A Mass of Niches

Luxury in the era of planetary technologies

11 min readDec 7, 2018

Ian Rogers, CDO of LVMH, came to INSEAD to discuss the transcendence of the internet as a technology and its impact on the market for luxury personal goods. The Serviceable Addressable Market is larger than ever before and will reward players who can move away from a storefront-first perspective to serving the customer wherever they may be.

Bear with me on this. In the heyday of the Space Age, people were enthralled about the possibility of encountering an alien civilization with technology far beyond our own capabilities. A Soviet scientist, Nikolai Kardashev, proposed in 1964 a classification system for potential civilizations that might naturally arise throughout the universe on the basis of their energy consumption alone, regardless of their biological characteristics, culture or history.

A Type I civilization is capable of using 100% of the sunlight energy that falls directly on a planet
A Type II civilization is capable of manipulating its planet’s sun and use 100% of the energy the star produces
A Type III civilization is capable of using the energy produced by all the stars in an entire galaxy

We can estimate many of these thresholds quantitatively for our own solar system and galaxy. Carl Sagan estimated in 1973 that our current sub-global civilization comes in at around a Type 0.7, a century or two away from becoming fully planetary.

“But we are witnessing the birth pangs of a new Type I civilization, based on science and prosperity. We see the seeds of this momentous transition germinating every day before our eyes. Already, a planetary language is being born. The internet itself is nothing but a Type I phone system. So the internet is the first Type I technology to develop. We are also witnessing the emergence of a planetary culture. In sports, we see the rise of soccer and the Olympics. In music we see the rise of global stars. In fashion, we see the same high-end stores and brands at the elite malls.
Some fear that this process will threaten local cultures and customs. But in most third-world countries today, the elites are bilingual, fluent in the local language and also a global European language or Mandarin as well. In the future, people will likely be bicultural, fluent in all the customs of the local culture but also at ease with the emerging planetary culture. So the richness and diversity of Earth will survive even as this new planetary culture arises.”
— Michio Kaku, ‘The Future of Humanity’ (2018)

20 years ago, the world had only just begun to connect to each other in an instantaneous and low-cost way through the internet. Consumer demand was still largely insular, with pockets of very different customer demographics in different parts of the world. Tastes and preferences were shaped largely by mass media which wielded incredible influence in curating and setting preferences for a suppressed supply of consumer goods.

It is difficult to overstate the importance of the emergence of the internet in our collective history. We have never before had the possibility to communicate instantaneously with organizations around the world in a language of 1s and 0s totally alien to our own. The emergence of the internet has shoved us forward in a transformational way and in doing so has upended expectations for consumer behaviour and supply of goods for consumers the world over.

Ian C Rogers, Chief Digital Officer of LVMH, recently attended a session of the Managing Value in Luxury and Fashion MBA course at INSEAD. He outlined his perspective on evolving consumer behavior and how luxury brands can deliver value to their customers in a post Mass Media world.

Ian is a self-described “skater boy from Goshen, Indiana” who, humility notwithstanding, contributed to the development of a Type I technology by creating internet music distribution over and over again for different players.

He developed the website for the Beastie Boys in the early ’90s and helped create the legendary piece of music software WinAmp. He founded Mediacode in 2001 and joined Yahoo Music through acquisition in 2003. He worked with Jimmy Iovine and Dr. Dre to bring Beats Music to life before joining Apple again through acquisition. He spearheaded the development of Apple Music and was the driving force behind Beats1 Radio.

At LVMH, he is busy shepherding the leader of one of the world’s most conservative and traditional industries into the thriving madness of Type I global consumption. In the classroom with MBA students, he shared his excitement about the possibilities of the internet in serving suppressed demand for luxury goods around the world.

“The internet is the biggest topic in our lifetime. In an environment of limited consumer choice, mass media rules. In an environment of unlimited choice, it’s a market of niches.”

1998 was the year of the Lewinsky scandal, Titanic’s box office exploits and France’s first ever football World Cup (spheres, not pigskins). The internet was still a pipe dream and the only real way to sell a Louis Vuitton handbag was to find a customer who could afford it, tell them about LV, make them want to buy it and finally make sure they either live near a store or can travel to one in another city to buy one.

When deciding whether to invest one more dollar in marketing for Louis Vuitton rather than spend it in research and development or in quality production, the choice 20 years ago was tilted towards marketing. One more potential customer who could come into the buying range would have a much greater impact on sales than one more stitched thread in a particular model of suitcase. Ian refers to this as “Returns to Marketing versus Returns to Quality”.

However, today, the landscape is far less clear. The internet has transformed our way of life in a dramatic way. “There is no more online life and offline life, there is just a life and sometimes you connect to people on your phone and sometimes you speak to them face to face.” This means that the return dynamics for marketing vs quality have been upended. Consumers speak to each other and serve as your main customer touchpoint, particularly for luxury personal goods with a high degree of emotional involvement and a substantial serving of irrationality and dreams.

The Total Addressable Market for luxury personal goods could have been computed in largely the same way 20 years ago as it could be today. Broadly speaking, one way of imagining the total extent of the TAM for luxury goods is by finding the number of people worldwide in the right income bracket multiplied by the average basket size for a typical LV purchase (say $1,000 in today’s USD).

The sources of growth in TAM in this back of the envelope thinking come from population growth, increase in share of the population that crosses the affordability threshold and the basket size. Using this simple yardstick, the TAM for luxury personal goods today, around $500b, represents a CAGR of 4.2% relative to 20 years ago when the same market was around $230b with fewer people overall and fewer wealthy people as a proportion of the total. This is not wildly different to Bain & Company’s 2017 estimate for total market size for luxury personal goods excluding cars, although TAM is not the same as a currently served market size. All the same, we are within an order of magnitude of a reasonable estimate for the market’s full TAM potential.

In 1998, Louis Vuitton had around 200 stores worldwide, with a strong tilt towards lucrative markets in the United States and Japan. Thinking about the serviceable market potential based on a storefront-first approach to consumption in a Mass Media age, you could imagine each store serves both affluent adults who live in the city and affluent tourists who visit it. High-income consumers will visit a store if there is a reasonable expectation for travel time given the size of a city and the number of stores within it. Finally, some cities are more attractive destinations for tourists than others, implying the share of spending from tourists relative to locals will be different in a place like Buenos Aires relative to, say St. Moritz.

To do this, I collected demographic data from various sources, made some assumptions on city-types and picked a basket size of $1,000 for 2018 and adjusted it for inflation for 1998 to provide comparability. Obviously these are all gross back of the envelope generalizations but the point is to come to an approximate size of the Serviceable Addressable Market and compare it to the Total Addressable Market a player like Louis Vuitton could contemplate in 1998 relative to today.

Driven by stores alone, it’s clear that the first priority is to at least grow coverage as fast as the population as a whole or you risk falling behind. Louis Vuitton appears to have followed suit with store growth, just about doubling the number of stores in 20 years and expanding its coverage of high-potential markets like China considerably.

Louis Vuitton store coverage in 1998 (left) and 2018 (right)

Store growth is an important factor that can explain the continued success of Louis Vuitton worldwide. The worldwide Total Addressable Market has grown substantially, at about a 4% CAGR over 20 years, driven by population growth, a larger proportion of high-income consumers and 2.2% inflation. Growth in store coverage has allowed Louis Vuitton’s Serviceable Addressable Market to remain in the 25–30% range of the total full potential, both by deepening coverage in fast-growing cities and extending coverage to new centers of population growth.

If the internet had never been invented, this would have been perfectly enough. You could imagine Louis Vuitton weighing the cost-benefit of expanding more aggressively to expand its Serviceable Addressable Market to a larger percentage of the total. More likely, you could imagine players being satisfied with maintaining a reasonable level of reach to customers worldwide, people they know and understand and can cater to without much difficulty. Spending one more dollar in marketing in this environment makes sense and pays off.

However, the internet has transformed our way of consuming and shaping tastes. Pockets of suppressed demand are no longer content with remaining on the sidelines when they can look at the rest of the world through their phones and develop desires for new products and new experiences.

Ian Rogers recounts a thought experiment: “What if I’m a consumer in Cincinnatti looking at my favorite football player wearing a house-brand watch and decide I want to buy one? What do you actually, precisely, expect me to do? The nearest boutique is a 6h flight away. I suppose I could go to a downtown jeweler and browse other brands but why would you let them do that to your watch?” In the age of the internet, there is no good excuse to let someone else capture the dream you have spent so long nurturing in the minds of your future customers.

How does the Serviceable Addressable Market change under this new model? Pew Internet estimates that 93% of high-income consumers have a smartphone device. Instinctively, we all know this figure is actually probably higher, whether you are looking at high-income consumers in France or in India. The Serviceable Addressable Market is no longer constrained to physical storefronts and 25% of the Total Addressable Market — it encompasses 93% of it, since everybody with a high speed connection is essentially capable of connecting to your boutique with a FaceTime call.

“Luxury culture is more accessible than ever. It feels like 2008 in the music business, when the internet brought a ton of opportunity for a creative and cultural industry.” This Mass of Niches is focused on quality and is made for online but has been disregarded until now. The opportunity is there for luxury players capable of serving the customer without dictating to them.

Like in the music business 10 years ago, “there are creators and there are consumers. Everything else either needs to add value or get out of the way.” Investing in quality in an age when consumers can share their experiences with their friends instantly reaps far more rewards than putting one more 30s copy on YouTube or on TV. In the era of Mass Media, players would focus on finding the largest possible mass to make a market viable. In the era of Mass Niches, the question is flipped on its head. People are markets of one with individual choice, decision making and an unprecedented ability to access information. The error would be to define this Market of One and withdraw from such a small opportunity. The lucrative question is rather, “do enough people behave in this way to make this market viable?”

The challenge with music is that there was a sustained period of net value destruction for many players in the value chain. For luxury, however, there is still a chance for net value creation when it comes to online. “Online can still be a high-touch consumer experience.” Luxury products benefit from in-person appeal but today’s consumers are already used to not having to move to purchase things, so why would it really be much different for a high-end watch they know they will want to buy sight unseen? Ian tells us about a high-end videoconferencing service that can connect potential customers browsing a website directly to a boutique store FaceTime call, complete with a video mixing table for the attendant to punch buttons on. A tip he offers for creating attractive high-touch experiences is “figure out how rich people solve their problems then scale it.” A customer may not be able to visit the store in person but you can sure as hell serve him like he is. For the right price, the store attendant could conceivably fly himself and the purchase out to the customer instead of the other way around.

The internet is one of the most important and perhaps first truly planetary technologies. Its impact on our culture is still unfolding across countless domains, including the world of luxury. It’s no longer enough to expect a customer to travel to buy a watch when the same product is being flashed across Instagram from hundreds of different locations. We might have to wait another hundred years to become a truly planetary civilization but the birth pangs of a new global culture are emerging everywhere, including venerable, artisanal and creative cultural industries like music or luxury.