Luxury retailers in China join the online trend

BEIJING — Sipping a cup of Pu’er tea while watching white-gloved clerks wrap a newly purchased handbag has become something of an indispensable experience for today’s luxury-store shoppers in China.

But tea and other in-store perks are losing their lustre as competition from online retail platforms eats into the brick-and-mortar sales of luxury goods.

E-commerce is dramatically changing the face of upscale shopping in China, which, according to market tracker Fortune Character Institute, was the world’s largest market for luxury consumer products in 2013. Chinese buyers spent US$106 billion (S$152 billion) on luxury products in 2014, an amount equal to 46 per cent of the global total, according to the Forward Business and Intelligence Company, a Shenzhen-based market analysis firm.

More shoppers than ever are buying Hermes clutches and Christian Dior makeup by simply clicking a mouse, at a time when demand for luxury goods in China and around the world is cooling down.

That is a one-two punch that has retail stores reeling.

An October report by the United States consultancy Bain & Company, which surveys the global luxury market every year, predicted the US$275 billion industry would end last year with a mere 2 per cent growth in overall sales, down from 3 per cent in 2014 and the most meagre expansion since 2008.

In China alone, said Bain, the market for luxury products was expected to grow just 10 per cent last year, down from 13 per cent in 2013.

Responding to the changing environment are some of the sector’s most prestigious players. Prada and Louis Vuitton’s parent LVMH is one of the big names that scaled back shipments to retail stores in the country last year, according to Bain.

Fortune Character said companies selling 83 per cent of all high-end brands available in China downsized their storefronts last year. That percentage will likely rise to 95 per cent this year, the institute predicted.

In addition to e-commerce competition, Fortune Character said stores are feeling the heat of the cooling economy, and an increasing numbers of shoppers who buy upscale brands directly from overseas retailers through the Internet and while travelling abroad. The government’s three-year-old campaign against official gift-giving tax policies are also affecting shopper habits.

As a result, according to company reports, Louis Vuitton closed seven stores in the country last year, following previous shutdowns by Prada and Hugo Boss. Also last year, Burberry downsized its flagship store in Hong Kong.

CLICK AND BUY

Meanwhile, luxury brand companies are reaching more Chinese customers through the Internet.

Hermes and Cartier are two of many companies now connecting with shoppers through websites.

Sources told Caixin that Chanel recently opened an e-commerce business department at its China office, in hopes of finding new Internet channels to build sales.

Burberry opened a shop on Alibaba Group Holding Limited’s website Tmall.com in 2014, and the following year Chanel launched sales of its Coco Crush jewellery on the website Net-a-Porter. Cartier, Christian Dior and Hermes are also on the Internet, with the latter launching a men’s clothing, shoes and accessories website in September.

A 2015 report by the consultancy McKinsey & Company said worldwide online sales of luxury products grew at an annual rate of 27 per cent between 2009 and 2014 — about four times the sales growth rate for luxury-brand stores.

Globally, the report said, luxury shoppers in 2014 spent US$ 15.5 billion on products obtained through e-commerce platforms — an amount equal to 6 per cent of global luxury spending. That figure was expected to top US$ 77 billion, or 28 per cent, by 2025.

“All luxury-brand companies know that e-commerce is inevitably the best way for future growth among the next generation of consumers,” said Ms Liu Xiao, director of the North China division at Meilishuo.com, an online fashion clothing retailer whose majority stakeholder is the social networking giant Tencent Holdings Ltd. “Everyone is finding a way.”

But Ms Liu said most makers of luxury goods are approaching the e-commerce arena with caution. Some argue, for example, that they will always need stores to serve wealthy buyers of high-end clothes.

“Normally, shoes, scarves and other accessories are more proper for online shopping,” she said. “But high-quality clothing requires a shopping experience that’s not easy to get online.”

Mr Long Yu, a member of the board of directors at Coach Incorporated, a maker of handbags, said companies, such as his, think very carefully before giving any e-commerce retailer permission to sell products. Their caution is rooted in an intense desire to protect the value of every brand.

One employee of a firm in the luxury-goods industry, who asked not to be named, said sales through any website that reaches a mass audience may diminish a company’s brand value. That is why many brands are sold only through tightly controlled marketing networks. These networks force e-commerce providers who lack official resale authorisation to acquire products through bulk dealers, and then resell at a markup.

Another concern among luxury-goods manufacturers is that online sales may expose a brand to counterfeit risk. Some counterfeiting problems are more complicated than others. A person working for a luxury-brand maker said that some of his online customers have abused the company’s refund policy by buying a product online and later demanding a refund upon returning a knockoff version.

A person close to Burberry’s China operations said that, in some months, up to 30 per cent of all goods sold through the company’s Tmall store were returned for refunds.

Despite the industry’s fears, however, many investment firms see online as the future frontier for luxury brand sales.

Last May, the clothing and jewellery e-retailer Xiu.com said it had received a US$30 million investment from several firms, including the Taiwanese equity investor Pacific Venture Partners and the US venture capital firm Kleiner Perkins Caufield & Byers. That same month, online retailer Zhen.com said it had raised US$60 million.

CUSTOMER RELATIONS

Some marketers of international luxury goods have done what may have been unthinkable a few years ago: They have cut prices in China.

Early last year, Chanel slashed prices 20 per cent for its customers in the country, closing what had been a price-tag gap that had forced customers to pay more than people in other major markets. Following suit with special discounts were Christian Dior, Versace, Cartier and Hermes.

A Fortune Character report said wealthy Chinese spent 20 to 30 per cent more than luxury shoppers in other countries for the same brands in 2015. But that was down from nearly half in 2011.

But some analysts are predicting a rebound for luxury-product sales in the domestic market soon, after a government decision to cut import tariffs on high-end brands.

Not all companies support price-cutting as a way to attract wealthy consumers in the country. “Large-scale price cutting hurts a luxury brand’s image,” said Ms Liu of Meilishuo.com. So, rather than discount, some companies have enhanced in-store perks for high-brow customers.

And many are looking for new ways to balance popular perks with the power of the Internet.

CEO at the luxury e-retailer Saksfifthavenue.com Sun Yafei said that while it is true many companies are closing brick-and-mortar stores, they are also working to improve the shopping experience at those left standing. Some retail outlets are going so far as to offer cafe services and fashion shows to boost customer loyalty. CAIXIN ONLINE