Delphi Digital Researcher: 4 Areas to Watch for NFTs and Digital Luxury

A few weeks ago, while I was walking at Marina Bay Sands, a quote from my girlfriend sparked my interest in financial wisdom:

"You know what?" she mused, "Chanel bags are not just a symbol of fashion, they are an excellent investment. Their value can grow by 10% per year. ”

These words made me think deeply. How can a seemingly ordinary leather bag bring a higher return than the S&P 500?

Chanel's bags, in high demand.

Source: bragmybag.com

What is the secret behind this? Is it the charm of "practicality" or "scarcity"? This led me to delve into the luxury industry. The key points are:

Luxury brands have extremely high profit margins, even outpacing the tech and software industries.

Today's industry landscape

I've done an analysis of the world's top luxury brands.

High-end luxury goods are divided into two camps: brand groups and mysterious family businesses. Let's take a closer look:

The first is the brand group, dominated by giants such as LVMH, Richemont and Kering:

• LVMH in France, with around 60 subsidiaries, manages 75 luxury brands, from Louis Vuitton to Dior. LVMH has been able to grow to this scale thanks to the shrewd strategy of its chairman, Bernard Arnault, the richest man in the world. I highly recommend Acquired's episode, which provides an in-depth look at LVMH's growth and has provided me with a lot of material to complete this article.
• Founded in 1962 by François Pinault, Kering, the global luxury group, began as a timber trading company before transforming into the luxury industry, acquiring a controlling stake in the Gucci Group and Yves Saint Laurent. Today, its portfolio also includes well-known brands such as Bottega Veneta and Balenciaga.
• Switzerland's Richemont is the owner of brands such as Cartier and Van Cleef & Arpels. It operates independently, ensuring that its brands remain unique and unaffected by the company's overall identity.

What's fascinating about brand groups is their ability to take advantage of economies of scale – a rarity in an industry that prides itself on craftsmanship and exclusivity.

Even though design and production are still specific to each brand, LVMH achieves economies of scale in raw material sourcing, marketing and advertising transactions.

They've taken this art to the extreme, building a "machine" that not only increases the value of their brands, but also maintains gross margins of around 30%, while adopting a non-interventional management approach that allows each brand to maintain its unique charm.

Then there's a look at family luxury brands like Hermes, Versace and Prada.

In these brands, heritage and tradition are crucial. They are bastions of craftsmanship and exclusivity, perpetuating the legacy and values of the founding family. In general, they resist rapid expansion and strictly maintain brand identity. It's a more conservative way of doing business, cultivating a loyal customer base and an unrivalled sense of exclusivity.

So, what exactly is luxury?

Coco Chanel, a visionary in the world of luxury.

Source: Getty Images

Coco Chanel defined luxury as "necessities that start where necessities end."

In other words, luxury goes beyond value and immediate utility. Luxury brands sell dreams, aspirations, and exclusive lifestyles. It represents prestige, status – it is a symbol of owning something, both as a show-off and as a fashion statement.

Compare that to standard and premium items, where the price is ultimately determined by practicality.

Standard goods vs premium goods vs luxury goods

Designer handbags are the epitome of luxury

With the popularity of automobiles in the 20th century and the increasing importance of women in the labor market, there was a decrease in the demand for traditional fashion items such as hats and gloves. After all, hats are not suitable for driving.

The handbag became one of the few women's fashion items that continued to flourish, transforming from a utilitarian item into a symbol of fashion and status.

Handbags are a prime example of a highly profitable business.

Take Hermes, for example. As of June 2023, Hermes has a net profit margin of 33% for the entire company, which is comparable to Meta, the star company in the FAANG, and even 1.5 times that of Netflix. This demonstrates profitability close to that of the software industry, far exceeding the margins of general consumer goods. By comparison, Nike's net profit margin is around 11%.

来源：Google Finance

From a product perspective, the situation is even more interesting. Considering the wide availability of leather and the five-digit price tag on Hermes handbags, the marginal profit margins can be as high as a staggering 80-90%, well exceeding the cost of production.

Did you know that the average woman in the U.S. owns 6 to 11 handbags (from different sources) and buys 2 to 3 new bags each year.

There are two key words here: revolving income.

Focus on observations

From traditional luxury to digital exclusivity, this will be a natural evolution of the luxury industry.

If the Birkin bag represents the pinnacle of physical luxury,

So maybe CryptoPunks NFTs represent the pinnacle of digital luxury?

Why can a CryptoPunk NFT be worth more than $100,000, or a Fidenza can sell for $250,000? These digital assets, like their physical counterparts, offer limited practical uses, but they are in strong demand – the hallmarks of luxury goods.

These luxury empires, which once dominated the physical luxury market, are now moving into the digital realm, especially with the high-profit potential of NFTs.

LVMH, for example, launched a $39,000 NFT of the Via suitcase, including a physical suitcase. It is also a key member of the Aura Alliance, which uses blockchain for authenticity verification and customer engagement. LVMH has been exploring the NFT space since 2021.

In the Web3 space, we often think about who will be the next Disney. Ambitious teams sell such dreams in order to become the next big thing. But I'm more interested in who will be the LVMH of Web3: the luxury, ultra-profitable vertical that controls it.

For "LVMH in Web3", I think there are a few areas worth paying attention to:

1. Dynamic NFTs: Not limited to static monkey JPEGs

来源：2024年NFT的未来，Delphi Research

Beyond traditional static digital images, the future of NFTs lies in dynamic, interactive experiences.

For example:

ERC-6551 (or Token Bound Accounts) is a new standard that allows each NFT to have its own personal wallet. NFTs can now perform a variety of operations on-chain – owning assets, performing on-chain activities, and interacting with other applications. This opens up endless possibilities for innovative digital consumer experiences.

2. Loyalty program: But make it more exciting

We all know those traditional loyalty cards, stuffed in wallets and forgotten. Or earn some inconsequential points when shopping online. But what if loyalty programs become truly exciting?

Web3 and NFTs have breathed new life into this idea. Go beyond the ordinary – exclusive passes, special offers, and a friendly open world between different loyalty programs. Blockchain's natural interoperability fosters collaboration and expands consumer welfare.

For example:

• Loyalty+ is an open, connected rewards ecosystem powered by smart tokens.
• TYB is a play-to-earn platform that helps brands build meaningful connections with their customers.

3. Talking fashion

Technology is transforming traditional clothing into interactive experiences.

For example:

• IYK。 By embedding a special NFC chip into the garment, IYK makes the garment more than just a fabric;
• Using IYK, 9dcc has launched a range of luxury T-shirts as a "networked product". Wear it and ask your friends to scan the NFC chip on the t-shirt and see how it weaves a story based on your real-world interactions. Fashion items can now be connected and functional.

4. Clothing Clothing

Imagine being rewarded just by wearing and sharing your favorite brands. Showcase your style on social media and earn tokens. This is what "dressing to make money".

It's a win-win situation – brands get real engagement, and consumers are rewarded for showcasing their style. This may be a better way for brands to spend on marketing spend rather than investing in digital advertising that is heavily trafficked and often lags behind customer purchase intent.

For example:

• BNV is a pioneer in this model, experimenting with new marketing strategies in the digital space.

In summary, the world's most attractive companies today are concentrated in the technology and luxury sectors. Combine them and the future will be full of exciting possibilities.