Opinion: China's online luxury gameboard

Thursday, 9 November 2017 | News

Luxury companies have made it clear on several occasions that “the business of Amazon does not fit with their brands” as stated by LVMH CFO in October 2016. Fast forward a year later, we found that top luxury brands have largely kept to these words. Only “access luxury” brands like Calvin Klein, Kate Spade or Michael Kors have succumbed to the temptation of Amazon’s huge traffic and high spending Prime members, yet with limited assortment and/or through short-term collaborations.

But how about China? Have Chinese platforms done a better job than Amazon in attracting luxury brands? The main debate there seems to have been to “T-Mall or not to T-Mall”. Given the ubiquity of Chinese consumers – representing close to one third of global luxury spend, with three quarters of their luxury consumption happening outside of China – the debate is really a much broader one, in which global giants are making bets on the future global landscape. The digital playing field, as we see it, is structured around four “plays”:

  1. Luxury brands who have – finally – seriously invested in their own E-Commerce capabilities. Burberry was the pioneer, re-inventing themselves as the “brand of millennials”, then bringing technology to their physical stores. Now leading brands have all upgraded their online presence, with a flurry of ideas to enhance their customers’ omni-channel experience.
  2. Multi-brand in-season online stores, which are the digital avatar of traditional department stores. The pioneer and most successful player – so far – in this category is a pure-play: Net-A-Porter.com. One could argue though that they have not been that successful yet in attracting the crème-de-la-crème of luxury brands. They are also still very small in China. LVMH has recently launched their own version of the luxury digital department store, 24 Sevres, with 70 LVMH brands already on it. The plan is to expand the brand participation beyond the LVMH Group. 24 Sevres has not entered China yet but will certainly join the game here when they are ready. Given the weakness of the Chinese traditional department store channel and their incapacity to do anything in the digital world, Alibaba and JD.com have decided to enter this game by launching their own platforms, respectively Pavilion and Toplife. T-Mall’s Pavilion was introduced in August 2017 as a sub-section of Tmall.com focused on APASS members (T-Mall club’s top spenders), offering them a shopping experience meant to resemble in-store shopping thanks to virtual and augmented reality, with a personalised customer service and exclusive rewards. Toplife is JD.com’s vehicle to earn the right to play in the luxury segment: Toplife offers services for the most demanding luxury shoppers, including dust-free sealed temperature and humidity controlled warehousing, a “white-glove” delivery service named “JD Luxury Express”, and in-house fashion consultants providing styling advice 24/7.
  3. Friends of retailers. The most famous player in this group is Farfetch.com, which entered China in 2014. Farfetch enables traditional retailers of luxury products – primarily in Italy, where luxury distribution is still dominated by old school multi-brand shops – to extend their reach beyond their boutique, to a broader international audience. The same approach works with distributors in countries where brands are still operating under a franchise model. An organised version of parallel trade… with a question mark about its long-term viability, as brands are using increasingly powerful technologies to track product flows and control their distribution. This may explain why Farfetch announced a new direction, to become more like a “legitimate” online store like Net-A-Porter. Apparently JD.com liked this idea, investing USD 400 million for a minority stake in Farfetch.com before initiating a logistics collaboration to help expand their China presence. As JD.com CEO put it: “As part of our major luxury push, we could not have found a stronger online partner than Farfetch. This partnership further extends our lead in the battle. But Farfetch.com will have to face a few serious Chinese competitors with the same business model like 5Lux.com, Shangpin.com and NASDAQ listed Secoo.com.
  4. The fourth group is formed by discounters and “flash sales” players, which can be characterised as “friends of the brands” because they provide a solution to brands for their excess stock, like factory outlets do. Yoox was the pioneer of flash sales in China, as early as 2012, investing in Chinese mobile capabilities including a WeChat store. Alibaba entered this game through a USD 100 million investment in Mei.com in 2015. The investment rationale was that “Mei.com’s close cooperation with a wide selection of luxury brands will complement Tmall.com’s existing selection of affordable luxury goods for Chinese consumers”. Soon thereafter, Alibaba launched the “Luxury Channel”, a flash sales TV channel for luxury brands, jointly operated by Alibaba and Mei.com, then “T-mall Space”, an online pop-up store platform for luxury brands. Once you help brands with their off-season excess stock, and once you have built a large base of flash sale members, why not do the same with in-season products? This is what Yoox.com intended to do before they were bought by Net-A-Porter, creating a powerful in-season/off-season combination.

These four “plays” form the four corners of a “luxury digital gameboard” in constant evolution, with capital influx from luxury brand groups (LVMH, Richemont, Kering), market place giants (T-Mall, JD.com) and venture capital players fuelling more new entrants and rivalry.

OC&C’s China luxury digital gameboard

Although players in each group have built significant businesses with premium and access luxury brands, they have not been able yet to convince the most elite brands (LV, Chanel, Hermes, etc). Bolder brands like Burberry, Hugo Boss, Furla, have taken more risks on T-Mall or JD.com. Kering’s Yves-Saint-Laurent is collaborating with Farfetch.com. Dior Fashion, Givenchy and Loewe are experimenting with a variety of one-off online campaigns with various partners. Cosmetics brands in general have been more proactive in each one of the four plays.

Perhaps the most interesting lessons could be learned from Zara (although not considered luxury), who has used T-Mall to garner new traffic to their brand at affordable promotion prices before smartly re-channelling new customers to their shops, where they can fully experience the brand and its omni-channel convenience.

In China’s rapidly changing digital landscape, opportunities always abound to observe, experiment, and ready oneself for bigger moves.

Pascal Martin, Partner

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