Storm Clouds Loom Over China's Red-Hot Luxury E-Commerce Market

    With China’s luxury industry expected to become the world’s largest by 2015, and the country’s online population swelling, dozens of companies have jumped on the high-end online retail bandwagon. But there are signs that storm clouds may be looming.
    Jing DailyAuthor
      Published   in Fashion

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    With China’s luxury industry expected to become the world’s largest by 2015, and the country’s online population swelling, dozens of companies, including domestic media portals like Sina and Netease, new upstarts like ShangpinZouxiu and ihush, and international players like Yoox have jumped on the high-end online retail bandwagon. With "luxury e-commerce" becoming a hot topic in the Chinese-language media, investment funds too have plowed into the segment. According to a report by iResearch, Chinese luxury e-commerce platforms received over 12 rounds of financing in the first half of 2011, raising a record US$283 million. With online shopping moving up the value chain, more competition looking to crack the market, and more individual brands expressing interest in adding e-commerce functionality in China, there's plenty to be optimistic about. But as an extremely young and untested market, full of similarly young and untested companies, storm clouds may be looming.

    According to reports cited this week by iFeng (Chinese), e-commerce only accounted for about 2.6 percent of total revenue in the Chinese luxury market as recently as 2010, but owing to changing consumer attitudes towards online shopping, better brand awareness and a supply chain development, the industry is projected to grow around 20 percent annually. As an Analysys International study recently held, China's luxury e-commerce market achieved 3.45 billion yuan (US$541 million) in the second quarter of 2011, adding that the expected annual turnover may reach 16 billion yuan (US$2.5 billion). Within the next two years, the study added, China's luxury e-commerce sales should exceed 20 billion yuan (US$3.1 billion).

    Despite the rising popularity of luxury e-commerce, fueled by consumers obsessed with finding the most deeply discounted items, the sector likely has serious growing pains ahead. As iFeng points out this week, "industry insiders" (有业内人士) have observed that several e-commerce platforms sell luxury items of questionable authenticity, which in itself threatens to kill already shaky consumer confidence in higher-end online shopping. Also, a lack of industry consolidation and an absence of any clear frontrunner in the market means consumers -- with dozens upon dozens of sites hyping themselves as "luxury e-commerce" -- will have an even harder time telling them apart. Additionally, according to L2's recent Prestige 100 China report, China's nascent e-commerce market remains hobbled by “weak credit card penetration rates and online fraud fears." Brands are combating this inadequate payment infrastructure through a variety of means, including accepting payments from customers' bank online, providing payment options of Alipay, and accepting cash on delivery (COD). Still, for the e-commerce market to truly mature, easier and more reliable payment methods are a must.

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    Aside from overcrowding, payment concerns and counterfeits, iFeng notes that the youth of the Chinese e-commerce market means many consumer concerns remain highly practical (translation by Jing Daily team):

    High-priced luxury goods aren't only expensive because of their quality, but also because they have a higher level of service, particularly in terms of after-sales service. As such, after-sales service is something for those thinking of buying online to consider. Also, buying online isn't the same as shopping at brick-and-mortar stores, as many shoppers enjoy the more intimate shopping experience of a physical store. For those people, they might lose interest in online shopping because of this lack of intimacy.

    In addition, many Chinese consumers find themselves concerned about the reliability and legitimacy of logistics and transport, [as many of the luxury e-commerce sites are new and unproven, and lack formal guarantees].

    As Torsten Stocker of the Monitor Group recently told Jing Daily, the relative chaos of the market indicates to him that "luxury e-commerce in China more on a natural evolution path, where new concepts and ideas are still being tested, and where it is still unclear what will work for which brand." According to Stocker, many individual luxury brands are now "quite serious about developing an e-commerce platform," adding that from what he has heard, "several will launch next year." Still, in terms of multi-brand retailers -- an area with no clear leader and many new entrants -- Stocker points out that Taobao's T Mall is becoming more organized, "creating a Lifestyle section in which luxury brands can fit, similar to being in a real mall or department store."

    Now, he adds, the key challenge for platforms like T Mall, and the risk for brands setting up shop there, "will be in creating the full luxury experience, from browsing to ordering, receiving and if necessary, returning items."

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