Online vs. Bricks-and-Mortar: The China Dilemma

February 2, 2015/0/0
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As luxury brands look to mitigate a significant slowdown in sales in mainland China, which registered negative growth last year for the first time ever, the country’s e-commerce market remains an attractive opportunity as well as an ongoing challenge. Often fearful of diluting brand value while still looking to boost return on investment in a tough but crucial market, brands must walk a delicate tightrope.

Despite any reservations about e-commerce in China — from the near-futility of fighting a vast gray market to the fact that Chinese consumers are relatively new to big-ticket online purchases — there’s no denying its importance. China is the world’s largest e-commerce market, and according to the Ministry of Industry and Information (MIIT), online transactions leapt some 20 percent year-on-year in 2014, reaching 12 trillion yuan (US$1.96 trillion).

Meanwhile, bricks-and-mortar retail remains a critical touchpoint for brands to reach and influence consumers, despite the fact that in-country sales are tepid, rental costs are high and rising, and staff retention rates are dismal. Consumers continue to do a significant amount of pre-purchase comparison shopping offline, particularly in the cosmetics segment. This adds another layer of difficulty to market entry for smaller Western brands, as those that have undertaken an e-commerce-only market entry strategy have yet to take off in a significant way.

This puts brands in a continued tough position: they need some form of offline touchpoint if they’re to achieve widespread success in China, yet many — if not most — bricks-and-mortar locations are likely to remain expensive showrooms, with the majority of affluent consumers continuing to make big-ticket purchases abroad for a litany of reasons.

Over the past year, most e-commerce efforts among major Western players has centered around Alibaba’s wildly popular Tmall, which in 2014 enticed big names like Burberry, L’Occitane, Rimowa, and Estée Lauder by offering to purge counterfeit and gray-market items. This carrot-and-stick approach clearly assuaged lingering brand concerns, as did the platform’s central position in the market. Since 2011, Tmall sales have increased more than tenfold, reaching $50.9 billion last year. And while Tmall alone is not the answer, when added to a comprehensive omnichannel strategy that includes overseas “China-Readiness” and offline engagement in mainland China and Hong Kong, it can help brands buy some time and make some much-needed domestic sales.

China Luxury Advisors and Covington invite you to a seminar and evening reception on the challenges of online versus bricks-and-mortar for luxury brands on February 5 in London. Panel speakers include principals from China Luxury Advisors, Bloomberg, Yoox, and Rapisardi Intellectual Property. Click here to RSVP.

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