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On a recent Saturday in Soho in downtown New York, lines of shoppers in white sneakers and striped Breton tops buzzed for the fifth floor of a nondescript commercial building. Their destination was Everlane Studio, the New York showroom of an ecommerce retail start-up taking aim at the luxury goods business model.

In the showroom, located round the corner from Prada and H&M, shoppers could try on - and then go home to buy online - linen T-shirts made in Vietnam for $35. Leather mules from Brescia in Italy were priced at $155.

Everlane, founded in San Francisco in 2010 by Michael Preysman, a computing and economics graduate who had worked in private equity, sells classic designs over the internet, promising "radical transparency". It aims to tap into millennial angst about provenance and price, pledging low-cost, high-quality goods made in factories used by designer brands.

In the context of the €251bn luxury business, Everlane - which reported $12m in revenue in 2013 and has closely guarded its sales figures since - and Warby Parker, an ecommerce start-up trying to disrupt the high-end eyewear industry, are minnows. But they are a sign of how changing consumer habits, international turmoil and the internet are reshuffling the dynamics of the high-end goods market.

Chinese consumption had been fuelling double-digit growth in luxury since 2010, but now the industry must innovate, say analysts at consultancy Bain, as consumers' desires and habits evolve. Goldman Sachs forecasts, in the short to midterm, that luxury sales will grow a shallow 1-4 per cent.

"The average for the sector will be flat but within the sector there will be winners and losers because it has become a mature market and there is a battle for market share," Gucci chief executive Marco Bizzarri told the FT recently. "And the winners in the market will be those that innovate the most."

Under Mr Bizzarri and new creative director Alessandro Michele, Gucci reported sales up 51 per cent in the first quarter of 2017, smashing through analysts' forecasts of about 20 per cent and grabbing market share. Their strategy has been to reposition the brand with an entirely new image, channelling a street fashion dynamic of bold colours and lines that play well on social media. Crucially, Mr Bizzarri has sped up Gucci's supply chain, allowing Mr Michele to get his ideas to market faster.

Another winner is Moncler, the upmarket outerwear brand led by Remo Ruffini, who has become a case study as a luxury innovator. He took a niche, burnt-out French skiwear brand, found private equity backers and turned it into the leader in a fast-growing segment. As other luxury brands stumbled in 2016 as the Chinese government cracked down on luxury spending at home and abroad, Moncler sales rose 18 per cent to €1.04bn. Passing the €1bn mark for the first time, it made nearly €200m in profit.

Mr Ruffini, a university dropout who worked in his father's textile business in Como, Italy, is "convinced 90 per cent of consumers follow trends and they are not able to decide which bag they like best. They buy the bag they think is a trend," he has told the FT. As a consequence, he believes it is vital for a brand to differentiate itself with a "very strong image" - not least because luxury sales are increasingly driven by social media.

Luca Solca, an analyst at brokerage Exane BNP Paribas, argues innovation is vital for brands as Chinese luxury consumers - who now account for 30 per cent of luxury spending, according to Bain - have become choosier. And with the Chinese consumption of luxury having slowed down, there is - at least at present - no other emerging group of consumers of equal size to take its place. There is no fresh national market about to be tapped, says Mr Solca. "The newness imperative is one of the most important challenges brands will have to tackle."

Mr Solca adds that different innovation strategies are starting to emerge in the industry. He identifies these as "make or break full blast", such as when a brand ushers in completely new aesthetics, as at Gucci. A second model is "incremental", when a brand such as Moncler chooses to maintain its best-known products at the core of its look while evolving its aesthetics step by step. The final version is "capsule-driven" - small, more novel collections in line with the overall aesthetic.

Failure to adapt fast enough can be drastic. Prada is still in the throes of a turnround, after sales plunged on slowing Chinese demand; it reported full-year net income was down 16 per cent to €278m in 2016. Its founders, Miuccia Prada and Patrizio Bertelli, were openly sceptical for years about the impact of the internet on luxury.

Succession as a broader theme in the luxury industry is expected to increase in importance as last generation's fashion founders give up their businesses and young entrepreneurs, in touch with millennial tastes, come through. Mr Preysman, for example, founded Everlane when he was 25 years old.

Finally, the secular slowdown in overall luxury growth is forcing extraordinary operations from family groups to boost profits in lieu of revenue growth.

In April, LVMH announced the acquisition of Dior Couture, already controlled by tycoon Bernard Arnault but separately held, to exploit synergies between the groups. And last week LVMH, the world's largest maker of luxury goods, expanded aggressively into online retail by announcing the launch of a vast multibrand ecommerce site, 24 Sèvres.

This article was originally published by the Financial Times.
Copyright The Financial Times Limited 2017.

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