SHANGHAI — Chinese consumers are increasingly looking to e-commerce to purchase luxury and fashion products — and brands are finally stepping up to meet that demand.
Luxury brands have yet to realize their full potential for online sales in China, according to industry observers. The proliferation of counterfeits in China and fears about diluting brand identity have held companies back for years, and only now is the tide starting to turn.
Tompkins International principal Michael Zakkour said the situation is about to change dramatically.
“The main drivers are cross-border e-commerce, whereby foreign luxury brands are attracting Chinese consumers to their local web sites and fulfilling from the U.S. and Europe to China, as well as brands creating [their own] flagship stores Tmall and JD.com,” Zakkour said.
Online luxury sales currently account for only five percent of the domestic luxury market in China, according to a recent report from business intelligence agency L2. But sales grew 20 percent last year, a growth rate three times that of the overall market.
That market is still growing, with data from Euromonitor putting the 2015 value of China’s luxury goods market at $22.5 billion, and the projected 2020 value of the market at $27.6 billion, an increase of 23 percent over five years.
Danielle Bailey, head of APAC Research for L2, said that on the whole, luxury brands have not kept pace with the desire of Chinese consumers to source authentic luxury products online. Those who ignore what Chinese customers want and need risk being left behind among the sector’s biggest spending nationality.
“At the end of the day Chinese consumers want that authenticity and online is a way to deliver that to them,” Bailey said.
Despite a slow uptake overall, of the 107 brands examined in L2’s “2016 Digital IQ Index: Luxury China” report the number that have added e-commerce offerings in China over the past year has grown, with recent adopters of own-brand e-commerce options including Cartier, Van Cleef & Arpels, Piaget and Montblanc.
The report specifically called out Tommy Hilfiger as having made great strides in the e-commerce space in China recently, with the brand’s aggressive expansion leading to its full range of products being offered on a China direct-to-consumer site, as well as stores on Alibaba’s Tmall and JD.com.
Both Tmall and JD.com, which dominate the e-commerce landscape in China, have been actively seeking luxury and fashion brands for their platforms. JD.com has recently snagged deals with Tag Heuer and Calvin Klein, while Tmall has struck agreements with Burberry, Ports 1961 and a number of high-end beauty brands, including Dior, Chanel, Estée Launder and La Mer.
“We are in conversations with a lot of brands, be it watch or fashion. It will take some time to make online a comfortable environment for luxury brands,” said Haoyu Shen, chief executive officer of JD Mall.
Despite the reluctance of luxury brands to partner with China’s major e-commerce platforms, L2’s Bailey said companies should seriously consider the example of Burberry, which inked a deal to join Alibaba’s Tmall in 2014.
“Burberry’s presence on Tmall is not about selling a single product — they are using it as a branding vehicle and they are leveraging their relationship with Alibaba to get rid of gray market and unofficial sellers on the platform. At least for now, the primary benefit of being on those platforms is clearing out that clutter and establishing an official presence, providing people with authenticity and using it as a vehicle to communicate branding and awareness in the market,” Bailey said.
Thibault Villet, chief executive officer of flash sales site Mei.com (formerly known as Glamour Sales), noted several changes in the e-commerce landscape in China since his site launched six years ago. Younger consumers are increasingly seeking out new and niche designer brands, he said. Meanwhile, smaller brands are starting to use established e-commerce platforms as a cheaper alternative to bricks-and-mortar expansion within China.
“The fact is, we are working with a lot of brands who do not have the financial means to expand a network of stores. They find it very convenient to reach customers through e-commerce,” Villet explained. “We’ve seen our average basket growing by 10 or 15 percent every year since we started and there is a need from those customers to find out about new brands, particularly customers born in the Nineties and after.”
Trust, price and the ability to deliver a luxury experience are the three ingredients that are vital to success with Chinese consumers, said Penny Li, an executive who used to run Farfetch’s operations in China and is gearing up to launch a new e-commerce platform featuring Chinese designers.
“Chinese consumers are ready to spend a lot of money on luxury online, but they still want to have a discount. This is why Farfetch is doing so well in China. Even though it’s not a specialist discount or flash-sales luxury site, the prices are still less than Chinese consumers would be paying in [Mainland] stores,” Li said.
Jenny Xu is an avid online shopper from Shanghai who is indicative of the kind of research-heavy consumer who is prepared to spend big online. Before making a big purchase online, Xu said she compares prices on sites including Farfetch, Gilt, Mei.com, Neiman Marcus and Saks Fifth Avenue — and occasionally also heads in store to try clothes on if she is buying a brand she hasn’t bought previously.
“I bought a Chloé bag that was over 10,000 yuan [$1,525 at current exchange], also a Lanvin bag that was more than 10,000, yuan. I guess anything under 20,000 yuan [$3,050], I would be OK to spend on a product online,” she said. Both of these things she bought through Farfetch.
But it’s not necessarily first-tier shoppers such as Xu who will prove to be the biggest boon for luxury brands online. Recent research from McKinsey said consumers in second-tier, third-tier and low-tier cites hold plenty of untapped potential. E-commerce means brands can reach consumers in far-flung corners of the country where it would not be viable to open bricks-and-mortar stores.
The McKinsey report doesn’t specify cities or regions. In terms of the investment from major players such as Alibaba and JD.com, they are both working on reaching the entirety of the country — from the northeastern plains to the mountainous southwest with their “last-mile” logistics rollouts.
“Major e-commerce platforms are investing heavily to acquire customers and build logistics networks in low-tier cities,” the research said.
Meanwhile, experts stressed that brands should make more use of the social network WeChat as a one-to-one communications vehicle.
“WeChat can be used to proactively track and target consumers, perhaps to identify your VIPs, or notify them that a new product has arrived in store that fits the profile of the products they have purchased previously. An application like WeChat is severely underused by luxury brands for this purpose,” Bailey said.
“I think a few brands, like Alexander McQueen, have embraced WeChat. They are pushing products through that platform, even approaching Chinese consumers shopping in London and offering them special products and discounts through WeChat,” Penny Li said.
But she added that making e-commerce available to Chinese consumers and reaching out to them using WeChat is not enough to take advantage of China’s intricately integrated digital eco-system.
There are also payment options to consider, with most Chinese consumers far more accustomed to using homegrown digital payment systems such as WeChat Wallet or Alibaba’s Alipay than Western systems such as Apple Pay or PayPal, or even credit cards, for online purchases.
“Chinese consumers don’t like to use credit cards online, because they don’t feel safe; it’s not like in the Western world,” Li said. “Farfetch finally added Alipay as an option last year and within two or three months, 70 percent of our purchases from Chinese consumers were using Alipay.”
At the end of the day, according to Zakkour, when it comes to accessing Chinese consumers, luxury brands just can’t afford not to be engaging with them online — because that’s where they are.
“Thinking that you are ‘protecting your brand’ from e-commerce is a head-in-the-sand attitude. This is where Chinese consumers want to engage and do business with you. They put more stock and trust in your brand if they can buy directly from your U.S. site or your China-based online flagship store,” he said.