Xiu.com screenshot | Source: Xiu.com

We continue this week’s focus on e-commerce by turning our attention on how to succeed in the rapidly expanding e-commerce market in China. 

BEIJING, China — According to a recent report by The Boston Consulting Group (BCG), China is set to become the world’s next e-commerce superpower, surpassing the United States to become the largest online commerce market in the world, with an estimated market size of $300 billion. In 2006, less than 10 percent of China’s urban population shopped online. By 2015, that figure is expected to have quadrupled, reaching 44 percent, while the total number of e-commerce shoppers in China will grow to 329 million.

What’s more, according to BCG, China’s massive geography, a middle class that is rapidly expanding beyond the country’s largest cities, and widely accessible, heavily subsidised high-speed internet — broadband in China costs just $10 per month, compared with $30 per month in India — make the country unusually fertile ground for e-commerce, with internet access far outpacing the reach of physical retailers. Indeed, up to a quarter of e-commerce demand in China is for products consumers cannot find in physical stores, with apparel and skincare amongst the fastest-growing online categories.

But for fashion companies aiming to crack the online retail opportunity in China, it’s imperative to understand that the country’s e-commerce market is very different to established markets in the United States and Europe and that online shoppers in China — much younger, on average, than their Western counterparts — have different expectations, preferences and patterns of behaviour.

“Chinese consumers’ recognition and preference for fashion brands is quite different from mature markets,” said George Wenhong Ji, founder and CEO of Shenzhen-based fashion e-tailer Xiu.com, which sells international luxury brands like Gucci and Chanel, and last year raised $100 million in a second round of funding from elite venture capital firm Kleiner Perkins Caufield & Byers and private equity firm Warburg Pincus.

“Fashion brands that are not so popular could be received very well in China and vice versa. [Chinese consumers] are still price-sensitive and have poor loyalty towards brands,” said Ji. “It’s important to study Chinese consumers’ income and expenditure – how much money they earn in different cities of China and how much they would spend on fashion; how much they would spend on fashion online,” he continued.

According to the BCG report, 7 percent of online shoppers are responsible for 40 percent of online spending. For fashion retailers, the importance of these “superheavy spenders,” each of whom complete over 50 transactions a year and have a preference for heavily branded goods, cannot be underscored enough.

To entice superheavy spenders, first and foremost, it’s vital for online retailers to get the product mix right, Morgan Tan, vice-president of e-business at Lane Crawford, told BoF. These high-spending consumers are looking for must-have seasonal items that aren’t available elsewhere, she said, noting a growing demand for niche labels. Indeed, Xiu.com, which last year recorded sales of approximately $150 million, plans to carry more international and Chinese labels that competitors do not offer, while The Corner, a luxury e-tailer owned by the Yoox Group, which operates a China-specific site at thecorner.com.cn, recently launched The Vogue Talents Corner, an initiative promoting less known emerging designers in collaboration with Vogue China.

Compared to their counterparts in the West, affluent consumers in China have a lower baseline knowledge of fashion products and are ravenous for information, an opportunity for retailers to engage them more frequently with content and advice. “It is about engaging her daily,” said Jeff Yurcisin, president of Shopbop.com, which recently launched a site in Chinese. “We send out daily emails to our customers, so she gets her fashion fix every day,” he continued. “The opportunity is for us to be a personal stylist, to spend more time telling stories and introduce her to brands that the American customer already knows.”

But despite their hunger for information, Chinese consumers are distrustful of online retailers. Amongst the world’s most highly social shoppers, Chinese shoppers trust information and recommendations from their peers on blogs, social networks and user review sites far more than official brand communications. In fact, according to BCG, only 19 percent of Chinese consumers even visit official brand sites, as compared to between 41 and 60 percent in Japan, the US and Europe.

“Online shoppers in China are much more wary than the US and UK,” said Fabienne Pellegrin, Asia business development director for Salvatore Ferragamo, who also oversees the brand’s digital development. “They need more information than the average online shopper. There’s so much abuse online, so they are programmed not to trust anything,” she continued, emphasising the importance of peer recommendations and user reviews. In fact, over 40 percent of Chinese shoppers surveyed by BCG had both read and posted online product reviews, nearly double the rate in the US. “Encourage [consumers] to write reviews about your product because so many people read them,” advised Ms. Pellegrin.

As in the West, a high level of customer service is another essential part of a successful China e-commerce strategy. “[Chinese consumers] will become loyal to an e-commerce company because of high quality service,” said Mr. Ji. “It’s about making the online shopping experience as convenient and risk-free as possible with reliable deliveries and free returns,” said Ms. Tan. “Unlike many other online retailers, we offer a multi-channel approach for customers that allows them to collect or return their order to our stores,” she continued.

While shipping costs are low, China has a poor delivery network dominated by local, independent couriers that are neither efficient nor reliable, a major hurdle for online retailers. To address the issue, The Corner has partnered with international shipping service Fedex to provide couriers who wait at customers’ doorsteps while they try on their purchases and facilitate on-the-spot returns. The Corner also leverages sophisticated RFID technology to seal packages with anti-counterfeit microchips (according to the BCG study, 45 percent of shoppers worry that their goods will be swapped for fakes while in transit).

Alongside delivery-related services that lower risk and make shopping more convenient, affluent Chinese consumers also expect rewards for their loyalty. As a result, VIP reward programmes or other special incentives are critical to success. For example, VIP shoppers on Xiu.com can view fashion shows and pre-order next season’s products months in advance of others. “We find that for more high-end customers, they value additional services, such as VIP sales alerts, pre-order, seasonal gifts,” said Mr. Ji.

But for international retailers targeting China’s fashion e-commerce market, consistently delivering a high quality experience that’s localised to the needs, behaviours and expectations of Chinese consumers often means investing in China-based operations. Indeed, while Net-a-Porter has long shipped to China, the company recently announced that it would open a distribution centre in Hong Kong this summer to better serve the Asia-Pacific region.

“Throughout 2010, we set up local operations — an office and logistics centre — in Shanghai to run the business locally,” said Federico Marchetti, founder and CEO of Yoox Group. “A local structure and local team ensures we provide Chinese customers with a unique online shopping experience characterised by completely localised, best-in-class customer service,” he added. “Although e-commerce enables brands to have an international distribution, the online shopping experience still works better at a local level.”

Ultimately, a successful China e-commerce strategy is composed of the same fundamental elements that matter in the West: engaging content, great customer service, dependable deliveries and easy returns are all critical. But in China, these elements count in different ways and weights, with editorial-style content, peer-to-peer persuasion, risk-free deliveries and rewards programmes carrying particular importance.

Divia Harilela is an associate contributor at The Business of Fashion.

Taobao | Source: Jing Daily

Online shopping is growing rapidly in China (BBC News)
“Across China, online companies large and small are learning how to be effective e-commerce players – or fail like US goliath eBay, which was trounced by upstart Taobao back in 2006. In 2010, China’s online shopping industry had a turnover of $80bn, and grew 87% year-on-year. China’s 420 million internet users spend around a billion hours each day online – and last year, 185 million made at least one online purchase.”

Ferragamo shows resilience of luxury sector (Reuters)
“Up-market Italian shoemaker Salvatore Ferragamo posted first-half profits up by a third on Monday, adding to evidence that the luxury industry remains vigorous through the global financial turmoil… The Florence-based family firm, which is less profitable than its peers, said first-half core earnings before interest, tax, depreciation and amortisation rose 59 percent to 83.8 million euros, with a margin on sales of 18.2 percent from 14.9 percent a year before.”

Combining Sports, Music and Fashion Raises Buzz for Sneaker Companies (Forbes)
“Buzz scores—which measure recent consumer perception—have been rising among 18-49 year-olds since early August for sneaker giants Adidas and Nike, corresponding to the companies’ recent advertising endeavors that combine together sports, music and fashion.”

Snapette Aims at Women Shoppers (All Things Digital)
“The majority of e-commerce sites share a single thing in common: They were built by dudes. That hasn’t escaped the founders of Snapette, a social photo-sharing app built by women, explicitly for women… The app, which launched in Apple’s App Store a few weeks back, focuses on the experience of shopping and leaves out buying altogether — for now.”

Lulu Kennedy: fashion’s fairy godmother (Telegraph)
“Kennedy is a fashion talent-spotter, founder of the venture Fashion East, which plucks emerging designers out of obscurity and gives them the chance to showcase collections to the style cognoscenti during London Fashion Week… Since 2000, star designers including Ilincic, Saunders, Richard Nicoll, Henry Holland of House of Holland and the Pringle designer Alistair Carr have all had their careers kick-started after being singled out by Kennedy’s gimlet eye.”

Savigny Luxury Index June 2011 | Source: Savigny Partners

LONDON, United Kingdom — The M&A and IPO scene in luxury goods and fashion continues to storm ahead. This month’s Market Pulse reveals a redefined Savigny Luxury Index which now includes Italian fashion powerhouses Prada, and soon, Salvatore Ferragamo.

Big news

• Two very high-profile IPOs: Prada listed in Hong Kong on 24 June and Salvatore Ferragamo listed in Milan on 29 June.  Both pulled off their IPOs amongst tricky conditions with high levels of IPO pullouts since the beginning of the year both in Asia and in Europe

• Stripping out Prada, which caused an artificial jump in the SLI, the SLI decreased by 2 percent; still outperforming the MSCI which decreased by 3.2 percent.  Despite concerns over rising interest rates in China, the luxury sector (along with internet stocks) has been seen as a safe haven for investors as the global economic outlook is marred by a looming debt crisis in the USA and in certain European countries

• Continued strong M&A activity: Kurt Geiger, Moncler and Uriage were all snapped up during the month

Going up

• Hermès’ share price is at a new high, closing above 200 euros a share on 30 June, raising questions as to whether LVMH is scooping up more shares or whether third parties are betting on further actions from Mr. Arnault or the Hermès group

• European luxury stocks rallied at the end of June as investor concerns over the impact of the Aegean debt crisis on the Eurozone were allayed by the announcement of austerity measures by the Greek government

Going down

• Ports share price lost over 7.5 percent as investors made a sharp retreat from the Hong Kong stock market amid concerns over China’s tightened monetary policy in order to curb inflation

What to watch

• M&A activity in the sector is hotting up, with more transactions being announced each week

Luxury Sector Valuation, June 2011

Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry

Louis Vuitton's Young Arts Project, REcreative | Source: REcreative

Calling all aspiring artists: Louis Vuitton launches just the site for you (Telegraph)
“REcreative, www.recreativeuk.com, has been devised and developed over the past year… Aspiring artists can upload their work and share it with the online community in the ‘Projects’ section of the site, where leading artists and critics will select their favourite works to highlight.”

Labelux boosts fashion M&A (M&A)
“Mergers and acquisitions activity in the fashion sector maintained its surge with the purchase of English outerwear company Belstaff by Swiss luxury goods business Labelux. The undisclosed deal follows on from the recent retail acquisition surge, with the purhcases of Kurt Geiger, Moncler and Labelux’s own purchase of Jimmy Choo.”

Ferragamo gets go-ahead for Milan IPO (Reuters)
“Salvatore Ferragamo said on Thursday it had received clearance from market regulator Consob for what could be the first initial public offering in Milan this year. The Tuscan family-run maker of fine leather shoes, valued by analysts at around 1.5 billion euros.”

J. Crew reports 1Q loss on clearance pricing (MSNBC)
“Preppy clothing seller J. Crew Group Inc. said Thursday it swung to a loss in the first quarter as it marked down clothes to clear out excess inventory and took charges related to being acquired. The company, which went private in March… said net loss totaled $29.9 million.”

British fashion world pays tribute to the Telegraph’s Hilary Alexander (Telegraph)
“Last night at London’s St. Pancras Renaissance Hotel, the great and the good – and the drop dead fabulous – of the British Fashion industry gathered to pay tribute to the Daily Telegraph fashion director, Hilary Alexander’s remarkable career.”

Art of the Trench | Source: Burberry

Burberry Looks Online for Ways to Gain Customers (IHT)
“Angela Ahrendts still remembers when she bought her first Burberry trench coat… Ms. Ahrendts — who now runs the company — is hoping to move the quintessentially British brand into the age of the Internet to attract a new generation of shoppers.”

Luxury Pundits: Stay Elitist Yet Youthful (Media Post)
“Luxury brands… must be elitist, empathetic, immediate, social and youthful in order to succeed… the single worst thing that happened to luxury was its democratization.”

La Perla to rationalise brand strategy (Drapers)
“Italian lingerie firm La Perla is to rationalise its brand portfolio and lower prices in a move it claims will boost its market share.”

Bond Street rings up record for shop rents (Times Online)
“Shop rents on London’s Bond Street, home to the world’s glitziest brands, are poised to defy the credit crunch and smash through £900 per square foot — a record in Britain.”

Online museum for fashion house Ferragamo (Reuters)
“Italian fashion house Salvatore Ferragamo has taken a museum detailing its history and culture online, allowing young designers to add their creative touch to its shoe models.”

El Palacio de Hierro luxury department store, Mexico City | Source: iluminet.com

Ferragamo Chief Norsa Says Mexico Is Strongest Luxury Market (Bloomberg)
“Salvatore Ferragamo SpA Chief Executive Officer Michele Norsa said the Italian fashion brand’s strongest sales growth among major economies this year has been in Mexico, where the wealthy spent more at home as the peso fell.”

Asos benefits from overseas sales (FT)
“In a statement ahead of its annual shareholder meeting, Asos said trading was in line with expectations for the six months to September 30. The fashion site said it had 1.2m active customers in the period, up from 890,000 a year ago, with 5.6m visitors a month.”

U.K. Retail Sales Index Rises to Highest Since April, CBI Says (Bloomberg)
“Retailers saying sales increased from a year earlier outnumbered those reporting declines by 3 percentage points, compared with a reading of minus 16 points in August, the biggest U.K. business lobby said in a statement in London today.”

M&S Sales Improving, Cautious On Outlook (WSJ)
“U.K. retailer Marks & Spencer Group PLC Wednesday reported better-than-expected fiscal second-quarter sales, driven by the introduction of more affordable food and revamped clothing and homeware ranges, but cautioned that trading conditions will remain difficult well into next year due to the economic downturn.”

Random Thoughts Before the Train to Paris (New York Times)
Cathy Horyn collects her thoughts before her arrival in Paris.

Massimiliano Giornetti for Ferragamo S/S 2009

Ferragamo menswear designer takes on womenswear (Reuters)
“Italian fashion house Salvatore Ferragamo has said its menswear designer Massimiliano Giornetti will also take on women’s ready-to-wear.”

Hugo Boss keeps 2009 outlook after weak Q2 (Reuters)
“Hugo Boss said on Thursday second-quarter loss before interest and tax (EBIT) widened to 15.6 million euros ($21.99 million) from 2.2 million in the same period last year. Sales fell 5.4 percent to 303.9 million euros.”

House-Brand Menswear That Aims to Be a Cut Above (WSJ)
“Passersby along New York’s Fifth Avenue will soon see a change at Saks Fifth Avenue: Rather than a designer collection, a corner window will announce the department store’s own new line of menswear.”

How Do You Like Me Now? (New York Times)
“Until Mr. Gaskins chose to reveal himself, now that he is closing his business, as the author of The Emperor’s Old Clothes, only a handful of friends knew he had such a biting side. But as Fluff Chance, his pseudonymous creation, Mr. Gaskins is fearless in his critiques of colleagues and their creations..”

The uproarious story of Biba, the store that defined the Sixties (Daily Mail)
“Way before Kate Moss donned vintage styles, Barbara Hulanicki, the brains and talent behind Biba, was putting together the most evocative and iconic fashions from all eras. And instead of flogging them at film star prices, the boutique was dead cheap.”

The Meatpacking district in the 1970's, courtesy of the Bowery Boys

Fashion in Dark Times (The Atlantic)
“During the fashion boom that began in the 1980s, the relationship between fashion and its customers was the same as the one between art and its rich, often unlovely patrons: all that money sloshing around led to excessive consumption, but it also created a fertile soil in which works of beauty and integrity could develop.”

This year’s model: How Lakshmi Menon put India in Vogue (Independent)
“Lakshmi Menon has entered the fashion stratosphere with her first solo editorial shoot in American ‘Vogue’. But her success raises one, deeply unsettling question: why is she the only South Asian model regularly strutting down the international catwalks?”

Online fashion sales fall on month (Drapers)
“Online sales of fashion rose 17 percent on last year in April but fell 2 percent against March according to the IMRG Capgemini e-Retail Sales Index.”

Della Valle Boosts Stake in Saks to 5.9 percent (WWD)
“Carlos Slim Helu has company. Tod’s SpA chairman and chief executive officer Diego Della Valle has doubled his investment in Saks Inc. in the past month and now owns 5.9 percent.” (Subscription required)

Ferragamo Net Slides 17 Percent (WWD)
“Italy’s Salvatore Ferragamo SpA reported a 17 percent drop in earnings in 2008 due to marginal revenue growth and a raft of new store openings.” (Subscription required)

“Australia”, Starring Nicole Kidman, Hugh Jackman and … Ferragamo  (WSJ)
As part of Salvatore Ferragamo’s “long standing brand strategy,” it has made accessories for the movie Australia starring Nicole Kidman.

Giles Hearts Boys, Too (Fashionista)
Giles Deacon has launched a menswear range in collaboration with New Look.

Retail Rx for a Hip Mom-and-Pop (NY Times)
By George, a small retailer in Austin, Texas is emblematic of the challenges for mom-and-pop retailers in the current economic environment.

Ugg sales soar at John Lewis (Drapers)
At John Lewis, Uggs, the ubiquitous Australian boots, “saw a 300% increase in sales.”

Scene from Australia, photo courtesy of TV.com.