Richemont’s partnership with Alibaba marks the clearest sign yet that the luxury industry is overcoming its suspicions of Chinese ecommerce.
On Friday the Swiss group announced a joint venture that will see its Net-a-Porter and Mr Porter sites launched on Alibaba’s Tmall Luxury Pavilion, an ecommerce site created specifically to appease brands’ concerns about online shopping not being luxurious enough.
It follows an investment by Alibaba’s rival JD.com into luxury online marketplace Farfetch last year, illustrating how even the industry’s most established groups are teaming up with local Chinese players in an arms race to target the world’s fastest-growing luxury market.
“Everybody is keen to get exposed to the huge customer base on these platforms,” said Marco Bizzarri, chief executive of Kering-owned Gucci, at a conference in Shanghai earlier this month. “On the other side, we need to make sure we obtain the luxury feeling, luxury perception and exquisiteness in terms of presentation.”
Until now many of the European brands that dominate the luxury sector have been cautious to work with Chinese internet platforms for fear that outsourcing a part of their distribution could dilute the exclusivity of their brands.
“We’ve always been very careful with the way we distribute our products,” said Toni Belloni, group managing director at LVMH, the world’s largest luxury group by revenues. “We have a global strategy that’s built around our stores as the best way to access customers and China is no different. The store is the first point of contact for all our brands — where its storytelling becomes story-living.”
China is already the most important market for the booming luxury goods industr y and is the engine of future growth. Demographic trends, coupled with government policies to stimulate domestic consumption, mean that the country’s consumers accounted for one in three luxury purchases last year and by 2024 they will be responsible for 40 per cent of sales, according to BCG and Tencent.
Luxury sales to Chinese customers are increasingly taking place in their domestic market, rather than during trips abroad, driven by shrinking price gaps between China and the rest of the world. Most of this growth is happening online, led by digitally-savvy millennials shopping on smartphones.
Against this backdrop, Chinese platforms like Alibaba’s Tmall, JD.com, Taobao and Secoo Holding, which between them boast hundreds of millions of mobile monthly active users, advanced data analytics and sophisticated online payment systems, are presenting themselves as the route for luxury groups to tap into this crucial customer base.
“There are still a lot of counterfeits or re-sellers on some platforms,” especially those that are consumer-to-consumer, says LVMH’s Mr Belloni. “They are moving in the right direction of cleaning up but there’s a long way to go.”
Luxury sales to Chinese customers increasingly happen at home rather than on trips abroad © Bloomberg
The platforms believe that they can work alongside the brands’ own China stores and ecommerce sites. “It doesn’t have to be one or the other,” says Sébastien Badault, the head of Alibaba in France. “We can help brands with consumer insights so that they can figure out which city to put their store in because that’s where their potential consumers are. We see where the people are who have the means and the interest.”
A natural first step for many European luxury houses has been to team up with the likes of Alibaba or JD.com to offer make-up, watches or wine and spirits — products which typically have always been sold through multi-brand retailers.
Luxury brands have also tended to start by launching their own Chinese ecommerce websites, begin marketing to Chinese customers through the ubiquitous WeChat app and experiment with pop-ups. For example French luxury house Hermès this month launched an ecommerce website in China, following in the footsteps of Louis Vuitton and Gucci. A year ago Hermès launched a WeChat pop-up store for its Apple smartwatch in China, and it is considering a collaboration with JD.com.
Smaller Italian brands that don’t have a big group behind them have been among the first-movers. For example Valentino and Moncler have both signed up with Alibaba’s Tmall Luxury Pavilion.
Platforms like Alibaba and JD.com still face the challenge of convincing brands that they are serious about stamping out counterfeiting, a big concern among many luxury executives.
Meanwhile Richemont’s Johann Rupert is unequivocal about how to master online sales in China. He told the Financial Times on Friday: “I do not believe that any single luxury goods company can do it on its own.”
With more than 50 stores in the country, China is the largest market for Italian menswear brand Zegna. And its owner is worried. “I am more and more concerned, I’ve seen a slowing trend,” Ermenegildo Zegna told the Financial Times. “I am cautious about the outlook for next year; there are many uncertainties.”
Mr Zegna is not alone. Companies in the luxury sector have seen an average share price decline of 20 per cent since mid-May, according to RBC Capital Markets, partly driven by fears that after two years of strong growth, Chinese consumers are reining in sales in the face of slowing GDP growth and a trade war with the US.
China is crucial for luxury brands: Chinese consumers account for a third of luxury sales, and contributed about three-quarters of spending growth in the sector in the eight years to the end of 2016, according to consultancy Bain.
After falls in the wake of an official anti-corruption campaign launched in 2013 that cracked down on the practice of gifting, China’s domestic luxury sales began to rebound in mid-2016. They expanded a “spectacular” 20 per cent last year to Rmb142bn ($20.4bn), adds Bain.
Following a strong start to 2018, brands have begun to signal concern over the shorter-term prospects for the China market. LVMH, the owner of Louis Vuitton and Dior, said during its third-quarter results last month it would be “vigilant” due to an “uncertain geopolitical and monetary context”.
Mr Zegna is equally cautious. “We have seen a little slowdown this year, and I think the currency exchange fluctuations has an impact on the psychology of the consumer,” he said. China’s renminbi is close to its lowest rate against the dollar for a decade, making imports more expensive.
Despite this sell-off, analysts warn that fears of a China slowdown have been exaggerated, with sales of luxury brands such as Gucci and Louis Vuitton seeing strong growth in the last quarter, alongside high-end car brands.
“Macro concerns have trumped micro reality in the luxury sector,” said Erwan Rambourg, a sector analyst at HSBC, adding that “growth is bound to slow as the sector enters year three of a strong recovery.” While China’s stock market has seen a weak year, “the recent equity market pullback is in no way comparable to the mid-2015 slump and consumer confidence is much stronger as well,” he adds.
Beijing has also helped the sector by cutting import taxes on luxury goods in July, allowing companies to cut prices by 4 per cent on average in a move which boosts sales, according to HSBC.
“No matter what people say about trade wars . . . Wealthy consumers in China are still spending,” says Daniel Zipser, a Shanghai-based partner at McKinsey.
