Are Fashion Brands Underestimating the Importance of China E-Commerce?

Gap Store on Tmall | Source: Tmall

BEIJING, China — With its burgeoning middle class and status-conscious consumer culture, China remains the primary engine driving luxury market growth, even in a rapidly weakening global economy. But recent reports from China’s National Bureau of Statistics show that even China’s economy is experiencing what one Chinese cabinet member called a “sharp slowdown.”

For fashion brands operating in China, this presents a distinct challenge. Over the last several years, many brands have made significant investments expanding their retail presence in the Middle Kingdom, driving the growth that has thus far protected the luxury fashion sector from global economic woes. But now, reliable market sources have indicated to BoF that same store sales amongst several luxury fashion retailers are actually slowing.

Nonetheless, physical stores remain a top priority for many brands. Indeed, flagship brands like Gucci, which operates 42 stores in China, and Louis Vuitton, which has 40, are moving ahead with a number of new store openings in 2012. Burberry, which has 59 stores in China, but whose revenue growth across Asia dropped 19 percent last year, plans to increase retail space in the region by 12 to 14 percent, with a focus on larger stores.

But in the coming years, a significant percentage of wealth creation in China is expected to come from literally hundreds of second, third and fourth-tier cities. Indeed, a study by the Boston Consulting Group (BCG) projects that in the next 10 years, consumption in these cities will surpass first-tier cities. By 2020, lower-tier cities will account for 60 percent of economic growth and in order to reach 80 percent of the country’s market for mid- to high-priced fashion, brands will need to have a presence in a staggering 460 cities. The sheer scale of this reality, coupled to the high cost of real estate investment, makes a strategy based solely on brick-and-mortar expansion a significant challenge to say the least.

“Physical retailing is pricey for companies. Sky-rocketing real-estate prices eat up a much larger proportion of operating costs than in more developed markets [and] China’s distribution structure is still inefficient,” the BCG report argues. “But selling directly to consumers on the internet circumvents both of the cost outlays.”

Indeed, in order to succeed in a fast-changing China, brands must refocus attention on e-commerce. “Companies cannot have a major presence in China without having an online presence, not only to generate sales but also to engage with customers where they spend so much time,” says the study. And while business-to-consumer e-commerce in China is still in its early stages (consumer-to-consumer marketplaces currently make up the bulk of e-commerce transactions in the country) Tmall (formerly Taobao Mall), currently the largest B2C online retail site in China which already attracts over 10 million people per day, reached $16 billion in sales last year, while 360buy, the country’s second largest B2C e-commerce site, generated $4.9 billion during the same period.

Furthermore, sales on B2C websites are set to more than triple to $102 billion in 2013 from around $31 billion in 2011, according to Beijing-based research firm Analysys International. Indeed, by next year, business-to-consumer sales are expected to account for 47 percent of total online sales in China.

Notably, apparel sales make up a full 36 percent of China’s online sales, the biggest single category, compared to only 17 percent in the US, making China e-commerce a significant opportunity for fashion brands.

But although it’s increasingly clear that e-commerce has a critical role to play in a sensible China strategy, precious few fashion brands are taking China e-commerce as seriously as they should. While leading brands like Burberry, Gucci and Louis Vuitton have made fairly swift progress and operate active e-commerce channels in China, many others are lagging behind. Indeed, brands like Yves Saint Laurent, Marc Jacobs and Valentino, who each operate several physical stores in China, have yet to adapt their e-commerce sites for the Chinese market.

Clearly, localising site content and building out local fulfillment should be top priorities. But brands who are late to the China e-commerce game, would also do well to heed the following advice.

Leverage social media. In China, consumers are naturally wary of B2C e-commerce, due to unreliable information and the proliferation of knock-offs. To gain the trust of consumers, brands must enable peer-to-peer recommendations and user reviews, while also investing in building an active presence on the local social networks where consumers often make their purchasing decisions.

Think mobile. Mobile commerce is still in its infancy. But for brands planning to build a China e-commerce presence, optimising for the mobile platform represents a significant future opportunity. Indeed, in recent quarters, 3G subscriptions in China have grown dramatically and some expect that 3G users could number over 250 million by the end of 2012, paving the way for a dramatic shift in the way that people research products and complete purchases. Already, Alibaba, Tmall’s parent company, reported more than 100 million unique mobile visitors last year to Tmall and Taobao Marketplace, the company’s C2C site. Meanwhile, during the same period, the total value of purchases made via mobile on Tmall and Taobao Marketplace hit $1.86 billion, up more than six times from the previous year. “In the past, Taobao’s mobile users were mainly purchasing intangible and virtual products,” reported IDG News Service. “But now the companies have seen a huge surge in the number of mobile users buying physical products on the sites, with the change attributed to better usability of the company’s apps and mobile sites.”

Invest in robust digital marketing support. There is currently a significant disconnect between how Chinese consumers spend their time and how marketers spend their budgets. BCG found that only 13 percent of overall advertising spend was devoted to online channels, despite the fact that 64 percent of time spent with media is now spent on the internet, a startling gap. But the good news is there is no shortage of online advertising opportunities. Branded apps, interactive games and video channels on Youku (China’s YouTube) are particularly underleveraged. Indeed, according to BCG, “given the amount of time Chinese consumers spend watching videos, it deserves even more attention.”