From Daigou to Digital: Luxury Executives Weigh in on Biggest China Challenges

A Cartier store in Hangzhou. (Shutterstock)

A Cartier store in Hangzhou. (Shutterstock)

The European luxury industry has a China paradox.

“We Chinese demand discounts. We love discounts,” said Sir David Tang, at the 2015 Financial Times Business of Luxury Summit in Monaco on June 9. The Hong Kong entrepreneur, restaurateur, raconteur, and founder of fashion label Shanghai Tang said, “Loyalty equals a discount for Chinese shoppers. Give them a discount and they will feel special. They will be loyal.”

And herein lies the paradox. Nothing matters more to European luxury than protecting a brand’s heritage. The word “discount” makes a luxury CEO go weak at the knees. Equally, there’s nothing the Chinese consumer values more than a handbag bearing three little words: “Made in France”—and a price tag that assures them they’re buying the best on the planet.

Analyzing the habits of China’s luxury consumers was a main subject on the table from the outset of the three-day conference in Monaco from June 7 to 9 where Gavyn Davies, chairman of Fulcrum Asset Management described, “The Chinese economy is breaking all known human records for growth.”

Luxury experts at the conference covered a wide range of topics critical to the China market, including evolving tastes, digital technology, the anti-corruption campaign, and of course, daigou sales—or goods smuggled into China and sold online to avoid the country’s high tariffs.

Clearly “price” and “loyalty” go together like a horse and carriage for China’s luxury consumers. According to Tang, the luxury industry must accept and address the issue—which has given rise to the word daigou (“to buy on behalf of”) finding its way into the European language of luxury.

“Luxury shoppers are unimpressed with the limited buying options in China and will travel overseas for friends and family to buy at the best price,” said Tang. “So around 60 percent of Chinese luxury goods are bought outside the country.  It’s reflected in the 107 million Chinese who traveled abroad last year, spending over US$129 billion.”  Tang said even the wealthiest consumer seeks an advantageous price, suggesting it was chic to boast of finding the best price.

Paris has been seeing big sales from these daigou shoppers since the introduction of a fast-track 48-hour French visa last year resulted in a 61 percent increase in visas granted to Chinese visitors in 2014 over the previous year.

In the opening address by Johann Rupert, chairman of Richemont, the world’s second-largest luxury goods group, he said he remained bullish about China’s long-term prospects.

Rupert made light of China’s current gender imbalance, remarking, “You have more men than women in China, so how are [men] going to get lucky? They’re going to have to be very generous to women.” With a confident shrug, the billionaire owner of Cartier dismissed the Apple Watch as potentially disposable.

The ripple effect of China’s luxury slowdown was core business and highlighted in discussions that emphasized the need for luxury to address product development and digital adoption. Luxury brands are latecomers to both. The modern Chinese consumer is sophisticated, time-sensitive, digitally savvy, and socially aware.

“The millennials must be addressed,” said Jiang Shan, CEO and founder of Prowon Consulting, who is well-placed to comment on the habits of China’s luxury consumers.

Shan has shepherded brands like Giorgio Armani, Christian Dior, and Elie Saab into China while facilitating high-net-worth individuals’ travels to Paris—for example, Chanel flies Shan’s wealthy clients to the French capital for their haute couture shopping.

“The good times are gone,” he said, remarking on the soft foot traffic at Shanghai’s Plaza 66 shopping center. “It’s not only the anti-corruption but the first generation of luxury consumers have matured (millennials aged 25-34). They’ve given up the logos, they don’t need to display taste, they like Chinese designers like Uma Wang and interesting European brands like Stella McCartney and Rick Owens.” In light of this, Shan said there were exciting opportunities for young French brands.

Ira Kalish, chief global economist for Deloitte, said to meet the challenge of these tech-savvy Chinese consumers, long-term value creation will only succeed when luxury brands embrace product development (the handbag that charges your phone) and CRM systems that capture quality client data and thus transform it into a more personalized and engaging customer experience.

“Innovate, adapt to change, and give back to the community” was his message. In line with this, Rupert said he believed that while the DNA of a brand must remain, 25 percent of all products should be new.

Nathalie Remy, partner at McKinsey & Company in Paris described 95 percent of luxury consumers using a smartphone and 80 percent using social media on a weekly basis. She said that official figures from China indicate 6 percent of luxury sales are online, but the real figure could be better estimated at two or three times that thanks to daigou sales.

Since the offspring of China’s one-child policy experience 13 touch points (their counterparts in the West just nine) before making a luxury purchase, Remy said the more touch points a brand can use to engage the consumer, the greater the chance of a sale and of increasing loyalty.

“All brands must innovate richly and across the board,” she said.

These “touch points” were further emphasized by Ulric Jerome, partner and COO of the online retailer matchesfashion.com. He described the future as an increasingly sophisticated “universe” of websites with rich content, stores offering loyalty cards and diverse shopping experiences, social networks, and magazines. “You accept opportunities to talk to customers—or miss opportunities.”

“Brands are like private clubs,” said the veteran fashion photographer Mario Testino. “You need to create the desire and then everyone wants to belong.” Testino described how Vogue China editor-in-chief Angelica Cheung introduced him to China’s unique cultural nuances and aesthetics, “including no suntans.” Testino remarked on how he finds the Chinese quick learners who know brands. “Mostly they shop abroad.”

José Nevers, founder and CEO of FarFetch, which clusters the world’s leading independent boutiques on one website, said a new era he called “neo-retail” was just beginning. “Click and collect—you order it in LA and pick it up in Monaco.” Nevers said his recent acquisition of the London boutique Browns merely offered the opportunity to “test, showcase, and demonstrate new brands.”

“Chinese shoppers are highly motivated and smart,” said Thomas Luan, the founder of VIPMerit, maker of an embryo website, haishang.cn. It’s a Chinese-language site utilizing patent-pending technology that will be the first to enable cross-border online/mobile commerce so mainland Chinese consumers can shop genuine products directly from the world’s leading department stores, brands, and boutiques.

“Brands and retailers should embrace cross border e-commerce to capture the daigou market in China, regain control of brand image and counterfeiting, re-establish direct customer relationships, and improve their social media presence in China,” said Luan. “Haishang.cn will do that.” Luan boldly describes it as “Lyst for China.” Lyst.com is a UK website partnering with the world’s major brands.

Luan, who was born in China and is now based in Silicon Valley, graduated from MIT and is a veteran of cross-border commerce, having led eBay into China.

He notes that Chinese shoppers are “high-maintenance.” Luan said unlike in other countries, where a customer service hot line may be manned from 8 a.m. to 8 p.m., 24-hour contact is non-negotiable for Chinese. “If you are to engender loyalty, they need a seamless shopping experience. They shop at every hour of the day, including at 2 a.m.”

Luan said haishang.cn will ultimately offer a personal shopping assistance hotline to provide a complete customer experience. And Yoox’s founder Federico Marchetti said a “butler service” was the next step for Yoox.

It’s a critical moment for luxury: McKinsey noted that more than 75 percent of luxury purchases are directly or indirectly influenced by digital engagement. They see it as the industry’s weak point.

There were also sobering moments at the conference.

Rupert acknowledged the effect of the Chinese government’s crackdown on gifting. “The anti-corruption drive is a wise thing to do,” he said, believing it will continue.

Randy Weddle, chairman of Hong Kong-based MRW Management agreed with Rupert’s sentiments and added, “The fact that sales have fallen because of the government’s anti-corruption initiative is a good thing. It was a false situation, in which sales were up, in some part because people were gifting with the motivation of corruption, which is ethically not a good thing.

“At the end of the day this is a correction that was necessary. The luxury companies, while seeing a dent in their profits, should be happy they are not participating in something that is not ethical.”

What keeps Rupert awake at night is not sluggish sales, but the longer-term effect of artificial intelligence—robots that will do the work and kill off jobs. “Then society will have to cope with structural unemployment and envy, hatred and class warfare.”

His views were echoed by Kalish, who said while China’s economic activity decelerates, there are concerns that workers migrating from the country to the city will not be absorbed by the workforce—which may lead to social unrest.

In Monaco, the continual purr of Ferraris in the background set a mood that all is well in this tiny luxury kingdom. For those piloting the luxury industry in China, however, the Silk Road is showing, if not potholes, new bumps that need careful navigation.


Susan Owens is the founder and editor of Paris Chérie, a Paris-based fashion website dedicated to bringing French style news to Chinese readers.

 

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