Luxury Brands Rethink Approach in China

Firms that once recoiled from online retail now see path to growth

Author: Rahul Chadha

August 17, 2017

Luxury brands are rethinking their ecommerce strategies in China. Companies selling high-end goods once shunned online sales channels there, concerned that their brands might be damaged by the heavy discounts routinely offered by retailers and the rampant availability of counterfeit items.

As a result, these brands’ retail strategies have relied heavily on the use of brick-and-mortar locations in the country, where pricing and high-end customer service can be carefully controlled.

But that sentiment is changing as luxury firms become increasingly set on tapping into China’s massive—and growing—ecommerce sector. eMarketer forecasts expect China’s retail ecommerce sales to total $1.13 trillion this year, and climb to $2.66 trillion by 2021, when they will account for an impressive 40.8% of all retail sales in the country.

China will be responsible for generating an increasing share of worldwide spending in the sector over the coming years, with consultancy McKinsey & Company estimating it will jump from 32% in 2016, to 44% by 2025. By then, the company estimates luxury goods spending in China will total RMB2.7 trillion ($406.4 billion).

China has become even more important to luxury brands because worldwide demand for luxury items has been lackluster in recent years. In a recent report on Chinese luxury goods, McKinsey noted that global consumption of luxury goods hit a low in 2016 not seen since 2009.

Perhaps in response, these companies have been ramping up ad spending in China. Data from Zenith shows that ad spending focused on the category will total $2.04 billion this year. More money is projected to be spent on out-of-home ads than any other format this year, but Deloitte projects that digital media ads will draw more spending than any other type of media in 2018.

Luxury brands are now making some serious online inroads in the Middle Kingdom. In July, Louis Vuitton launched an official online store in China to sell its line of high-end handbags, shoes and other products. Consumers are able to complete transactions using popular payment methods local to the country, such as Alipay and WeChat Pay.

The same month, luxury goods purveyor Gucci also launched its own direct-to-consumer online store dedicated serving customers in China.

But some brands are also opening up storefronts on platforms operated by China’s two largest multibrand ecommerce retailers, Alibaba and JD.com, which were once shunned due to the lack of control they offered. Despite this, the large user bases offered by the companies may have become too enticing to be ignored.

Earlier this month, Alibaba launched a new section dedicated to luxury goods on its business-to-consumer (B2C) ecommerce platform, Tmall, dubbed the Luxury Pavilion. Alibaba is using a scarcity model familiar to luxury brands to maintain an air of exclusivity for the section; only consumers with a very high net worth, or those who met a threshold based on annual purchase amounts, were allowed to shop on the Luxury Pavilion.

But even these efforts might be a tough sell given Alibaba has long been plagued by accusations that it hasn’t done enough to combat counterfeiting on its ecommerce platforms, which includes popular consumer-to-consumer (C2C) site Taobao.

Rival JD.com may have better luck courting luxury brands to sell on its site since it has always focused on a B2C model in which counterfeiting is not as prominent. The firm recently made a significant move into luxury with its recent purchase of a stake in UK-based online luxury fashion marketplace Farfetch. And JD.com reportedly plans to open its own luxury-focused platform similar to Tmall’s Luxury Pavilion.

Not that online luxury sales will be easy: A multi-market survey of young adult internet users conducted by Deloitte this year found that nearly two-thirds of respondents in China still preferred to make high-end fashion and luxury purchases in stores. That was a higher figure than in the US (43.3%), the UK (50.0%) and Italy (51.9%).

And that was among users ages 20 to 30, an age demographic one might assume would be predisposed to making online purchases.

Photo credit: Jeremy Wong on Unsplash


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