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Jun
2015

Are independent luxury e-commerce sites truly a workable proposition in China?

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When the industry was optimistic about luxury e-commerce in China in 2011, a number of investment organisations held the opinion that ‘luxury items are not very suitable for selling online’. Three years have passed, and most of the flourishing online luxury shopping websites have now closed or been repositioned. At the end of May, the closure of VIP China.com was just further evidence to support the previous view.

As many observers and analysts including ourselves have noted that there is no authorisation for online sales in China from genuine foreign luxury brands. Any authorisation e-commerce websites have received is generally from premium/ mass-market foreign brands that claim to be luxury when selling into China.

When assessing the market, we can summarise what luxury e-commerce companies do in China is to act in a similar manner to that of a Daigou (grey market seller), or to actively create a rush of Chinese consumers to buy in the stores during the discount season overseas. And those that have a ‘joint business’ with luxury brands are mostly just cooperating with distribution agents or dealers that are unable to guarantee the stable supply of products to them.

There tends to be a contradictory situation where, on the one hand those e-retailers fear that consumers will not buy products, but on the other, they are also afraid that consumers could buy too much resulting in insufficient supply.

Luxury e-commerce is cooling down?

In March and April, there has been a tremendous amount of news in the media that affordable luxury is now so popular online that consumers are rushing to buy it. However, at the end of May, the e commerce site VIPChina.com, which received funding from SAIF (Softbank Asia Infrastructure Fund) and investment quicker than any other, went into liquidation. Were the market expectations nothing but hype?

Looking back four years, the market was much like that of the dot.com era; it was the hottest time for luxury e-commerce in China, people invested and got involved in this industry not because it was well analyzed and used a proven business model but because every competitor was looking forward and willing to invest, so othe investors just rushed to follow the trend driven by the fear of being late and left behind.

Currently no luxury online retailers can guarantee their merchandise supply and resolve the issue, meaning that failure could be just a matter of time. Taking advantage of its excellent strategy to cooperate with banks, clubs and telecom companies, VIPChina apparently solved the issue of trust and targeting high-end customers. However their advantage was a temporary savior giving it greater longevity than most, the merchandise supply remained the key to success.

In 2010, the hottest period of luxury e-commerce, Chi Jingchao, Managing Partner of Ying Capital said, ‘I think luxury brands cannot sell online and I will never invest in the industry.’ The following two major reasons that support his claim are:

1/ Lack of cost advantage

Luxury e-commerce sites do not have the cost advantage that is related to the unauthorised products they are selling.

If the retail cost of luxury e-commerce is half that of the traditional retailers, then even if they spend the same amount of money on commodity purchases (commodity purchases overseas are expected to be much cheaper than those in China) than the traditional retailers, the luxury e-commerce sites remain competitive. But the problem is that in China these purchase channels are strictly controlled by the luxury brands themselves. So in terms of the supply of goods, luxury e-commerce has no cost advantage compared to traditional luxury retailers. This naturally results in them having to reduce their handling, sales and financial expenses etc. in order to make a profit.

However, during the peak times, every luxury e-commerce website was throwing money at marketing regardless of the cost because VC was feeding them money constantly. Contrary to the view of the general public, luxury e-commerce businesses have no overall cost advantage over traditional retail in China.

2/ Lack of consumer experience

Luxury e-commerce websites are unable to provide proper consumer experience via the online sales process.

Consumers on the whole prefer traditional offline stores that are beautifully decorated, filled with luxury products and have a high-class atmosphere. They consider that they will be well served and respected by the retail staff. Chinese consumers now see luxury as not just about the product that they purchase, but also a psychological satisfaction they receive, and a ‘noble’ and rare spiritual feeling. From this point of view, the word ‘luxury’ and ‘e-commerce’ are contradictory to many.

It is hard to educate real luxury consumers to change their behavior and to move to shopping online. Therefore, what most major luxury e-commerce sites have done is to attract consumers by displaying a small number of luxury items, but with the aim in fact to sell affordable luxury and designer brands or some of second-tier European brands that the Chinese have yet to hear of.

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However, as can be seen from the figures above, sales of luxury goods online in China are still rising. In the June 2013 issue of the Luxury Insight China we reported that according to the China E-commerce Research Center, the online luxury market had increased from 6.37 Billion in 2010 to 10.88 Billion RMB in 2011, a 70.8% year on year growth. In 2012, the market growth slowed, but still grew to 15.51 Billion RMB. During 2013, the value was 20.82 Billion RMB, a 34.8% growth compared to 2012, and it is estimated that by the end of 2014 the market is predicted to reach to 27.42 Billion RMB.
As a share of the entire luxury market in China, the e-commerce sector has room for growth. The China E-Commerce Research Center data indicates that in China, luxury online sales accounted for only 3% of overall sales of luxury goods, while in the United States, the figure is 12%.

If the market is still growing and there is room for development, the question for luxury e-commerce companies is ‘which direction to go in and what kind of business model to adopt?’

Currently, there are still some luxury online retailers operating in the fiercely competitive market in China, this is the active list

  • VIP.com has transformed into a website that specialises in special offers, and was listed on the New York Stock Exchange in March 2012
  • Xiu.com is now a global fashion marketplace with authorisation from Salvatore Ferragamo and Fossil
  • ihaveu.com founded by Sun Tongyu, ex CEO of Taobao.com, is still operating as normal
  • 5lux.com maintains its operations by buying through authorised dealers overseas and reselling in China
  • Despite gossip about Secoo.com, the second-hand luxury online trading platform that claims sales made on the site are in decline, the company is still in operation.

Most other luxury e-commerce sites are not in a good condition.

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The business model dilemma

While the Chinese luxury industry continues to expand year on year, independent luxury online shopping websites are falling by the wayside, demonstrating that the challenges of the luxury e-commerce sector are not specifically a problem of the market capacity, but a problem with the business model.

It is said that the roots of luxury e-commerce originate from Gilt, the US luxury online shopping website. In the early stages, Gilt with its ‘membership + discount + luxury brands selling’ business model achieved great success. But the growth of the Gilt has a specific historical background. Gilt was first established when the financial crisis broke out and luxury brands were holding high levels of inventory. As a vehicle to help brands clear their inventory and solve the supply problem was a key success factor for the site. But after that period the business of the site has been in decline.

However in China, the domestic luxury e-commerce sector had never solved the problem of product supply. Chinese consumers are demanding when it comes to buying luxury online, but their purchasing power and loyalty has been questionable.

A KPMG survey carried out in March 2014 showed that of the approximate 10,000 respondents, the average spend of their latest online luxury purchase per person is about 1,397 RMB. Among them, only 1/6 spend over 2,000 RMB on their most recent order. According to the survey, the purchase power of these Chinese luxury online consumers is not as high as the e-commerce companies expected. Consumers still expect to buy luxury goods in a very low cost, and their loyalty to the site cannot be guaranteed.

Differing consumer spending habits also affect marketing strategy of different sites in differing ways.

Jiapin.com is one of the earliest luxury B2C online shopping website in China. Formally launched at the end of 2009 and funded through several rounds of investment from some Venture Capital sources, the site still operates badly. In 2011, IBM invested a large sum on the site and the CEO, Yang Peifeng who shared his grand plans about jiapin.com.

‘We will create an online luxury selling platform and offer various valuable luxury products through more competitive prices to meet the strong domestic consumer demand.’ In fact, the business model the site adopted was that of a ‘Flash Sale’.

In order to expand the customer base, jiapin.com cooperated with some of the major banks to offer discounted luxury products for some of their high-end credit card holders. But the problem is that the mode of Flash Sale required three basic premises to achieve the expected operating and profitability goals:

  • A broad product mix
  • The adequate and stable supply of products
  • A price advantage

Obviously, jiapin.com could not achieve all three conditions.

Luxury brands always want to create a dreamlike experience and an elegant lifestyle in which the public are fascinated. But for those who operates luxury B2C e-commerce sites this dream becomes a thankless task, as on one hand the luxury brands they offer do not authorise them, on the other, consumers are looking for the cheapest products and as a result have a lack of loyalty to the site.

Yang Peifeng, CEO of jiapin.com left the company 9 months after introducing a $US 15 Million investment from Macy’s, after which the site transformed into a platform selling fashion at sale prices.

Although the luxury market in China is huge and offers great potential, it is also very special in the way it works. Consumers here are some of the world’s fastest learners who become mature within two to three years, compared to foreigners for whom it took a decade or two.

Due to the differences in culture and consumption behavior, and foreign business models are often not be applicable in China, in the majority of cases. Success requires professional organisations that are localised and know how to operate a business, both in China and internationally. Gilt to those Chinese domestic luxury e-commerce websites is a typical example.

Looking at the market environment as a whole, the government’s ongoing anti-corruption campaign has caused a substantial decline in sales of luxury goods both in the Mainland and in Hong Kong, and luxury brands are also slowing their new store openings. The operating environment for domestic luxury online shopping sites has become more difficult, but looking at it from another angle, full of opportunities. To benefit from these opportunities, any company wanting to break into the market needs to create a new business model based specifically on the characteristics of the Chinese market. Although, as we know, it is far from easy!


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