Luxury Ecommerce: Still Young in China

Different from other lux- ury goods retailers that are busy expanding globally， Neiman Marcus also shows its cautious and discreet side when it comes to development.

Even though the Chinese luxury goods market had drastic development in these years， the U.S.-based highend chain department store， which has been in the retail of luxury goods for over 100 years， did not come to China until last year.

To be more specifically， it only got into China’s ecommerce market.

In March 2012， Neiman Marcus made its first attempt in China by injecting capital into Chinese domestic ecommerce dealer Glamour-Sales， which is positioned as a fashion ecommerce dealer offering special discounts in certain times. Nine months， Neiman launched its own ecommerce platform in China and set up an operation center and warehouse in Shanghai.

However， half a year later， Neiman decided to cut half of the workforce for its website in China. In addition， it is going to close its warehouse in China and transfer the responsibilities of selling and delivering products in China to its U.S. headquarters.

This reminds people of the fact that the Chinese ecommerce of luxury goods is far from maturation， even though many luxury dealers are busy moving their retail business， no matter run by themselves or with partners， to the Internet.

“Up to now， whoever is engaged in the ecommerce of luxury goods in China cannot avoid the problem of suppliers and consumers. I think most of them have problems in their business models，” said Ren Guoqiang， partner of Roland Berger.

Market still Under Cultivation

In order to realize that all goods bought by consumers in China are delivered from the warehouses in the United States， Neiman made a great sacrifice to its Chinese branch. The warehouse in Shanghai was closed； half of the operation team was laid off. Neiman only left its Chinese website， a counterpart of its official English website in the United States. The Chinese website is run by a small team， consisting of personnel of client services， sales and marketing.

Someone said that Neiman’s leave was a result of the lack of confidence in the Chinese economy， but the spokesman for Neiman stressed that closing the warehouse in Shanghai was more of a change to its business model.

“Neiman will create a better business model in China （after closing the warehouse，” the spokesman said.

“The business of those online luxury goods dealers cannot provide enough foresights into the future condition at this moment，” said Gao Ming， general manager of Ruder Finn’s Shanghai branch. “It is certain that the ecommerce of luxury goods will have a bright future， but presently it is not matured yet and still under cultivation.”

But seemingly not all luxury dealers have realized this. They abandoned their previous conservativeness and discreetness， accelerated their pace to the ecommerce market.

Lane Crawford， a high-end department store brand from Hong Kong， decided to return to Shanghai this autumn in the form of ecommerce. Many other luxury brands immediately followed suit.

But in Ren Guoqiang’s opinion，none of them has displayed a proper business model.

In the last two or three years， there were a lot of domestic online dealers of luxury goods having emerged in China， but now most of them have already given up their single line of luxury goods and turned to the medium- and highend fashion brands， so as to avoid any disastrous results for the investors.

Foreign dealers are not free from this either. They might have no worries about the supply of goods， but where they can find enough consumers remains a hard problem.

“Presently， the online shopping’s biggest advantage for Chinese consumers is still the lower price. For the ecommerce of luxury goods， discounts are still their biggest appeals，” Ren Guoqiang said. “However， most of Internet shops of foreign luxury brands and high-end department stores provide no or small discounts of their products.”

“Even if there are some discounts， spending a large amount of money buying things online still fret many consumers，” Ren added.

For those luxury goods dealers that have offline and substantial outlets， the retail website can work as a tool for showcasing and promoting the brand images and products， even if they cannot contribute to the sales. But for the luxury goods dealers that simply rely on the Internet， their operative cost in China needs the full support from the sales made online and the chance of success is very small.”

A marketer for a luxury brand said that “no profits were brought from online channels in several years”.

A Practical Choice

There were reports saying that Nei- man’s closing its warehouse in China and appointing the U.S. warehouse as the center for selling and delivering goods to China are actually to improve the growth rate of its own international business. This is because its owner TPG and Warburg Pincus LLC two private funds are going to make it public and sell it to a sovereign fund.

Neiman used to be a popular target of acquisitions because of its supple base of rich consumers， but its profits saw a dramatic drop soon after being acquired by TPG and Warburg Pincus LLC， thanks to the blow landed by the economic recession.

It did not recover to the level before the financial crisis until now. Its net profits in the last financial year ending July 31， 2012 amounted to 140 million U.S. dollars. In 2008， the figure was higher than 142 million U.S. dollars.

“There is a great gap between the cost of establishing an Internet shop from scratch and the spending on changing the original website into another version （mostly linguistic change） based on a complete online retail system. The latter costs little while the former might need hundreds of thousands dollars，” said Gao Ming.

Actually， some foreign ecommerce dealers of luxury goods have already launched the Chinese websites even though they have not yet entered China， which provides more convenience for Chinese consumers’ online shopping.

Chinese consumers， who are extremely sensitive to the price， have already concluded that purchasing luxury goods from overseas websites is actually less costly， because the luxury products sold by the websites that are run and have warehouses in China are more expensive due to the tariffs.

“Making a Chinese counterpart of their original websites might be a detoured， but practical way of foreign online luxury goods retailers. This solves the problems of product supply and quality， and will save a lot of time and cost in transportation since they no longer need to pay a certain amount of customs for a batch of products moved into China，” Ren Guangqiang said.

But this pattern has its own limit and defects. The biggest one is that it affects customers’ experiences， aftersale service and possible detainment of products by the customs administrative department. The three factors might completely ruin the experience of buying a piece of luxury goods， which usually takes consumers a lot of time to consider the rationality and necessity.

“In addition， such a pattern could not expand the business effectively，”Ren Guoqiang added.