A perspective devoted to the future of luxury e-commerce in China.

1. PERSPECTIVE FEBRUARY 2013
THE ONLINE
LUXURY
BLOODBATH
A SNEAK PEEK
INTO THE FUTURE
OF LUXURY
E-COMMERCE
IN CHINA
Thomas Wu, Jacob Jin, Sing Wang Ho

2. The online luxury bloodbath
Published by
Value Partners Management Consulting
Limited, 1402 Harcourt House
39 Gloucester Road, Wan Chai,
Hong Kong
February 2013
Written and edited by:
Thomas Wu, Jacob Jin, Sing Wang Ho
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thomas.wu@valuepartners.com
For more information on the issues
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3. 3
OVERVIEW
AS CHINA’S ECONOMY TAKES OFF, THE CHINESE ARE
GETTING RICHER AND THEIR APPETITE FOR LUXURY GOODS
IS EXPLODING. AT THE SAME TIME E-COMMERCE IS BOOMING.
COMBINING THE TWO SOUNDS LIKE AN EXCELLENT IDEA
AND MANY PLAYERS, BOTH DOMESTIC AND FOREIGN,
HAVE ALREADY JUMPED ONTO THE BANDWAGON
AND LAUNCHED VARIOUS PLATFORMS PROVIDING LUXURY
E-COMMERCE SERVICE TO CONSUMERS.
YEARS HAVE PASSED, NEW PLATFORMS CONTINUE TO
APPEAR AND WE HAVE STARTED TO SEE SOME PLATFORMS
ALREADY FAILING. THE TRUTH IS THAT, BEHIND ALL THE
GLAMOUR, NONE OF THE PLATFORMS IS MAKING A PROFIT.
IN THIS SHORT ARTICLE, WE AIM TO UNFOLD SOME
OF THE CHALLENGES AND COMPARE HOW DOMESTIC
AND FOREIGN PLAYERS DEAL WITH THEM.
PERSPECTIVE THE ONLINE LUXURY BLOODBATH

4. 4
Online Shopping Market (bn USD)
B2B segment experiencing faster growth in the e-commerce
408
29%
166
43%
242
22%
322
122
251
85
189
200
56
166
124
29
74
42
3
133
95
10
64
39
2009
2010
2011
C2C business
B2C business
CAGR 2012-2015 (%)
Source: iResearch
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
2012
2013
2014
2015

5. 5
THE BOOMING ONLINE
LUXURY MARKET
1
iResearch
Luxury e-commerce in China is showing
rapid growth. According to China Daily,
online luxury goods sales in China
topped US$1.6 billion in 2011, a 69%
increase over the previous year.
The market is expected to grow
by 30% per year in the coming years
and by 2015 it is expected to reach
around US$6 billion.
Strong growth in demand for luxury
This growth is supported by an increased demand for luxury goods and a
growth in e-commerce.
The sale of luxury goods in China is
expected to reach $27 billion by 2015
up from $16 billion in 2010. It will
become the largest luxury market
in the world by 2015, succeeding Japan.
Driven by an increase in disposable
income due to rapid urbanization,
Chinese are now more willing to spend
on quality luxury goods.
The lifestyle of Chinese is also changing.
More and more Chinese are becoming
fashion-conscious, seeking quality
and items that match their personal
style and taste.
More and more Chinese are
becoming fashion-conscious,
seeking quality and items
that match their personal style
and taste.
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
Increasing adoption of online
shopping
China e-commerce market is estimated
to be US$189 billion in 2012. The growth
rate is at a phenomenal rate of 65%
in recent years. A 29% annual rate
is expected going forward between
now and 2015 1.
In the past, Chinese consumers were
not receptive to online shopping mainly
because of counterfeit concerns.
This is changing as consumers increasingly embrace the convenience of
online shopping, stimulating growth
in B2C market.
Consequently, many B2C e-commerce
platforms have emerged, the most
dominant of which is Taobao.com’s
Tmall. Most of these platforms offer
price competitive propositions as well
as convenience to consumers. However,
many buyers are bargain hunters looking for good deals online and big ticket
purchases remain uncommon.
For example jeweler Chow Tai Fook
have launched a Tmall store, selling the
same range of products on offer at their
offline stores; about 70% of purchases
are below RMB 2,000 while the average
ticket size in offline stores is above RMB
3,700.
Hence, it is clear that for big ticket
purchases such as luxury goods, there
is a need for a different proposition that
can capture luxury shoppers.

6. 6
Market share of online B2C shopping websites in Q2 2012
37,4%
Others
32,4%
17,2%
0,9%
2,4%
1,0%
2,3%
1,1%
2,3%
1,5%
1,5%
Source: iResearch
PERSPECTIVE THE ONLINE LUXURY BLOODBATH

7. 7
EMERGING ONLINE
LUXURY PLATFORMS
2
中商情报网 (www.askci.com)
NOTE: * Jiapin is owned
by VIPStore group:
- Macy invested 15 milion into
VIPStore;
- VIPStore also owns omei.com,
a non-luxury European Website
in China.
Investors have noted the rapid growth
of the B2C e-commerce and luxury
goods markets and married the two.
In recent years, many luxury shopping
platforms have been launched,
especially in 2011. Amongst the top 20
platforms, an excess of US$500 million
of investment capital has been raised
in 2010 and 20112. Local companies
made a head start, but foreign players and investors are also rushing in to
capitalize on the growing market.
Foreign players enter the online luxury
market in a variety of ways. Net-a-Porter, a global luxury e-retailer, acquired
Shouke.com and rebranded its website
into Outnet.cn.
Others such as Armani, DSquared2
and PPR group (which holds major
luxury brands such as Bottega Veneta,
Gucci, Yves Saint Laurent, Alexander
McQueen, Balenciaga and Sergio Rossi)
have used services such as that offered
by Yoox which helps foreign brands
host their own official e-commerce operations. Neiman Marcus invested $28
million into a Chinese fashion website
owned by Glamour Sales Holding.
Other foreign apparel retail companies
have also targeted China’s growing online market. For example, Macy’s, holder
of multiple mid-range fashion labels,
invested $15 million into VIPStore and
plans to release some of its lines in VIPStore’s non-luxury website, omei.com.
Zara, which already has over 100 local
stores in 40 major cities, has recently
launched an e-commerce website.
Launch dates of notable online luxury websites in China
2008
APRIL
2009
2010
JANUARY
AUGUST
2011
JULY
DECEMBER
2012
JANUARY
OCTOBER
AUGUST
JUNE
NOVEMBER
SEPTEMBER
MAY
MARCH
*
2008
2009
2010
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
2011
2012

8. 8
WHOLLY DOMESTIC
DOMESTIC-FOREIGN PARTNERSHIP
WHOLLY FOREIGN
Domestic and foreign websites positioning in China by price
NO DISCOUNT
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
DISCOUNT ON SELECTED ITEMS
DISCOUNT ON ALL ITEMS

9. 9
NO ONE
IS WINNING
With so many luxury e-commerce
platforms in the market, competition is
intense, especially for the multi-brand
players. Several companies have either
shut down or have shown signs of
financial distress. Easynet shut down
its website after less than one year of
operation. Xiu and Shangpin both have
cut costs by downsizing their teams and
closing offices.
What seemed like a lucrative market is
no longer so appealing, and the cool
down of interest amongst investors is a
strong signal. For example, Xiu did not
receive its third round of funding from
its investors and Vipshop went to IPO
reporting a loss and fell short of the
capital it intended to raise.
The majority of the platforms are positioning themselves as discount outlets,
leveraging the Taobao value that
is very much ingrained into the minds
of Chinese internet shoppers.
This price positioning puts tremendous
pressure on profitability and there
is no proof that it can ever be a viable
model in China as none of the players
are making a profit.
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
While the discount players struggle,
there are platforms that do not compete on price. They fail to capture the
real luxury shoppers while giving up
on the bargain hunters and are also
not profitable. A much clearer value
proposition targeting the real luxury
shoppers is needed to steer them away
from driving or flying to their favourite
shops to get the full luxury shopping
experience including the greeting, the
tactile feeling of the goods, the smell,
the services, etc. The list can go on.
So what can online luxury shopping
offer? Before we tackle the complicated
issues of value proposition, positioning
and targeting, we address the fundamental challenges facing all platforms:
Sourcing, Marketing and Distribution
These challenges affect all types of
platform, but affect local and foreign
players to varying degrees.

10. 10
Sourcing – the struggle to procure
merchandise that consumers can trust
Luxury brands rarely grant authorized
distributorship to online retailers
in China. Chinese luxury websites have
resorted to sending buyers to Europe
to procure goods from wholesalers
and outlets, or even purchase directly
from overseas retail shops. With such
narrow and unreliable sourcing channels, Chinese luxury websites would
end up only securing out-of-season,
less popular, at times questionable
condition and more importantly incomplete ranges of products from luxury
brands.
For those that have contracts with
brands to become authorized online
distributors, they are mostly limited
to specific product categories that
again limit them in offering a broad
range of products to consumers.
Chinese luxury websites
have resorted to sending
buyers to Europe to procure
goods from wholesalers
and outlets, or even purchase
directly from overseas retail
shops.
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
Aftersales service is essential for
categories like watches, and thus getting the endorsement from brands
and being able to provide aftersales
services like maintenance, returns
and repairs has become a key criteria
for platforms to succeed.
On the other hand, foreign players like
Net-a-Porter and Yoox either carry or
have already secured reliable sourcing
agreements with luxury brands.
These players would also carry fashion trend or brand media content to
reinforce the authenticity and authority
edge that they have over local players.
A win for the foreign players

11. 11
3
Beijing Business Today
Marketing and promotions – still a race
for traffic
Due to strong competition, platforms
have to spend a considerable amount
in marketing and promotions to draw
users to their platforms.
Despite the large sum spent on advertising, online luxury platforms are not able
to build customer loyalty.
A large part of this is due to the homogenous offer and services of discount
websites. This translates to non-distinctive marketing messages that revolve
around ‘low price and large variety’.
And for the ones that do not compete
on price, there does not seem to be
strong enough value proposition to gain
traction yet.
Overall, it is still a relatively simple game
of generating traffic through links from
other portals which end up being rather
costly. Over the last two years, we have
seen an increase of 31%-34% in online
advertising prices3.
Some local players are affiliated with or
are subsidiaries of large internet portals
or corporations, providing an edge in
online consumer understanding and access. However, they still lack the finesse
in marketing luxury that established
foreign platforms possess.
On the other hand, foreign platforms
may not have the access to consumers
that local platforms enjoy.
Distribution – the last mile is always
the most difficult
Distribution networks in China are still
heavily fragmented, with over 7,500
regional players operating in some 200
cities.
Companies distributing nationally face
many issues managing these regional
players. Chinese courier services are
still maturing, and it is not uncommon
that packages are damaged, lost or
stolen during delivery.
Luxury goods are even more prone to
these risks given the high value. As a result, luxury e-commerce platforms rely
on International courier services like
UPS and FedEx despite their premium
prices. However, international couriers
are only permitted to operate in eight
cities in China and are required to operate as joint-ventures with local couriers
in other parts of China, exposing clients
to the same risk and nuances as working with a network of regional couriers.
Chinese platforms, in this instance,
have the upper hand, as many are part
of a bigger company or conglomerate
with businesses in real estate or other
industries providing a physical presence
and knowledge in local markets.
They can be very effective in identifying local logistics partners; and some
players (e.g. VIPShop) have set up their
own logistics operations to support the
platforms.
A tie
A win for the local players
PERSPECTIVE THE ONLINE LUXURY BLOODBATH

12. 12
CONCLUSION
WOULD LOCAL-FOREIGN
PARTNERSHIPS BE THE
WINNING FORMULA THEN?
Foreign and domestic players have
their own strengths and weaknesses.
While local players can contribute in
their strengths in distribution and local
marketing reach, foreign players can
capitalize on their finesse in brand
building and understanding as well as
their access to authentic procurement
sources.
While several websites have formed
partnerships between local and foreign
players, none of them are profitable yet.
Local player, Xiu.com, managed to partner with major brand label, Salvatore
Ferragamo, but the brand only offer a
limited number of product ranges to
Xiu.com.
American department store, Macy’s,
has acquired an 8% stake in local player
VIPStore and offers their product line
on the local platform.
While local players can
contribute in their strengths
in distribution and local
marketing reach, foreign
players can capitalize on
their finesse in brand building
and understanding as well
as their access to authentic
procurement sources.
PERSPECTIVE THE ONLINE LUXURY BLOODBATH
However, they are still in the early days
of promoting the platform and have not
achieved the needed awareness to drive
business.
Clearly, a simple supplier-distributor relationship is insufficient and players still
need to understand the roles of either
party in the partnership. It goes without
saying that both domestic and foreign
players need to select partners that fit.
They also need to actively play their
strengths to build a distinctive platform.
We would challenge that:
1. Current shoppers on the discounted
luxury platforms are not real luxury
shoppers, but bargain hunters
2. It would be highly challenging to
make the discount model sustainable
given the challenges we have mentioned
3. Online platforms should take a step
back to understand who are the luxury
shoppers that would shop online
4. Players should also try to understand
what would appeal to the luxury shoppers and what experience they expect
in an online environment as opposed to
the retail shopping experience

13. 13
We believe there are still opportunities
in the market as long as the right play
is called and the consumer proposition is strong. Should you wish to learn
more about the topic, please feel free to
contact Value Partners and we would be
delighted to share our insights with you
further.
PERSPECTIVE THE ONLINE LUXURY BLOODBATH

14. 14
AUTHORS
THOMAS WU
JACOB JIN
SING WANG HO
Partner of the Hong Kong office
Associate of the Beijing office
BA of the Hong Kong office
thomas.wu@valuepartners.com
jacob.jin@valuepartners.com
singwang.ho@valuepartners.com
PERSPECTIVE THE ONLINE LUXURY BLOODBATH

15. ABOUT
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