The rise of non-fungible tokens (NFTs) in fashion and luxury

An experimental exploration of NFT utility in the context of a new luxury paradigm

Thèse de Master , 2022 , 86 Pages , Note: 7/8

Gestion d'entreprise - Divers

The concept of the metaverse and non-fungible tokens has become ubiquitous, and fashion and luxury companies are faced with the need to define a thorough strategy to tackle its business impact. Despite some brands acting at the forefront of NFT adoption, the utility of the infant technology remains unclear. By conducting a 2x2 factorial design experiment, this research creates insights into guidelines for NFT strategies for fashion and luxury companies. First, the high importance of connecting NFT offers with experiences is confirmed. Second, a coherence of values between NFT technology and the luxury industry was illustrated. Finally, the experiment suggested a high difference in perceived utility of real-world asset NFTs and digital asset NFTs for mainstream brands, while the difference could not be proven in the case of luxury companies. In conclusion, the NFT strategy matrix was developed, which introduces four dimensions of brand loyals, brand collectors, fad enthusiasts and fad curious differentiated by their brand loyalty and desired NFT utility. This framework aims to provide a tool for fashion and luxury companies to cater their holistic NFT offering to different customer groups. In general, it is advisable to move from digital asset NFTs toward real-world asset NFTs in order to engage consumers with rare experiences in a virtual or physical setting and deploy the technology as an experiential marketing tool.

Table of Contents

1. Introduction

2. Literature review and theoretical framework
2.1 Introduction to blockchain
2.1.1 Technological functionality
2.1.2 Second generation of blockchain and NFTs
2.1.3 NFT project classes
2.1.4 Outlook for Blockchain and NFT technology
2.2 The industry of fashion and luxury
2.2.1 Definition and industry overview
2.2.2 The new notion of luxury
2.2.3 The relevance of Experiential marketing
2.2.4 Fashion and luxury’s approach to Experiential marketing
2.3 NFTs in fashion and luxury
2.3.1 Coherence of values
2.3.2 Industry NFT projects
2.3.3 Critical assessment
2.4 Sub-conclusion and research question

3. Methodology
3.1 Research philosophy and theory development
3.2 Research approach and design
3.2.1 Data collection
3.2.2 Data preparation
3.2.3 Research ethics and delimitations
3.2.4 Data validity and reliability

4. Data analysis
4.1 Data overview.
4.2 Hypothesis testing
4.2.1 Descriptive statistics
4.2.2 Analysis of variance
4.2.3 Correlations

5. Discussion
5.1 The importance of experiences
5.1.1 Experience realms in RWA NFTs and DA NFTs
5.1.2 Business approach to experience management
5.2 The relationship of NFT type and Brand type with NFT utility
5.2.1 Diffusion of NFT type and Hype cycle
5.2.2 High NFT utility in luxury
5.2.3 Luxury DA NFTs with highest utility
5.2.4 Business assessment
5.3 Recommendations for fashion and luxury companies
5.3.1 The NFT strategy matrix
5.3.2 Implementation and advantages of NFT strategy matrix

6. Conclusion

Bibliography

List of figures and tables

Appendix

Abstract

The concept of the metaverse and non-fungible tokens has become ubiquitous, and fashion and luxury companies are faced with the need to define a thorough strategy to tackle its business impact. Despite some brands acting at the forefront of NFT adoption, the utility of the infant technology remains unclear. By conducting a 2x2 factorial design experiment, this research creates insights into guidelines for NFT strategies for fashion and luxury companies. First, the high importance of connecting NFT offers with experiences is confirmed. Second, a coherence of values between NFT technology and the luxury industry was illustrated. Finally, the experiment suggested a high difference in perceived utility of real-world asset NFTs and digital asset NFTs for mainstream brands, while the difference could not be proven in the case of luxury companies. In conclusion, the NFT strategy matrix was developed, which introduces four dimensions of brand loyals, brand collectors, fad enthusiasts and fad curious differentiated by their brand loyalty and desired NFT utility. This framework aims to provide a tool for fashion and luxury companies to cater their holistic NFT offering to different customer groups. In general, it is advisable to move from digital asset NFTs toward real-world asset NFTs in order to engage consumers with rare experiences in a virtual or physical setting and deploy the technology as an experiential marketing tool

1. Introduction

„[…] We see the metaverse as a natural space for us to express our brand and create unique experiences in ways that were impossible with Web 2.0 […].“

-Marco Bizzarri, President and Chief Executive Officer Gucci (McDowell, 2022).

The concept of metaverse has become an ubiquitous topic and refers to a virtual universe beyond physical reality, which enables social and immersive interactions for its participants (Mystakidis, 2022). For this, the basis is created by an evolution of the Internet through various technologies, ushering in its third generation, the so-called Web 3.0 (Jones, 2022). In this context, the introductory statement by Gucci’s CEO is related to the increasing popularity of non-fungible tokens (NFTs), a disruptive technology in the context of Web 3.0 known to revolutionize many industries (Golomb, 2021). NFTs introduce the concept of digital ownership and revolve around scarcity, rarity, and uniqueness of virtual and physical items. Among other industries, the technology has already been deployed by the fashion and luxury sector, with selected companies succeeding at it and others less so. For instance, while Dolce & Gabbana holds the record for the most expensive NFT fashion collection ever auctioned at 5.56M$ (Thomas, 2021), Rebecca Minkoff’s collection of virtual garments could not even command the set floor price and remains unsold (Bain, 2022c). In contrast, Gucci has been one of the first companies to enter the sphere as an early adopter, advocating a strategy of test and learn to slowly build its own brand metaverse with Gucci Vault (Jones, 2022). However, this is precisely where the key challenge lies for most fashion and luxury brands, and that is to evolve a sustainable competitive branding strategy rather than being tempted by the possibility of a quick financial win.

In this early phase of NFT adoption, either rashness or restraint seem to dominate the business environment, which leads to confusion among consumers and the lack of refined strategies among fashion and luxury houses. This results in the clear need to analyze the current situation in order to define a possible target scenario and, above all, to develop corresponding recommendations for action for the future of NFTs in fashion and luxury. The question arises: What is the utility of NFTs for fashion and luxury companies to engage their customers and create a sustainable competitive advantage?

The presented quantitative research has the clear aim to answer this query. As such, it is divided into a theoretical and empirical section. Firstly, the theory section endeavors to understand the current status of literature and theories about the topic of NFTs as well as fashion and luxury. After an explanation of the technological characteristics of blockchain and NFTs, an introduction to the industry of fashion and luxury follows. These two conceptual analyses are then combined to shed light on the potential of NFTs in fashion and luxury from a theoretical perspective. Due to the low maturity of NFT technology and the only recent spread of the phenomenon in business reality, theoretical frameworks from other disciplines will be applied to the subject matter. The most relevant field will be marketing, more specifically the concept of Experiential Marketing (Pine & Gilmore, 2011). This theoretical framework brought forward by Pine and Gilmore will support in analyzing and mapping current NFT solutions as well as identifying future efforts.

Secondly, the empirical part intends to put the created theoretical insights and base to test. The potential utility of NFTs in fashion and luxury is empirically investigated by conducting an experiment in the style of a 2x2 factorial design. Consequently, a description of the methodological choices with regards to the conceptualization of the research will usher in this section. Afterwards, the collected data will be analyzed statistically, and results will be presented. The concluding discussion part aims to integrate the theoretical basis with the empirically created insights.

The main goal of the research is to provide businesses with relevant implications to strengthen their understanding of NFT utility for customers. Further, actionable recommendations are to be laid out to support fashion and luxury companies in creating their custom NFT strategy.

2. Literature review and theoretical framework

As discussed initially, the theoretical part of this thesis aims at providing a thorough understanding of the concepts addressed.

In order to fully grasp NFT technology and its characteristics, there is a need to incorporate blockchain as the underlying infrastructure into the analysis. Thus, the first section deals with introducing blockchain including its related technological functionalities and development toward NFT technology. The first sub-section is wrapped up with an explanation of the two most prominent NFT project classes.

The second section represents the same rationale for the fashion and luxury industry. A definition of the term and industry overview serves as an introduction, followed by a deep analysis of the current developments within the industry. The role of experiential marketing concludes this second sub-section.

Finally, the two concepts are consolidated with one another. The reason for this approach is explained by describing their coherence in values before presenting chosen industry NFT projects. To conclude the third sub-section, critical assessments of NFTs in fashion and luxury are examined.

2.1 Introduction to blockchain

As defined by its founder Satoshi Nakamoto, blockchain is a distributed ledger technology, that enables sharing and verification of information in a decentralized manner by peer-to-peer network participants (Nakamoto, 2008). Blockchain has reached the status of a global phenomenon, mostly heard of in combination with the trendy buzzword cryptocurrency (Nofer et al., 2017). Unlike fiat money, these types of currency do not depend on a central authentication or third party, with Bitcoin as the original and most prominent version. Even though, known blockchain use cases have been heavily tied to the finance industry by the media, the technology still is at an early stage of development and limited explored (Zheng et al., 2017). In terms of current market size, there exist different ranges and measurements online, but the following serves as an approximation: In 2021, the worldwide market for blockchain technology was valued at $ 4.7 Billion. With an expected compound annual growth rate amounting to 56.3% (2021-2029), the forecasted market size will reach $ 163.8 Billion by 2029 (Fortune Business Insights, 2022). The main growth drivers refer to a further exploration of blockchain adoption as well as an increasing efficiency of the technology itself (Nofer et al., 2017). To get a thorough understanding of the technological aspects and the resulting practical application span, the following analysis explores blockchain in detail. First, the technical infrastructure and processes are mentioned. Here, a classical SWOT analysis supports to grasp the concept fully. Second, the development of blockchain towards a second generation and its implications, such as the enabling of NFT technology, are explained. Third, an exploration of NFT project classes conclude this chapter.

2.1.1 Technological functionality

As anticipated, it is useful to become familiar with the technical functionalities of blockchain to understand its utility. Basically, the distributed system contains data sets in the form of blocks connected to one another, which each include various transactions (Nofer et al., 2017). The first block is called genesis block and all following blocks have parent blocks with one individual block hash (Kronfellner et al., 2021). The concept of hashing allows to compress big text into unique and fixed-length strings and connect them (Park et al., 2022). Thus, hash values serve to identify every single block by referring to its parent block. Further, every block consists of a header and a body. The header includes specific information, such as the block version, a timestamp and the parent block hash. The body on the other hand provides detailed information about the saved transactions (Li et al., 2021). By saving the history of transactions, a complete ledger results (Nofer et al., 2017). Due to the lack of a centralized guarantor for the ledger quality, the implementation of this functioning is based on a consensus mechanism, supported by game theory and an incentive scheme (Quiniou, 2019). The corresponding Proof-of-Work (PoW) rule embraces game theory in such a way that miners produce (mine) the different blocks in a competitive context (Li et al., 2021). Basically, a hash value per block header needs to be calculated, either being smaller or equal to a target value. Whoever computes the value first, broadcasts the result and other miners must confirm the correctness of the hash value mutually for the block to be added to the chain (Zheng et al., 2017). The fastest miner to succeed in doing this receives a reward in the form of 6.25 bitcoins (as of this writing) (Li et al., 2021). This gratification fulfills an incentive scheme and motivates nodes to participate in the mining of blocks for a decentralized network (Quiniou, 2019). Further, there exist three different types of blockchain -public, private and consortium. The public one permits full transparency and visibility of records. The private one determines only specific nodes from an organization to join the process. In comparison, the consortium represents a compromise between the two prior ones, including a group of pre-selected nodes (Zheng et al., 2017). All forms of blockchain can be distinguished by three key characteristics, namely non-centralization, anonymity and auditability (Quiniou, 2019). Deliberate care is taken not to use the word decentralization since this implies a prior centralization, which never existed in the case of blockchain. Instead, the consensus mechanism makes third party verification redundant and enables a distributed ledger. Further, real identities can be protected by interacting with generated addresses. Lastly, all transactions are verifiable and traceable due to validation and relation to previous blocks (ibid.).

This introduction to the concept of blockchain culminates in a SWOT analysis. To begin with, the technology’s strengths are three-fold, namely immutability, distributed responsibility, and data security. Immutable data means that transaction information cannot be changed after it has once been added to the blockchain, which is central to businesses working with sensitive data (Zheng et al., 2017). Further, there can never be a single point of failure, shifting the responsibility to the whole system. Last, the data integrity of the system is relatively high due to a considerable number of backups, resulting in trustworthiness (Quiniou, 2019). But naturally, a young technology at an early stage of its innovation lifecycle, is accompanied by weaknesses as well. Here, limited scalability, privacy leakage and the consensus mechanism need to be mentioned. First, the total amount of bitcoin minings is restricted, impairing high frequency trading and scalability. Second, the protection of private information cannot fully be guaranteed even though access keys are in use. Third, the consensus mechanism of Proof-of-Work is energy-intensive, claiming lots of computing power (Zheng et al., 2017). Next up are the opportunities of blockchain technology. From an aggregated point of view, blockchain testing, applications and big data management are the top three opportunities. Blockchain testing refers to the establishment of official criteria to ensure a continuous quality of new forms of the technology (Quiniou, 2019). Blockchain applications on the other hand are targeted toward identifying new industry use cases beyond its initial application in the finance sector to further develop the technology (Pedersen et al., 2019). The last opportunity refers to a blockchain-based big data system that would enable sharing of records with any other sector in large quantities, leveraging on the inherent functionalities of the blockchain (Quiniou, 2019).

Finally, some threats should also be accounted for. The 51 percent problem is the most widespread reason for concern because it regards a majority vote that can be achieved by mining pools. This process would defeat the purpose of non-centralization and increase the potential for fraud and self-serving mining (Higginson et al., 2019).

As a conclusion of the technological functionality, McKinsey’s doubting and partly critic report needs to be mentioned. According to McKinsey, blockchain technology is “unstable, expensive and complex” in an early development stage with a limited fulfillment of related expectations for financial use cases (Higginson et al., 2019). This sobering statement is expanded with the insight that academic and industry papers have mainly focused on the analysis and application of blockchain in combination with cryptocurrencies, linking the technology strongly to the finance sector (Olsen et al., 2018). Finally, it must be acknowledged that these claims mainly relate to the financial industry, while McKinsey is positive about exploring various use cases in sectors aside from that (Higginson et al., 2019). This renders the need to broaden blockchain’s application opportunities even more clearly and the process has already been initiated with the redesign of some blockchain-related technicalities. As a result, the era of the token economy was ushered in (World Economic Forum, 2021).

2.1.2 Second generation of blockchain and NFTs

Tokenization means representing assets as digital tokens on a decentralized platform, assigning the ownership rights to agents in a fraud-resistant way (Sunyaev et al., 2021). In 2014, the foundation for a new token paradigm was created with technological advancements toward a second generation of blockchain (Quiniou, 2019). Namely, smart contracts and a new consensus mechanism were introduced. A smart contract is an event-driven promise in code, running in a predefined way once certain conditions are met (Li et al., 2021). As for the consensus system, the previous standard of Proof-of-Work will be replaced by Proof-of-Stake (PoS): every node in the network deposits a certain stake, the size of which determines the odds of being algorithmically chosen to mint the next block. Thus, miners become validators and the process of mining is substituted by minting/forging (Li et al., 2021). This alternative is energy-saving, efficient, safe and prevents fraudulent actions since validators have invested a significant stake in the network themselves, thus they lack interest to harm the blockchain (Lee, 2019). The most prominent second generation of blockchain is Ethereum, with Ether (ETH) as its respective cryptocurrency. The update on Ethereum to Proof-of-Stake is expected to happen by September 2022. Simply put, Ethereum replicates a worldwide, non-centralized computer and every network member will then agree on its state by staking ETH (Despotovic et al., 2022). These advancements hold innovative potential for the industry, with many emergent technologies deriving from a second generation of blockchain.

Within this token economy and especially on Ethereum, non-fungible tokens (NFTs) have emerged and risen to popularity. NFTs are tokens that can be used to represent ownership of unique items, which cannot be exchanged for identical counterparts (Ethereum Foundation, 2022). The value derives from the unique properties of the asset, setting them apart from fungible tokens like cryptocurrencies that can be replaced with one another (Ballhaus et al., 2021). Thus, NFTs are unique, indivisible, scarce and tradeable (Herian et al., 2021). The underlying rationale is that properties of physical goods like scarcity, uniqueness and verifiable proof of ownership shall be replicated in a digital world as well (Ethereum Foundation, 2022). NFTs can be minted in two ways, either indirectly or directly. If creators register their assets in protocols and include rules about its distribution terms, it is indirect. If creators code a smart contract, it is direct (Ballhaus et al., 2021). Like the underlying blockchain technology, the NFT market can be denoted as early stage. In 2021, the worldwide market volume was valued at $ 11.32 Billion with an expected compound annual growth rate of 33.7% from 2022-2030, which would result in a forecasted market size of $ 231.9 Billion by 2030 (Verified Market Research, 2022). The growth drivers are NFTs’ characteristics to enable and verify digital ownership, authenticity, traceability and security (Herian et al., 2021). Further, they can either exist as a fully digital asset or tokenize a physical one. In the first case, digital art and collectibles are items of scarcity and creators benefit from the opportunity to receive royalties for every transaction with smart contracts (Popescu, 2021). So far, CryptoPunks are the most traded NFT art with 10.000 digital art pieces exchanged on Ethereum (Park et al., 2022). Decentralized finance is another use case for fully digital NFTs. In the second case, physical items can be tokenized by creating a virtual twin and blending reality and virtuality. For instance, this has been done in the real estate market. Due to the highly complex ownership and validation structures in real life, this use case is at an early development stage (Popescu, 2021). The following overview provided by the Ethereum Foundation is a comprehensive summary of NFT characteristics:

Table 1: Comparison of Web 3.0 and Web 2.0

Abbildung in dieser Leseprobe nicht enthalten

Source: Ethereum Foundation, 2022

Like earlier, a SWOT analysis shall provide a better overview of the NFT phenomenon. The technology’s primary strength is restriction of digital ownership. Embedded ownership rights in produced content allow originators to control the distribution of transactions, enabling a new creator economy (Ethereum Foundation, 2022). Further, value can be protected by maintaining scarcity and overcoming digital abundance (ibid.). Currently, the main weakness is NFT’s non-interoperability, limiting the uniqueness of assets to one ecosystem (Herian et al., 2021). Considering its early stage, this flaw might be adjusted with further innovation. Another weakness that is already being tackled is indivisibility. Experimental concepts exist to fractionalize NFTs to allow multiple owners, furthering democratization of access (Popescu, 2021). NFTs’ main opportunity lies in widening its industry use cases beyond decentralized finance. In entertainment and media for instance, NFTs are analyzed for more forms of integration other than collectibles (Ballhaus et al., 2021). Last, NFTs come hand in hand with two main threats. First, there is a lack of a single standard since they exist on various platforms with different conditions. Second, globally differing jurisdictions might hamper NFT development. Legal environments and restrictive regulation complicate technological advancements (Herian et al., 2021).

To sum up, it needs to be mentioned that NFTs are an application within Web 3.0 at an infant level of maturity. While NFTs can only be placed within the phase of early adoption of Rogers’ innovation lifecycle, fungible tokens such as cryptocurrencies are already moving toward the early majority phase (Park et al., 2022). This context explains the high experimental nature of current NFT projects and the confusion about the real utility of the tokens.

2.1.3 NFT project classes

To round up this introduction to the current experimental landscape of NFTs, it is interesting to analyze some of its existing project classes. The economic aspect as well as projects of decentralized finance are left aside since this is not the focus of the research. According to Despotovic and the Ethereum Foundation, NFT applications can be divided into digital and physical assets, that can both be traded on the blockchain technology (Despotovic et al., 2022)(Ethereum Foundation, 2022).

Digital asset NFTs (DA NFTs)

Within the digital asset (DA) NFTs, one project class that gained popularity throughout the last year is at the heart of the analysis -the so called “profile picture or picture for proof non-fungible tokens (PFP NFTs)” (Casale-Brunet et al., 2022). It describes generative digital artwork, that features different traits of character (Weston, 2022). PFP NFT collections, mostly limited to 10.000 images, are automatically created based on code that refers to one common figure and creates anthropomorphic subjects (Steiner, 2022). Owners are able to set them as their profile picture or avatar on different platforms, for instance on Twitter (Weston, 2022). Two main characteristics set PFP NFTs apart from other forms of NFTs -the clear roadmap and the community benefit. Creators of PFP NFT collections, often framed as clubs, set out a clear roadmap for the usage of the images before the launch, which manages expectations for investors. Often, digital benefits like access to an online community or real-life events are included, integrating an element of experience (Steiner, 2022). The community aspect is what makes this case so special in the NFT sphere, though. On the one hand, by setting an NFT as a profile picture, one creates a digital identity, potentially anonymizing his/her real self and eliminating stereotypes around social media profile pictures (Casale-Brunet et al., 2022). On the other hand, one will be identified as a person in the know by other people of the crypto and NFT community (Weston, 2022). Essentially, it is a digital status symbol, whose value is determined by the recognition of other members of the community, the scarcity, and the related experiences. With regards to projects, CryptoPunks by Larva Labs has been traded at the highest volumes. But according to a social network analysis conducted with Twitter data, the Bored Ape Yacht Club by Yuga Labs has been the most relevant collection measured in social activity (Casale-Brunet et al., 2022). It is remarkable how this affects the perception of value within the NFT space, which is not necessarily economic, but very much of social origin. PFP NFTs as part of DA NFTs introduce a social and collective dimension, that hold brand-building opportunities for companies (Weston, 2022).

Real-world asset NFTs (RWA NFTs)

After covering the most prominent use case for DA NFTs, it is interesting to look at its physical counterpart, the real-world assets (RWA) (Bucsa & Kostova, 2022). Unlike the social aspect and community inclusion, the utility for tokenization of physical assets seems more functional. Tokenizing RWAs is a straightforward step for NFT technology since uniqueness and scarcity reflect physical assets’ intrinsic characteristics (Despotovic et al., 2022). Because these features need to be trustworthily validated in real life, the implementation of RWA NFTs is quite complex (Weingärtner, 2019). However, use cases are currently increasing. For instance, the real estate industry is one of major sectors testing to leverage on NFTs benefits of clear ownership documentation, quick transfers, smart contracts and automation of security (Rosenberg, 2022). One marketed example is Propy, an online auction house for NFTs representing physical real estate (Propy, 2022). Buyers bid for a non-fractional ownership of an NFT linked to a US-based owner of the property, receive legal documents and the process is inserted in the blockchain (ibid.). However, its most interesting application is its partnership with Helio Lending, enabling buyers to use the Propy real estate NFTs as a collateral for decentralized loans (Helio Lending, 2022). Tinlake is another project, enabling borrowing against non-fungible assets, e.g. real estate, from the global finance industry (Tinlake, 2022). Such a property token is particularly beneficial for people that own physical items of value instead of crypto wealth (Ethereum Foundation, 2022). Further, it shows how one project can cover various industries and serves as inspiration on how other valuable physical assets might be tokenized.

Apart from real estate and decentralized finance, an integration of real-world NFTs in consumer goods is also conceivable. As the industry is hit by an increasing number of worldwide counterfeits, NFTs could prove helpful to fully track product lifecycles (Despotovic et al., 2022). Genuine products can be publicly authenticated by transfers of ownership along the supply chain on distributed ledgers. Pharma and biotech industries are particularly interested in this case and the company Aimedis is a medical data NFT marketplace, aiming to build a virtual healthcare system around native tokens (Aimedis, 2022). In conclusion, RWA NFTs are straightforward to value due to their representation of an underlying physical good (Hargrave et al., 2019). Yet, buyers run a high risk of lacking protection. Real world services like inspections or contracts are needed to ensure this underlying value and the quality of goods and cannot be duplicated online, which makes this project class subject to fraud. Fraudulent actions are not reversible on the blockchain (Rosenberg, 2022).

To sum up this chapter of project classes, it can be stated that DA NFTs primarily serve the purpose of social community, while RWA NFTs fulfill a more functional approach. Within DA NFTs, different forms such as collectibles like digital art or sports cards, memes, music, and videos have been explored. Multiple industries can make use of these project types, of which the art industry and decentralized finance are the most prominently featured. The ultimate purpose of such social NFTs can be deemed as being the building blocks for eventual metaverses, while brands and artists can make use of the related community and the royalty mechanism respectively as of now already. Within RWA NFTs, all types of real-world deeds, tickets and scarce or valuable goods can be included. Until now, the most prominently featured industries are real estate and consumer goods, while the function of these tokens revolves around authenticating products and optimizing processes such as digitization of real-world tickets to prevent loss.

The table below (see Table 2) aims to illustrate the difference between DA and RWA NFTs divided by form, industry, and utility. It needs to be highlighted that the contents are neither mutually exclusive nor collectively exhaustive. Further, this reflects a momentary snapshot of the NFT industry, inspired by previous or planned applications of the technology. Possible future perspectives are not considered in this analysis but will be explored in the further course of this work.

Table 2: Comparison of DA NFTs and RWA NFTs

Abbildung in dieser Leseprobe nicht enthalten

2.1.4 Outlook for Blockchain and NFT technology

In conclusion of this chapter, the difference between blockchain technology and NFTs needs to be highlighted again. Nowadays, blockchain is perceived as a relatively mature technology with stable use cases for various industries, while still offering opportunities to grow (Quiniou, 2019). However, NFTs are built on numerous forms of blockchain and are viewed as an infant technology on the search for viable application cases (Popescu, 2021). Due to the recent history, both technologies carry challenges. First, energy concerns cannot be omitted, resulting from high gas fees and network congestion. Gas fees are the compensation for miners/ validators for creating blocks, amounting up to 300 per NFT at peak times (Despotovic et al., 2022). This mining/ minting process is also liable for overusing local energy networks.

Second, environmental concerns are among the loudest critique of the technology. With the current predominant Proof-of-Work, blockchain technology and its related use cases, such as NFTs, leave a high carbon footprint. This is related to the high energy usage again, but is already improved with the current switch to Proof-of-Stake on some blockchains (Li et al., 2021). This new consensus mechanism is expected to decrease the carbon footprint, the gas price and increase the speed of transaction (Despotovic et al., 2022).

Third, security concerns in relation to the non-centralization have risen. In case of identity theft or fraud, there is no central authority accountable that an investor could turn to for help (Quiniou, 2019). Despite these concerns, supporters are optimistic about a positive development and increasingly useful applications. Some even go so far as to interpret NFTs as an opportunity to transmit the value between the real and digital world, potentially succeeding to connect both dimensions indefinitely and mirroring each other (Wang et al., 2021). In general, the importance of experiences related to NFT applications is highlighted as well. According to Popescu, NFT utility improves as “digital experiences are built around them, including marketplaces, social networks, showcases, games, and virtual worlds” (Popescu, 2021).

Finally, the careful reader must have noted that fashion and luxury, which is at the focus of this work, was not among the listed industries for either DA or RWA NFTs. The reason is that this sector cannot be clearly assigned to either case, but rather builds its own repertoire of use cases as a mixture of both project types (Jones, 2022). While fashion and luxury industry engaged in digitalization very late, the use cases of NFTs are more in line with their inherent values and there is much experimentation happening at this stage. Before diving deeper into the rationale for blockchain and especially NFT application in fashion and luxury, a thorough introduction to the sector is needed.

2.2 The industry of fashion and luxury

The following chapter is designed as a complete analysis of the current state of fashion and luxury. For it is viable to understand the sector before reconciling it with the introduced technology of blockchain and NFTs in a comprehensible way. The introduction is organized as follows: After defining the term luxury and providing an industry overview, the main part of exploring the new notion of luxury follows. The trend toward Luxury 3.0 and a new generation of customers are introduced here. Building on this, the adapted marketing needs and development toward experience-based communication for companies is explained.

2.2.1 Definition and industry overview

Before conducting a deeper analysis of the fashion and luxury sector with its characteristics and particularities, an introductory definition of luxury appears useful. From an etymological point of view, the word “luxury” originates from the Latin term “luxus”, translating into excess and extravagance. From 1780 onwards, the connotation moved to “choice beyond life’s necessities” (Harper, 2018). Since then, the traditional concept of luxury has revolved around answering desires that are not related to actual needs (Cabigiosu, 2020). Oftentimes, a negative connotation accompanies this and the general notion of luxury might be perceived as detachment and an abnormal way of indulgence (Kapferer, 2012). To sum up, luxury can be ascribed to inheriting a symbolic value connected to experiences, objects and services that are not compatible with the standard. According to Cabigiosu (2020), luxury’s emotional meaning stems from combining excess and distinction (Cabigiosu, 2020). As a consequence, a luxury buy can be described as a “non-essential and expensive good/service purchased by wealthy consumers in the higher income bracket” (Global Industry Analysts Inc., 2022).

As a further introduction to the market, the current size, growth expectations as well as market landscape from a demand and supply perspective shall be analyzed next. In 2021, total sales worldwide in the corresponding industry of personal luxury goods amounted to $284 Billion, exceeding the pre-covid record (D’Arpizio & Levato, 2021). More specifically, the sector recovered quite quickly from the global pandemic, with China and Western markets showing a strong preference for experience-based goods and a high willingness to revert back to experiences in real life (Bain & Company, 2022). Within the segment of luxury, personal luxury goods are the strongest category and are deemed to grow with a double-digit percentage (Deloitte, 2022). In terms of geographical distribution, the manufacturing countries of luxury goods are traditionally focused in the Western world. Even though Italy is the country with the highest number of luxury goods companies, France captures the main financial share of the market, making up for 34%. Italy is next with a total of 20%, followed by the US (14%) and rounded up by Switzerland (6%) (Cabigiosu, 2020). From the market’s supply side, the top 7 luxury companies are as follows: LVMH Moët Hennessy-Louis Vuitton SE (France), Kering SA (France), The Estée Lauder Companies Inc (US), Compagnie Financière Richemont SA (Switzerland), L'Oréal Luxe (France), Chanel Limited (United Kingdom), Essilor Luxottica SA (Italy) (Faccioli & Sheehan, 2020). Since the mid 1980s, the competitive landscape has been shaped by a high activity of mergers and acquisitions, representing the reason for the big size and scale of these luxury companies (Cabigiosu, 2020). Confirming this development, the industry is currently characterized by a fast-moving trend toward consolidation. From the market’s demand side, Asia and the United States represent the leading consuming countries. More specifically, Chinese shoppers are the market’s key customers, being the “best performers in 2022” (Deloitte, 2022). The analysis at hand is focused on personal luxury goods due to their nature as the strongest performing category within the luxury sector (ibid.).

2.2.2 The new notion of luxury

The following part is dedicated to an identification of the most important trends and challenges, that are shaping the fashion and luxury industry’s course of development. In order to succeed with a plausible explanation of these factors, the broader context shall be set. In fact, the late 20th and early 21st century has been characterized by a key societal paradigm shift, which is the move from the modern to a postmodern society (Batat, 2019b). While modern society revolved around uniformity, hierarchy and the presence of an universal reality, postmodernism parted with these values (Batat, 2019b). The ephemeral nature of life is approached with a plurality in perspectives and the diversity of human experiences are embraced in postmodern philosophy (Patton, 2001). In sociology, this translates to a fragmentation of social identities and pervasiveness of symbols (Preda, 2001). This emergence of new norms heavily affected the fashion and luxury industry since its ambivalence between a positive and negative connotation depends on the societal context and dominant perceptions and norms. Over time, the industry’s focus shifted away from sacredness towards a more inclusive approach (Cabigiosu, 2020). The offer of high quality services and products at a more reasonable price can be depicted as democratization of luxury, which represents the cornerstone for a new luxury paradigm (Silverstein et al., 2014). Not only did the target group change, but above all the perception by customers, which prefer an emotional connection to the brand (Danziger, 2005). They tend to pay more attention to what a product stands for instead of its intrinsic characteristics (Cabigiosu, 2020). More specifically, the focus of old luxury was on price, aspiration, exclusivity, and ownership, while the notion of new luxury spans knowledge, inspiration, uniqueness, and access (Prandelli, 2021).

Within these pillars, fashion and luxury companies are facing four main trends with respective challenges. First, the Chinese market is set to become the new consumption hub, with local consumers becoming responsible for 40-45% of global purchases by 2025 (D’Arpizio & Levato, 2021). Hence, the industry needs to secure its geographical presence there now in order to anticipate the dominance of the East. Second, the digital distribution channel is likely to become the leading one, even though physical stores remain important (D’Arpizio & Levato, 2021). The challenge will lie in establishing a sustainable balance between digital and physical distribution channels and to regain the maximum control over both (Deloitte, 2022). Third, fashion and luxury brands are increasingly expected to publicly disclose ethical commitment and act responsibly (Hazan et al., 2022). For instance, it has become a trend for luxury companies to actively engage in re-commerce and build strategies around reutilization. The future task will be to communicate the company values clearly and do them justice long-lastingly with dedicated actions (Deloitte, 2022). Fourth, the industry’s key trend revolves around new target groups. By 2025, Millennials or Generation Y (born between 1981 and 1996) and Post-Millennials or Generation Z (born between 1997 and 2012) (Dimock, 2019) are said to become the most important customers, possibly representing 70% of global purchases (D’Arpizio & Levato, 2021). The main challenge here will be to understand their new demand and desire patterns, adjust the brand’s core messaging correspondingly and clearly communicate it to these new customers with effective marketing strategies. Combining these four trends with the prior identified new luxury paradigm, a shift from product orientation to market orientation can be seen in the sector (Highsnobiety & BCG, 2020). In a move away from the designer’s creativity as the sole determinant of brands’ products and services, fashion and luxury companies put the purpose to satisfy customer needs at their core now (Prandelli, 2021). The new focus lies in delivering the customer’s “perceived value” instead of the brand’s “desired value”, whereas value stands for the “bonus that a customer derives from his/ her luxury experience” (Batat, 2019b). The taxonomy of a new luxury customer, which can be split into three main characteristics, needs to be well understood.

The behaviour of the Millennial and Post-Millennial generations is marked by omnichannel consumption, collective purchasing, as well as emotional decision-making (Batat, 2019b). The first aspect of omnichannel consumption describes their heavy use of digital and especially social media and their capacity to easily switch between different digital mediums (Deloitte, 2022). These consumers spend a significant amount of time online, where they are connected to their peers. The impression prevails that experiences only become valuable if shared with the digital community (Batat, 2019a). It is precisely this community which is consulted during the act of purchase by Gen Y and Z. This collective purchasing behaviour represents the high connectedness and importance of mutual approval. The third aspect, emotional decision-making, highlights the relationship consumers build with brand values (ibid.). Even though they are said to portray little loyalty to one luxury company only and their decisions might be compulsive, it is important for them to feel coherence between their belief system and the brands’ (Highsnobiety & BCG, 2022). As D’Arpizio and Levato put it in the worldwide luxury goods study published by Bain, this pattern is said to reflect a luxury post-consumerism and expresses a “new cycle of desire” (D’Arpizio & Levato, 2021). While luxury consumers “aspire(d) to become” (ibid.) in the past, they currently “express to be(long)” (ibid.) (see Figure 1).

Figure 1: Luxury 3.0’s Cycle of desire

Abbildung in dieser Leseprobe nicht enthalten

Source: D’Arpizio & Levato, 2021

The last two aspects that play a new role in the context of postmodern luxury customers are knowledge and experience. Within the digital era, information has become a currency, hence knowledge is powerful. Applied to the fashion and luxury sector, “people in the know” are the new trendsetters and holders of the highest cultural relevance. Times of trend dictation by fashion and luxury brands are over and key opinion leaders rule the knowledge economy (Highsnobiety & BCG, 2020). Finally, the relevance of experience connected to fashion and luxury needs to be highlighted. In line with the trend where traditional excellence in a physical retail store is not sufficient anymore, luxury experiences need to be redefined (Hazan et al., 2022). New generations expect a wow effect from fashion and luxury brands by experiencing something exclusive as a community and reaching immaterial wealth (Batat, 2019b). As a conclusion, younger customers seek an experiential value in luxury goods and services and aim to distinguish themselves from one another with knowledge.

This year’s Highsnobiety report Luxury 3.0 (with reference to web 3.0) sums up the new consumer patterns as follows: “stories over product, knowledge over possession, community over crowds, participation and experiences over observation” (Highsnobiety & BCG, 2022). These principles lead the way for a new luxury paradigm governed by a postmodern consumer expressing his/her new desires, that fashion and luxury brands are encouraged to cater to in innovative ways. The challenge for brands is to stay competitive and establish a unique selling proposition within a world of Luxury 3.0.

2.2.3 The relevance of Experiential marketing

The following paragraph deals with a solution approach on how fashion and luxury brands can achieve exactly this unique positioning in Luxury 3.0. For companies to understand and communicate with their customers, the most important lever is their marketing strategy. Thus, an introductory definition of the term marketing seems useful at this stage. Interestingly enough, the official definition of marketing provided by the American Marketing Association (AMA), the leading professional organization in the field, has been revised in 2007 (Gundlach & Wilkie, 2009). In response to academic discourse on the prior designation from 2004, marketing was redefined as the “activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large” (Gundlach & Wilkie, 2009). The main change was to give the term a leading and positive connotation instead of a lagging and normative one (Ringold & Weitz, 2007). Further, the new focus on exchange highlights marketing’s capability to establish a conversational relationship with customers (Sheth & Uslay, 2007). In general, the broader and more inclusive design of the explanation succeeded in shifting the marketing discipline’s focus from a managerial activity inside one firm toward a bigger scope and significance for society at large (Gundlach & Wilkie, 2009).

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• Université: Bocconi University (Department of Management and Technology)
• Cours: M.Sc. International Management
• Note: 7/8
• Auteur: Laura Schneider (Auteur)
• Année de publication: 2022
• Pages: 86
• N° de catalogue: V1298717
• ISBN (ebook): 9783346765277
• ISBN (Livre): 9783346765284
• Langue: anglais
• mots-clé: NFTs, fashion, luxury, technology, metaverse