What next for retailers and NFTs?

McKinsey’s State of Fashion 2022 report concluded that non-fungible tokens (NFTs) are likely to become part of the mainstream for retailers this year. And according to Morgan Stanley, the entire NFT market could grow to $240 billion by 2030.

While this might sound farfetched to some, the hype around these unique crypto assets – where authenticity and ownership is verified on a blockchain – is increasingly difficult to ignore.

Use cases

The longer time goes on, the more use cases we are seeing, as brands – such as Adidas, Burberry and, somewhat ironically, Farfetch – target NFT enthusiasts with a once in a lifetime opportunity to purchase a unique, covetable and potentially tradeable item.

The speed at which some brands have embraced NFTs is truly remarkable, compared to the slower adoption of many other technologies. However, particularly since the start of the pandemic, beliefs about what consumers will and won’t buy are being dispelled; you only need to look at the seamless shift towards buying cars online to see the untapped potential of the internet.

For a market like retail (where brands rely on creative new ideas to stand out and win over the hearts, minds and pockets of consumers), today’s use cases are likely to be just the starting point.

Some early trends are:

• Authentication of physical products – using NFTs to verify the authenticity of a branded product, particularly where forgery is rife, such as in luxury goods
• Exclusive collections and collectables – launching a small number of digital assets, emphasising their exclusivity and therefore driving up the price
• Gaming – often linked to the above, creating digital clothes and accessories for example to adorn a customer’s avatar, tapping into people’s desire to be seen wearing certain brands and curating a certain style on-screen as well as in the real-world
• Licensing NFTs – granting a small number of licences to customers to make their own NFT versions of a popular branded product, as in Adidas’ WindRdy parka jacket competition
• Hybrid sales – selling digital versions of exclusive physical collections, such as Dolce & Gabbana’s Genesis Collection, which featured five physical pieces, virtual iterations of those pieces and four solely digital creations
• Charitable fundraising – raising money from NFTs to donate to charitable causes

The end of the gimmick?

The headlines to date have largely focused on the novelty and ingenuity of NFT campaigns. Soon, this grace period for “gimmicks” will start to end, and brands will come under more pressure to justify what they are doing and why – particularly in the context of amplifying their sustainability credentials.

Our latest Retail Agility report, Sustainability Matters: Putting the ‘eco’ in retail economics, highlights the dilemma retailers face with balancing their public commitments to being a sustainable business and new risk areas, such as a cross-regulatory clampdown on greenwashing.

NFTs require huge amounts of electricity, due to their reliance on cryptocurrency, the blockchain and high-power computers. Retailers have been able to remain fairly silent on this issue so far, but it’s something that will no doubt come up as more businesses board the NFT train, and because it will need to be considered as part of an organisation’s journey to net zero.

There are various other legal considerations, from the use of smart contracts to ensure long-term gains from secondary etc. markets in NFTs, to risks such as cyber security and other regulatory concerns, with the ASA recently acknowledging the potential for misleading adverts.

NFTs are becoming more affordable, and their popularity is increasing all the time. It’s an exciting new area for retailers, but certainly not one to be taken lightly.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.