US products. Luxury brands have been heavily impacted as well, especially on the European side for EU exports to the US.”
To mitigate the additional costs of these trade wrangles, e-commerce retailers need to identify which parties bear the financial burden – is it the seller, the buyer or the e-commerce platform itself, said Doussin.
For Brexit, it is not only tariffs, but also additional paperwork processes that retailers need to factor in when determining who foots the bill. One way some brands are responding is to move manufacturing locally so they eliminate cross-border activity and avoid any tariffs, she said.
Brexit is also forcing luxury brands to consider storage issues such as whether they should open their own warehouses in the EU or use third-party owned and operated warehouses.
Supply chain changes and, more importantly, new ways of doing business, could potentially have tax implications, said Karen Hughes, co-head of Hogan Lovells’ global tax practice.
“Since in tax terms profits follow value, new business models focused on data and technology may mean that where profits should be booked – transfer pricing – needs to change,” she said.
“The good news is that quite a bit of the thinking has already been done. That’s because of some striking similarities – perhaps surprisingly – between the luxury goods industry and the tech giants.
“Both have extremely valuable IP, high margins and, with e-commerce, are highly centralised. Of course, there are differences. But the key point is to learn the lessons: to acknowledge the role in value creation played by centrally held and developed IP, but also the significant contribution made locally.”
The Acceleration of Digitalisation and Ecommerce: What Luxury GCs Must Know was held on 21 April in association with Hogan Lovells. Click here for more information about Hogan Lovells' fashion and luxury brands capabilities.
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