Amazon's big luxury bet could be either ludicrous or genius for everyone involved...

In their 2015 book 'Luxury Strategy', experts Jean-No?l Kapferer and Vincent Bastien created the bible of managing a luxury brand.

The authors cite 24 counterintuitive managerial principles that help behemoths like LVMH command command incredible pricing power.

These 'anti laws' include:

• Don't pander to customer's wishes
• Make it difficult for clients to buy
• Remember the role of advertising is not to sell
• Do not look for consensus
• Do not look for cost reduction

For the makers of expensive handbags, jewellery, cognac or luggage, the takeaway from the book is obvious. Don't act like a mass brand. Don't even act like a premium brand.

Luxury is not a more expensive version of premium but a completely different mindset.

Instead you must act like the romantic interest in an old classic movie - be mysterious, unavailable, aloof, insular and slightly beyond reach, while at the same time appearing desirable, attractive and mesmerising.

Luxury branding and distribution clearly doesn't operate by the same rules as mass marketing. You wouldn't expect to browse for a €5000 handbag in the same place you buy toilet roll and batteries.

So why then is the world's largest online store planning to move into luxury sales?

This week, it was announced that Amazon is building its own platform for luxury.

According to reports:

"It will operate similar to the concession model seen in department stores and specialty retailers, where brands effectively lease space or pay a percentage of sales to run their own mini-shops within the store. On Amazon’s new platform, according to WWD, the companies will have complete control over the look of their online space, which products they sell (or don’t), and any discounts they offer. At the same time, they’ll have access to Amazon’s vast logistics network for fast delivery, as well as its customer service."

Is this the first sign of Bezos cracking under the pressure to move towards profitability?

Or is it another genius move from Amazon that's so far ahead of the game it just sounds insane?

The 24th and final 'anti-law' in Kapferer and Bastien's book is most relevant to this question.

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Contradiction

Law 24 focuses on control of distribution and is very relevant in light of Amazon's big news.

It simply states:

• Do not sell openly on the internet

The writers say that the benefits of digital (instantaneity, availability, accessibility, price reductions, automation of service, crowdsourcing, etc.) are actually ‘minuses’ for luxury and that digital is in fact in strong contradiction to luxury on most aspects.

Luxury is about one to one and human relations. By selling online, you quickly reduce the exclusivity of the brand and prioritise volume over margin. Luxury is subtle and implicit, whereas the internet is transparent and explicit.

This advice neatly fits into the narrative of an industry where brands have been known to burn stock to prevent items being sold cheaply.

The chapter ends by saying:

'Selling on the internet is a very small part of the turnover of a luxury brand and will stay that way for a long time. The brand can communicate via the internet, but should not be sold there. Why take the risk of damaging the brand for such a small amount of sales?'

Re-defined

Luxury and e-commerce have always been uncomfortable bedfellows. In a recent WARC piece, Faris tells a brilliant anecdote about a run-in he once had with Prada doyenne Miuccia Prada, who recoiled in horror at the thought of selling online. 

'Darling', she said, 'no one will ever buy Prada on the Internet’.

But in the four years since 'Luxury Strategy' was written, a lot has changed. The Chinese luxury market has exploded. Hyped streetwear brands like Supreme (a gateway to luxury for young consumers) have re-defined the rules. Industry analysts say the luxury sector has split into winners and losers according to which brands have realised the benefits of Instagram and Facebook. Just under 50% of luxury buyers worldwide do online research before buying and LVMH has led the way with a $40bn digital transformation.

According to Euromonitor, in the US over $10bn in luxury sales occurred online in 2018, with forecasted growth above $15bn by 2023. While this is still below 10% of overall luxury revenues, it's significant. Bain predicts that 25% of hard luxury (watches, jewellery) sales will be online by 2025.

Even Prada have pushed into e-commerce.

The advice to not sell online is clearly not being heeded.

Luxury brands are also open to selling via third parties. According to Luxe Digital, 'third-party multi-brand e-commerce platforms like Yoox Net-A-Porter and Farfetch have been growing robustly' and now outstrip direct brand sales.

So is selling directly on Amazon the next big step?

Amazon's Opportunity

For Amazon, the digital luxury opportunity is too huge to pass up. While the volume might be lower than in other verticals, the ability to skim a few points of margin from a $5000 dollar handbag purchase must be mouth-watering and it makes complete sense to use its world class existing infrastructure to sell anything it can.

There may also be a more sinister slant to Amazon's interest in luxury. As the biggest online retailer in the US, since 2017 a growing part of Amazon's business model has focused on selling third party products, taking the data about what sells and what doesn't and then creating lower cost 'own label' versions of the same product that sit at the top of search results. It's the perfect 'test, learn, refine' approach using other people's products and the sheer scale of the Amazon platform to do so.

In fact, unbeknownst to most shoppers, Amazon has over 80 'private label' brands in areas like active wear, kid's clothing and beauty. One of Jeff Bezos' most famous quotes is that 'your margin is my opportunity'.

Of course this is much more difficult to do in luxury. Private label luxury is an oxymoron, since the signalling power of a logo is by far the most important.

But given Amazon's sheer unwavering belief in itself, anything is possible.

Piggyback

The short term benefits for the 12 brands who have already signed up are attractive too. They get to piggyback on an enormous distribution platform where most of their customers already shop. For luxury brands without the ability or foresight to create costly e-commerce engines they can rely on Amazon's expertise in delivery, customer service and optimisation. For those who already sell online, it's merely another huge market segment that has been opened up.

Can they afford to say no?

Indeed Louis Vutton already sells bags on Amazon.com, clearly not wanting to turn their noses up at such a huge audience.

But there's another side to this coin.

In luxury, as in business, thinking only in short term is a fool's errand. The potential negative unintended consequences for luxury brands are huge.

Selling through third parties as a luxury brand is always a risk. You lose control of the experience, your margins get starched, you get thrown into algorithmically generated search results and pricing control is diminished too.

Brands like Ikea, Nike and Birkenstock have pulled products from Amazon over lack of control and problems with counterfeit goods. Though they're selling to the masses, these brands have realised that traffic driven to their own site is self-sustaining, more profitable, and actually brand-enhancing, while traffic and incremental revenue from Amazon.com is less profitable but also impacts your brand.

Precedent

The big question here is how the platform will look and feel.

It may be that Amazon will launch a completely new site. Brands probably won't be expected to sell directly on Amazon.com. This sleeker sub-platform could ensure the UX will look nothing like the current cluttered but efficient Amazon.com experience. Though it may still have the Amazon name.

There is precedent in China for this model. In 2017, Tmall introduced Luxury Pavilion, a platform for luxury brands on its site that sits apart from the main consumer portal and has an entirely different look and feel intended to let brands preserve their identities and exclusivity,

For luxury brands, making a deal with a company who's founder once uttered the immortal quote 'your margin is my opportunity' might be a case of dancing with the devil or a road to riches.

For Amazon, the potential upside is enormous and as a company that embraces failure, there's nothing really to lose.

Ludicrous or genius?

Time will tell.

Shane O'Leary

@shaneoleary1

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