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Chinese E-Commerce Giants Battle for Luxury Supremacy

Alibaba’s Luxury Pavilion and JD.com’s Toplife are going head-to-head, but which of these specialised platforms is a better partner for luxury brands?
Illustration by Victoria Berezhna for BoF
By
  • Casey Hall
BoF PROFESSIONAL

SHANGHAI, China — Online retail sales in China surpassed $1 trillion last year and though e-commerce giants like Alibaba and JD.com continue to grow, the past 12 months has seen both companies turn their attention to the underserved online luxury market for an added boost.

Alibaba’s Luxury Pavilion and JD.com’s Toplife are specialised luxury offerings that cater to high-end brands by breaking them away from their “mainstream” e-commerce platforms. Both offer luxury brand partners the opportunity to reach China’s massive online consumer base by opening digital flagships but there are significant differences in how they operate.

According to L2’s Digital IQ Index: Luxury China 2017, only 24 percent of luxury brands had official stores on Tmall (Alibaba’s B2C ecommerce platform) and only 10 percent operated them on JD.com as of June 2017. The hesitation among luxury brands is comprehensible. Deciding which platform to partner with can be tricky, not only because of the potential amount at stake, but also because China’s online ecosystem is one of the most complex and unfamiliar in the world.

But since Alibaba's launch of Luxury Pavilion in August last year, 60 luxury brands have joined the platform, including Burberry, Versace, Marni, Tod's, Giuseppe Zanotti, TAG Heuer, Guerlain, and Givenchy.  JD.com's Toplife, meanwhile, currently works with 30 luxury brands, including Alexander McQueen, Oscar De La Renta, Escada, Derek Lam, Tods, La Perla, Armani and newcomer Balenciaga, which joined the platform in July.

This is their store, it's not our store. They are free to create their own image.

“The two platforms offer a very distinctive value proposition to brands, especially on four critical aspects: brand control, offer exclusivity, delivery experience and traffic resources,” says Patrice Nordey, chief executive of Fabernovel Asia, a consultancy specialising in technology and innovation.

“While Luxury Pavilion is an evolution of Tmall and is displayed as a category within the platform, Toplife has been built and conceived as a standalone luxury application, helping to build the image of a more premium and exclusive destination. To create a sense of exclusivity, Luxury Pavilion relies on a Tmall scoring system to invite users on the platform [but] the anchor with Tmall platform insures brands to access a huge amount of traffic and data.”

In other words, Luxury Pavilion opened as an “app-within-an-app” accessible via Alibaba’s Taobao and Tmall apps (Alibaba’s China retail marketplaces reported 617 million monthly active mobile users for the quarter ending March 2018). Toplife, on the other hand, is a completely separate app from the mainstream JD.com platform (which had 292.5 million active customer accounts as of March).

Joining an invite-only loyalty club

This decision to make Toplife a separate entity from JD.com was vital for brands, according to Xia Ding, president of JD.com’s fashion division and head of Toplife, which soft launched at the end of 2017. Fashion is one of the fastest growing categories for JD.com, which saw its net revenue top $55.6 billion in 2017 (an increase of 40.3 percent year-on-year) and gross profit for full year 2017 of $7.8 billion (an increase of 43.7 percent from full year 2016).

“It means a lot to brands. If you look at our competition, Luxury Pavilion are basically carrying out a group of brands that sit within Tmall, they just bring them out and sit them together as one channel to the consumer they want to show. But if I want to search ‘Burberry’ I don’t have to go to that channel, so if I key in ‘Burberry’ on Tmall.com and ten different Burberry things show up, some might be authentic, some might not be authentic,” Xia says.

“I believe they have taken a shortcut in a way, but we are going to do the right way from the beginning, so we are making a separate platform, a separate app. So, the brand feels like it’s quite controllable, it’s quite a clean environment and they see next to them brands of the same peer group.”

Liu Xiuyun (also known as Jessica Liu), president of Tmall fashion and luxury, counters that Luxury Pavilion maintains its exclusivity within the broader e-commerce platforms in the Alibaba stable by being invitation-only and clearly distinct from Taobao and Tmall. Toplife, on the other hand, does not require an invitation to download; its app is open to all.

“Luxury Pavilion is a virtual app within Taobao and Tmall, which means that the Pavilion is not just a different storefront, but also includes complete experiences and services that a standalone app can offer. These include a luxury look and feel, customised search, intelligent recommendations, membership and loyalty programme. At the same time, brands can tap into the over 500-million consumer base currently on the Tmall and Taobao platforms,” Liu says.

Alibaba has the bigger online market share and the Luxury Pavilion image is in line with luxury clients' expectations.

Though Tmall would not disclose the exact prerequisites for consumers to score an invite to the Luxury Pavilion, a spokesperson said that spend on the platform and time spent searching for luxury goods were factors.

“With our technology and data-driven consumer insights, luxury brands can engage their customers through Luxury Pavillion both online and offline. Luxury brands not only understand and more deeply engage with today’s customer through our platforms, but they can also identify with a high degree of accuracy who their future clients will be,” Liu explains.

In short, while the more controlled environment of a standalone app may be seen as an advantage by some brands, it’s offset by the disadvantage of having to build traffic for a new, standalone platform, rather than tapping into an existing user base in the hundreds of millions.

Yvonne Ching, a Shanghai-based fashion and beauty influencer and avid luxury shopper, shops online from both Chinese and international luxury e-commerce platforms. Though she chooses Net-a-Porter for fashion and beauty brands still to enter the China market, she also highly rates the exclusive feeling of Tmall’s invite-only Luxury Pavilion.

“Shopping at Luxury Pavilion gives me a ‘privileged’ feeling. It’s like being a VIP and now granted to enter a more luxury part of a mall that you always go to,” Ching says, adding that the convenience of being able to stay within an already familiar app also doesn’t hurt.

“There are just too many apps to check every single day nowadays. Taobao has been such a big thing for the longest time, it’s become a habit for people. Luxury Pavilion’s entrance pathway from Taobao guarantees it traffic. Toplife, on the other hand, is convenient to access directly. However, people may forget to visit easily too.”

Digitisation is crucial

Sales of luxury goods in China hit 142 billion yuan ($20.79 billion) last year and Chinese shoppers accounted for 32 percent of the €262 billion ($300.48 billion) global luxury market, according to Bain & Co.

The sales are largely driven by China’s tech-savvy millennial generation — the average age of Chinese luxury shoppers has dropped from 35 to 25, according to the World Luxury Association — and where do they shop? Online, or, more accurately, on their phones.

According figures released by Tmall in April, more than 100,000 shoppers who have been invited to be Luxury Pavilion users each spend over 1 million yuan ($159,000) a year (on all Alibaba’s platforms).

Alibaba’s gross merchandising value for fiscal year 2018 totalled $428 billion. Full fiscal year 2018 results, released in March, also showed revenue up 58 percent on the year to $39.9 billion, with non-GAAP net income of $13.3 billion, a rise of 44 percent over fiscal year 2017.

Toplife's signature high-end logistics services include the much-vaunted 'white glove' delivery of goods via a handsome courier.

Demographically speaking, half of luxury consumers on Alibaba’s e-commerce platforms were born after 1990 and they account for over 45 percent of luxury purchases on the sites. According to Tmall, a third of the shoppers on the Luxury Pavilion are in the same age group.

All this means the luxury industry, never enthusiastic as a whole about the digitalisation of their business, have little choice but to jump on board. “Luxury brands will increasingly want to use ‘new retail’ technology and data-driven insights to connect with younger consumers,” Liu says.

“The luxury industry, as with the rest of the fashion industry, is moving towards a more tech-enabled, data-driven approach. Reluctance to embrace the digital revolution is no longer an option and retailers are realising the importance of adapting to the changing landscape.”

“Alibaba has the bigger online market share, compared to the other marketplace, and the Luxury Pavilion image is in line with luxury clients’ expectations,” says Guiseppe Zanotti of his brand’s choice to join Luxury Pavilion.

Giovanni Pungetti, chief executive for Greater China of OTB Group, Marni's parent company, says the pull of e-commerce in China has become too strong to ignore over the past 12 months, even for luxury brands.

“Everything changes so fast in China. I remember when I arrived [little over a year ago], the image of Tmall was very discounted items and not at all good for luxury or premium brands. Within one year the situation changed quite dramatically,” he says, adding the decision to partner with Luxury Pavilion was driven by “the power Alibaba and Tmall have in this market.”

The lure of a sophisticated local logistics network 

Another difference between Luxury Pavilion and Toplife’s offer for luxury players appears to be the relative flexibility in the partnerships between the brands and their chosen platform.

Although its parent, JD.com, started off differentiating itself from Alibaba’s marketplace platforms by offering a direct sales model, it has since expanded its marketplace dimension in order to drive sales. Toplife, meanwhile, operates mainly with a marketplace model, with brands responsible for the look, feel and discounting or other special activities on the site.

This being said, Toplife also offers brands the opportunity to take advantage of its expertise by utilising specially designed, high-tech, temperature controlled warehousing solutions, and makes it a prerequisite for brands to use Toplife’s signature high-end logistics services, which include the much-vaunted “white glove” delivery of goods via a handsome courier wearing — you guessed it — white gloves.

“I would say 90 percent [of brands] are using our warehouse, but some brands already have a strong presence in China. Tod’s, for example, already have many offline stores and they already operate on other platforms, so for efficiency and consolidation purposes they are using their own warehouse. However, the delivery, is only ours. We want to ensure the interaction with the consumer in the last mile is really up to Toplife standards,” Xia Ding says.

According to Oscar de la Renta chief executive Alex Bolen, this flexibility and added service when it comes to warehousing and logistics was a major part of the American brand's decision to partner with Toplife. As a brand with a relatively light footprint in China, Bolen says their focus is on building on Oscar de la Renta's already strong brand name to reach more Chinese customers, categorising the opportunity for them in the Middle Kingdom over the next three-to-five years as being in the "hundreds-of-million-of-dollars."

“Key for us really, is learning the logistics side of things. We want to make sure we can deliver very well to Chinese customers’ very high expectations, and that’s something we can do with Toplife and JD,” Bolen says.

For Oscar de la Renta, the opportunity in China for over the next three-to-five years is in the 'hundreds-of-million-of-dollars.'

Logistics also proved the deciding factor for Saint Laurent in their decision to partner with Toplife.

"Thanks to the sophisticated logistics network and personalised platform provided by our partnership with Toplife, Saint Laurent will be able to implement its omnichannel development in China, securing a top-level luxury journey to our clients," Francesca Bellettini, president and chief executive of Saint Laurent, said in a statement.

“This is their store, it’s not our store. They are free to create their own image,” Toplife’s Xia says.

“In fact, if we do anything, everything is subject to [the brand’s] approval. We can make recommendations to them, but ultimately the decision is theirs.”

The dynamic between brands and Alibaba’s Luxury Pavilion is a little different, with Alibaba’s platform offering a purely marketplace model for brands to open and operate what Jessica Liu calls “online maisons,” with Alibaba additionally providing brands with marketing, data analytics, and logistical assistance — a major value-add given Alibaba’s famed big data operation.

According to OTB’s Pungetti, when you sit on a database of more than a billion people, as Alibaba does, you can dictate the terms of any co-operation.

“They are very strong at negotiating and they present to you a form, with everything written down and you cannot do anything. We tried to our best and in the end, we were able to get something, but not so much. It’s not an easy job to negotiate with a group like that,” Pungetti says, comparing the massive online platforms of today to shopping mall landlords.

“If your shopping mall has the greatest traffic, of course, you have the power. In spite of the fact that so much of their business is low-priced business, having so much traffic in their shopping mall — let’s call it like this — of course, you also have the opportunity to get all kinds of consumers. We are an exclusive brand, a luxury brand with high prices [but] with this level of traffic you can find your consumer.”

“For fashion brands aiming to scale their e-commerce revenue, Tmall’s Luxury Pavilion is probably the best option at this time,” argues Fabernovel’s Nordey. “But since Tmall does not offer an all-in-one service encompassing delivery and warehouse management, Toplife can be more suitable and accessible to brands not having yet set up their e-commerce operations in China.”

But ultimately, there is no clear winner in the battle between Luxury Pavilion and Toplife, with each offering certain advantages for brands over the other — and with a market as big as China’s, there’s plenty of room for both to play.

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