Perspective online-luxury-012013-digiversion

PERSPECTIVE FEBRUARY 2013

THE ONLINE LUXURY BLOODBATH A SNEAK PEEK INTO THE FUTUREOF LUXURYE-COMMERCE IN CHINA

Thomas Wu, Jacob Jin, Sing Wang Ho

The online luxury bloodbath

Published byValue Partners Management Consulting Limited, 1402 Harcourt House39 Gloucester Road, Wan Chai, Hong Kong

February 2013

Written and edited by:Thomas Wu, Jacob Jin, Sing Wang Ho

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PERSPECTIVE THE ONLINE LUXURY BLOODBATH

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OVERVIEW

AS CHINA’S ECONOMY TAKES OFF, THE CHINESE ARE GETTING RICHER AND THEIR APPETITE FOR LUXURY GOODS IS EXPLODING. AT THE SAME TIME E-COMMERCE IS BOOMING. COMBINING THE TWO SOUNDS LIKE AN EXCELLENT IDEA AND MANY PLAYERS, BOTH DOMESTIC AND FOREIGN, HAVE ALREADY JUMPED ONTO THE BANDWAGON AND LAUNCHED VARIOUS PLATFORMS PROVIDING LUXURY E-COMMERCE SERVICE TO CONSUMERS.

YEARS HAVE PASSED, NEW PLATFORMS CONTINUE TO APPEAR AND WE HAVE STARTED TO SEE SOME PLATFORMS ALREADY FAILING. THE TRUTH IS THAT, BEHIND ALL THE GLAMOUR, NONE OF THE PLATFORMS IS MAKING A PROFIT. IN THIS SHORT ARTICLE, WE AIM TO UNFOLD SOME OF THE CHALLENGES AND COMPARE HOW DOMESTIC AND FOREIGN PLAYERS DEAL WITH THEM.


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Online Shopping Market (bn USD)B2B segment experiencing faster growth in the e-commerce

43%

22%

29%

2009

39

3

42

2010

64

10

74

2011

95

29

124

2012

133

56

189

2013

166

85

251

2014

200

122

322

2015

242

166

408

Source: iResearch

C2C business

B2C business

CAGR 2012-2015 (%)


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THE BOOMING ONLINE LUXURY MARKET

1 iResearch

More and more Chinese are becoming fashion-conscious, seeking quality and items that match their personal style and taste.

Luxury e-commerce in China is showing rapid growth. According to China Daily, online luxury goods sales in China topped US$1.6 billion in 2011, a 69% increase over the previous year. The market is expected to grow by 30% per year in the coming years and by 2015 it is expected to reach around US$6 billion.

Strong growth in demand for luxuryThis growth is supported by an in-creased demand for luxury goods and a growth in e-commerce.

The sale of luxury goods in China is expected to reach $27 billion by 2015 up from $16 billion in 2010. It will become the largest luxury market in the world by 2015, succeeding Japan. Driven by an increase in disposable income due to rapid urbanization, Chinese are now more willing to spend on quality luxury goods.

The lifestyle of Chinese is also changing. More and more Chinese are becoming fashion-conscious, seeking quality and items that match their personal style and taste.

Increasing adoption of online shoppingChina e-commerce market is estimated to be US$189 billion in 2012. The growth rate is at a phenomenal rate of 65% in recent years. A 29% annual rate is expected going forward between now and 20151.

In the past, Chinese consumers werenot receptive to online shopping mainly because of counterfeit concerns. This is changing as consumers increas-ingly embrace the convenience of online shopping, stimulating growth in B2C market.

Consequently, many B2C e-commerce platforms have emerged, the most dominant of which is Taobao.com’s Tmall. Most of these platforms offer price competitive propositions as well as convenience to consumers. However, many buyers are bargain hunters look-ing for good deals online and big ticket purchases remain uncommon.

For example jeweler Chow Tai Fook have launched a Tmall store, selling the same range of products on offer at their offline stores; about 70% of purchases are below RMB 2,000 while the average ticket size in offline stores is above RMB 3,700.

Hence, it is clear that for big ticket purchases such as luxury goods, there is a need for a different proposition that can capture luxury shoppers.


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Market share of online B2C shopping websites in Q2 2012

Source: iResearch

Others

0,9%

1,0%

1,1%

1,5%

1,5%

17,2%

2,4%

2,3%

2,3%

37,4%

32,4%


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EMERGING ONLINE LUXURY PLATFORMS

Launch dates of notable online luxury websites in China

2008

2008

2009

2009

2010

2010

2011

2011

2012

2012

APRIL JANUARY JULY

AUGUST JUNE MARCHDECEMBER SEPTEMBEROCTOBER

JANUARY NOVEMBER MAYAUGUST

NOTE: * Jiapin is owned by VIPStore group:

- Macy invested 15 milion into VIPStore;

- VIPStore also owns omei.com, a non-luxury European Website in China.

*

2 中商情报网 (www.askci.com) Investors have noted the rapid growth of the B2C e-commerce and luxury goods markets and married the two. In recent years, many luxury shopping platforms have been launched, especially in 2011. Amongst the top 20 platforms, an excess of US$500 million of investment capital has been raised in 2010 and 20112. Local companies made a head start, but foreign play-ers and investors are also rushing in to capitalize on the growing market.

Foreign players enter the online luxury market in a variety of ways. Net-a-Por-ter, a global luxury e-retailer, acquired Shouke.com and rebranded its website into Outnet.cn.

Others such as Armani, DSquared2 and PPR group (which holds major luxury brands such as Bottega Veneta, Gucci, Yves Saint Laurent, Alexander McQueen, Balenciaga and Sergio Rossi) have used services such as that offered by Yoox which helps foreign brands host their own official e-commerce op-erations. Neiman Marcus invested $28 million into a Chinese fashion website owned by Glamour Sales Holding.

Other foreign apparel retail companies have also targeted China’s growing on-line market. For example, Macy’s, holder of multiple mid-range fashion labels, invested $15 million into VIPStore and plans to release some of its lines in VIP-Store’s non-luxury website, omei.com. Zara, which already has over 100 local stores in 40 major cities, has recently launched an e-commerce website.


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Domestic and foreign websites positioning in China by price

NO DISCOUNT

WH

OL

LY

DO

ME

ST

IC

DISCOUNT ON SELECTED ITEMS

DO

ME

ST

IC-F

OR

EIG

N P

AR

TN

ER

SH

IP

DISCOUNT ON ALL ITEMS

WH

OL

LY

FO

RE

IGN


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NO ONE IS WINNING

With so many luxury e-commerce platforms in the market, competition is intense, especially for the multi-brand players. Several companies have either shut down or have shown signs of financial distress. Easynet shut down its website after less than one year of operation. Xiu and Shangpin both have cut costs by downsizing their teams and closing offices.

What seemed like a lucrative market is no longer so appealing, and the cool down of interest amongst investors is a strong signal. For example, Xiu did not receive its third round of funding from its investors and Vipshop went to IPO reporting a loss and fell short of the capital it intended to raise.

The majority of the platforms are posi-tioning themselves as discount outlets, leveraging the Taobao value that is very much ingrained into the minds of Chinese internet shoppers. This price positioning puts tremendous pressure on profitability and there is no proof that it can ever be a viable model in China as none of the players are making a profit.

While the discount players struggle, there are platforms that do not com-pete on price. They fail to capture the real luxury shoppers while giving up on the bargain hunters and are also not profitable. A much clearer value proposition targeting the real luxury shoppers is needed to steer them away from driving or flying to their favourite shops to get the full luxury shopping experience including the greeting, the tactile feeling of the goods, the smell, the services, etc. The list can go on. So what can online luxury shopping offer? Before we tackle the complicated issues of value proposition, positioning and targeting, we address the funda-mental challenges facing all platforms: Sourcing, Marketing and Distribution

These challenges affect all types of platform, but affect local and foreign players to varying degrees.


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Chinese luxury websites have resorted to sending buyers to Europe to procure goods from wholesalers and outlets, or even purchase directly from overseas retail shops.

Sourcing – the struggle to procure merchandise that consumers can trustLuxury brands rarely grant authorized distributorship to online retailers in China. Chinese luxury websites have resorted to sending buyers to Europe to procure goods from wholesalers and outlets, or even purchase directly from overseas retail shops. With such narrow and unreliable sourcing chan-nels, Chinese luxury websites would end up only securing out-of-season, less popular, at times questionable condition and more importantly incom-plete ranges of products from luxury brands.

For those that have contracts with brands to become authorized online distributors, they are mostly limited to specific product categories that again limit them in offering a broad range of products to consumers.

Aftersales service is essential for categories like watches, and thus get-ting the endorsement from brands and being able to provide aftersales services like maintenance, returns and repairs has become a key criteria for platforms to succeed.

On the other hand, foreign players like Net-a-Porter and Yoox either carry or have already secured reliable sourcing agreements with luxury brands. These players would also carry fash-ion trend or brand media content to reinforce the authenticity and authority edge that they have over local players.

A win for the foreign players


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3 Beijing Business Today

Marketing and promotions – still a race for trafficDue to strong competition, platforms have to spend a considerable amount in marketing and promotions to draw users to their platforms.

Despite the large sum spent on advertis-ing, online luxury platforms are not able to build customer loyalty. A large part of this is due to the homog-enous offer and services of discount websites. This translates to non-distinc-tive marketing messages that revolve around ‘low price and large variety’. And for the ones that do not compete on price, there does not seem to be strong enough value proposition to gain traction yet. Overall, it is still a relatively simple game of generating traffic through links from other portals which end up being rather costly. Over the last two years, we have seen an increase of 31%-34% in online advertising prices3.

Some local players are affiliated with or are subsidiaries of large internet portals or corporations, providing an edge in online consumer understanding and ac-cess. However, they still lack the finesse in marketing luxury that established foreign platforms possess. On the other hand, foreign platforms may not have the access to consumers that local platforms enjoy.

A tie

Distribution – the last mile is always the most difficultDistribution networks in China are still heavily fragmented, with over 7,500 regional players operating in some 200 cities. Companies distributing nationally face many issues managing these regional players. Chinese courier services are still maturing, and it is not uncommon that packages are damaged, lost or stolen during delivery.

Luxury goods are even more prone to these risks given the high value. As a re-sult, luxury e-commerce platforms rely on International courier services like UPS and FedEx despite their premium prices. However, international couriers are only permitted to operate in eight cities in China and are required to oper-ate as joint-ventures with local couriers in other parts of China, exposing clients to the same risk and nuances as work-ing with a network of regional couriers.

Chinese platforms, in this instance, have the upper hand, as many are part of a bigger company or conglomerate with businesses in real estate or other industries providing a physical presence and knowledge in local markets. They can be very effective in identify-ing local logistics partners; and some players (e.g. VIPShop) have set up their own logistics operations to support the platforms.

A win for the local players


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CONCLUSIONWOULD LOCAL-FOREIGN PARTNERSHIPS BE THE WINNING FORMULA THEN?

Foreign and domestic players have their own strengths and weaknesses. While local players can contribute in their strengths in distribution and local marketing reach, foreign players can capitalize on their finesse in brand building and understanding as well as their access to authentic procurement sources.

While several websites have formed partnerships between local and foreign players, none of them are profitable yet. Local player, Xiu.com, managed to part-ner with major brand label, Salvatore Ferragamo, but the brand only offer a limited number of product ranges to Xiu.com. American department store, Macy’s, has acquired an 8% stake in local player VIPStore and offers their product line on the local platform.

However, they are still in the early days of promoting the platform and have not achieved the needed awareness to drive business.

Clearly, a simple supplier-distributor re-lationship is insufficient and players still need to understand the roles of either party in the partnership. It goes without saying that both domestic and foreign players need to select partners that fit.

They also need to actively play their strengths to build a distinctive platform. We would challenge that:

1. Current shoppers on the discounted luxury platforms are not real luxury shoppers, but bargain hunters

2. It would be highly challenging to make the discount model sustainable given the challenges we have men-tioned

3. Online platforms should take a step back to understand who are the luxury shoppers that would shop online

4. Players should also try to understand what would appeal to the luxury shop-pers and what experience they expect in an online environment as opposed to the retail shopping experience

While local players can contribute in their strengths in distribution and local marketing reach, foreign players can capitalize on their finesse in brand building and understanding as well as their access to authentic procurement sources.


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We believe there are still opportunities in the market as long as the right play is called and the consumer proposi-tion is strong. Should you wish to learn more about the topic, please feel free to contact Value Partners and we would be delighted to share our insights with you further.

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THOMAS WU

Partner of the Hong Kong office [email protected]

JACOB JIN

Associate of the Beijing office [email protected]

SING WANG HO

BA of the Hong Kong office [email protected]

AUTHORS

Copyright © Value PartnersManagement Consulting LimitedAll rights reserved

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