The metaverse represents a growing opportunity to embrace in the coming decade. How luxury brands build their presence and interact in the digital space today may determine their future success in the years to come and therefore they should start engaging and get experience with it, says Mario Ortelli, Managing Partner at Ortelli&Co and Luxury Society Columnist.
A new chapter for luxury has started. One where digital assets most likely co-exist in harmony with their physical counterparts, where the price of a Non-Fungible Token (NFT) can command thousands of dollars more than that of a physical luxury good, and where interactions on the metaverse are beginning to enter the mainstream.
Over the past year, we have seen brands make forays into the world of digital; designing virtual clothing, entering into gaming, art, collaborating on NFTs with other creative industries. But it’s now time for the brands to take a structural approach to the metaverse, as the boundaries between the real and digital world are blurring.
And while this change may seem quite radical in terms of the luxury world, let us not forget that over the past 40 years, the luxury industry has undergone many radical changes and it has grown from strength to strength becoming a global and social phenomenon that has increasingly embedded itself with culture, music, and society.
These waves of growth that luxury has gone through time and time again have helped build the industry into a global phenomenon.
In the 80s, the focus was the United States and Japan, in the 90s, it was the shift from wholesale to retail models, the development of Hong Kong and travel retail, in the noughties, brands extended their offer into new product categories like eyewear and beauty and China’s demand for luxury goods began to emerge, and the past decade has seen China at full speed, the rapid transformation of digital and the start of brand extensions into experience as well as the importance of issues like sustainability and social responsibility.
All these subsequent waves have something in common. With each wave, the time taken to affect change lessened and they almost all remained over time. As a result, luxury companies have become less sceptical about embracing new opportunities despite their often rigid approach to change in order to protect their brand equity.
Which brings us to this decade. Not only will sustainability and social responsibility continue to drive the conversation around change in the industry, but the metaverse and all that it may entail will also reshape the next few years.
I believe that art and luxury goods will be the biggest beneficiary of the metaverse, a 3D immersive digital space of interoperable digital contents in which social, communication and, co-creation components will have new territories to develop. Its technology will help to revolutionise how companies find new business (pairing real products with NFTs or launching NFT only products), handle their resale (finally being able to track all the subsequent re-sales of their products), interact with consumers (in a world in which without the physical boundaries, co-creation and customisation can enter in new territories), build up consumer loyalty (thanks to the utility rights over time granted to NFT holders) and embed continued revenues stream over time (NFT smart contracts can foresee a revenue share to the brand for any subsequent resale of their creations).
Today we see just the tip of the iceberg, mainly in the form of gaming, but NFTs, digital assets, and metaverse will become so much more, enabled by the development of technology.
And luxury stands to profit greatly from it. As an industry that already has extremely high profitability, finding new revenue streams that can greatly expand that profitability even further is like gold dust. Furthermore, the opportunity to win big for luxury brands mining the opportunities that the metaverse offers will further accelerate the divide between winning and losing brands that we currently see in the market today.
From one side, mega-brands like Louis Vuitton, Dior, Gucci, Hermés, and Chanel, who are dominating the luxury scene, will probably gain even more traction capitalising in the metaverse their brand allure, consumer following, investment capabilities. On the other side, newcomers will be able to explore and interpret the new territory in a compelling way that enables them to reach brand relevance at an accelerated pace. The metaverse will also be a place for new forms of collaboration among brands and customers, like for example the NFT joint project just launched by Prada and Adidas.
Morgan Stanley estimates the potential value of the metaverse at around 10 percent of luxury companies’ revenues in 10 years’ time, with a contribution of up to 25 percent of the EBIT. But those estimates may, in the not-so-distant future, be increased. In fact, in the longer term, we could envision, at least for some brands with a strong appeal among younger consumers, that the digital component of their business could be even more relevant and, in any case, the products, experiences, and digital components of the business of the luxury companies going forward will be more entrenched in the metaverse.
Adidas and Prada are collaborating on a NFT collection.
As brands increasingly become signifiers of values and attributes (shaped through their products, experiences, and digital presence) that customers involve in their lives, it comes as no surprise that we have seen major companies registering their brands in digital assets like Nike and Adidas, or building up specialised internal organisations devoted to the metaverse as seen with Balenciaga, OTB, and Gucci.
In my view, all the luxury companies should start familiarising themselves with the metaverse, as the pace of the digital revolution will accelerate, having a wider impact than many at present believe.
As with any change, there is a risk of an initial bubble, and many business models in the metaverse may not be successful. But as we have seen in digital, companies must think about how to make it a part of people’s lives before trying to profit from it with revenues and margins.
The development of the metaverse will also depend on the progress made in addressing some of its current main issues. For example: the environmental impact due to the energy consumption linked to the blockchain technology, intellectual property protection (we can expect more lawsuits like the one taken by Hermès against the use of images of its bags into NFT content), the speed of Internet to enable a satisfactory user experience and lastly, regulatory framework to protect especially younger people for its misuse.
One benefit luxury companies have is that their brand equity and creativity give them the flexibility to play on any new channel provided that they do not undermine their brand equity, that is the key asset investors care of.
In my view, investors will invest more and more in luxury companies as a way to indirectly invest in the metaverse, as they did a few years ago when they invested in luxury companies when they wanted to have exposure to the growth of emerging markets and e-commerce.
In summary, I believe the metaverse represents another great wave for luxury brands to ride and to profit from … and it may be even bigger than some of the previous ones.