Trends in Chinese Luxury E-commerce: Strong Growth in the Digital Era

E-commerce is growing among luxury brands, Due to the impact of COVID-19, the youth-led change in luxury consumption behavior, and the trend of e-commerce livestreaming, a growing number of brands have increased e-commerce investments.

As the landscape heats up, how will the brands, luxury e-commerce players, and traditional e-commerce giants operate? How will the luxury e-commerce players maintain their competitive strengths through innovation in the supply chain, technology, and digitalization?

To find out more about these luxury e-commerce trends, GLG invited Zhang Peng, GLG Network Member and the former Director of Operations of Farfetch in the Greater China Region, to conduct an in-depth analysis. The following is a sample of the larger conversation presented in a GLG Teleconference and has been translated from the original Chinese.

Luxury E-commerce Market in China: Rapid and Sustainable Growth

The luxury sector shows an increase in year-over-year online consumption, particularly in the Chinese market. In Asia, the Chinese market leads the growth of luxury e-commerce. Two factors seem to be driving this trend:

1. A young consumer group with strong spending power. The average age of online luxury consumers is low globally, particularly in the Chinese market. From my observations, Chinese luxury consumers are 8 to 10 years younger on average than those in the rest of the world. These consumers — the so-called Gen Z — will likely contribute most to the growth of luxury e-commerce in China. They have a different attitude toward online consumption, a greater ability to accept new things and shopping habits. They will be a great driver for the whole sector of luxury e-commerce.
2. From offline to online. Thanks to the impact of the COVID-19 pandemic, many general consumers have shifted their behaviors from offline stores to online platforms. This move will likely continue, even as COVID-19 gradually stabilizes. COVID is also a major factor in the growth of luxury e-commerce.

During the pandemic, many consumers who had not made online luxury purchases started to use online channels. For them, purchasing online offered more advantages than offline shopping. They had access to a greater diversity of brands, search and browsing was more convenient, goods moved more quickly through customs, and the process for returning products and obtaining a refund was more streamlined. This experience is likely to cement long-term behaviors, and ultimately online luxury purchases will become a lasting trend.

Operation of Luxury E-commerce: Two Models

 In both China and beyond, the operation of luxury e-commerce can be generally divided into two models: 

1. Platform model (e.g., Farfetch). The strategy behind the platform-based business model is to create a platform similar to Tmall, Alibaba’s online purchasing platform, where the supply side is directly connected to the traditional buyer’s stores abroad, and also has direct cooperation with some brands. A buyer’s store, as a business form, is very mature in traditional luxury consumer markets, such as Europe and North America. These buyer’s stores usually have a longer history and therefore a greater ability to select goods, which allows them to feature multiple brands. Before the transaction, these stores and brands own the inventory of the products sold by platform-based online stores. And after completion of the transaction, the stores and brands do the These platforms charge them commissions as the main source of their income according to the operation and cooperation. \
2. Buyer-based model (e.g., Net-a-Porter, MatchesFashion, Mytheresa). The buyer-based operating model uses buying teams to purchase goods during a sales season or when brands launch new products. The e-commerce players own their inventory and can make independent decisions on sales methods, timing for promotion discount, distribution method, etc. These e-commerce companies usually distribute these luxury products from the central warehouses to every corner of the world. Profit in a buyer-based model is mainly derived from the difference between the buying price and selling price.

Currently, several e-commerce giants in China attach great importance to the top luxury brands. These companies simultaneously operate under both the platform-based and buyer-based models. They do this in two ways:

1. By encouraging luxury brands to set up flagship stores on their platforms. The brands are usually responsible for order performance, logistics, and other matters. The e-commerce platforms charge them commissions for the sales.
2. The e-commerce platform has its own luxury portfolio where its own buying team purchases directly from overseas channels, and is independently responsible for sales and delivery.

Vertical E-commerce vs. Traditional E-commerce

The online channels of the e-commerce market in China are primarily divided into three categories. The first is the brand’s own channel, such as the brand’s official website and WeChat mini-program; the second is the domestic comprehensive platform channel, such as the luxury channel of Tmall and JD.com; and the third is the so-called vertical e-commerce channel. In the future, the development space or growth rate of the brand’s own channels will be limited because the biggest challenge for the brand’s own channels is how to acquire new customers.

In terms of luxury e-commerce itself, we can likely be more optimistic about vertical e-commerce. Luxury is a relatively niche category while vertical e-commerce can better adapt to the following characteristics of the luxury market:

1. Scarcity: I have it and others don’t
   Consumers care more about what they like, or buy items that are less common in the market.
2. Prescience: I know now, and others will know later

Consumers get satisfaction when they are one step ahead of others to buy items or learn about fashion.

3. Platform’s property: Birds of a feather flock together

Consumers pay more attention to whether the purchase channels are trendy, unique, and tasteful.

These three characteristics are unique to the luxury sector and usually are not found in comprehensive e-commerce companies like Tmall and JD.com, and they cannot be achieved in a short period through rapid investments. But big companies have their own advantages. They are better at operating in the mass market, have a strong user base, and can also use their data and platform advantages to provide diverse products or promotional offers.

Key Trends in Luxury E-commerce: Data Driven and Digitalization

From the perspective of the logistics supply chain, in recent years, the domestic e-commerce market, including luxury e-commerce, has the following trends: 

1. Large promotional activities like the Double 11 Festival have a lengthened cycle. It started at three to five days and has gradually lengthened to several weeks or even one month. The benefit is that the pressure on logistics and supply chains can be more spread out, bringing a better experience to customers.
2. Customer data is used to better predict peaks in demand. By analyzing the customer data stored in the system, including those on purchase habits, behaviors, and promotional activities, e-commerce companies prepare for certain categories with high gross merchandise value (GMV) and order volume before large-scale activities to ensure timely delivery and provide customers with a fast and pleasant shopping experience.
3. Environmental protection and sustainable development takes root. This concept is manifested in the choice of packaging materials and shipping methods by the major platforms and brands.

In addition, major platforms and brands attach great importance to digital innovation, which is an important means to attract young consumers. Luxury brands are increasing their investments in digital marketing, and at the same time making targeted investments according to some trending behaviors of young consumers, such as augmented reality (AR) fitting for clothes and shoes, collaborating with e-sports to launch virtual goods and blind boxes, etc.

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About the Author

Zhang Peng is the former Director of Operations of Farfetch in the Greater China Region. He has over 15 years of experience in retail, logistics, and operations in the luxury and fashion sectors, specializing in warehouse management, logistics, and transportation, including experience in online and offline multichannel operations. From 2018 to February 2020, he served as the Director of Operations of Farfetch in the Greater China Region, where his main responsibilities included managing orders, logistics, and operations and inventory; ensuring logistics efficiency, compliance standards, and optimal consumer experience; developing new operational projects based on pricing structure, duty-free policies, and consumer behavior; and managing local warehouses and supply chains in China, etc. Previously, he served as Director of Logistics Supply Chain and Consumer Services at Under Armour and ASOS, and as Senior Logistics Manager at LVMH Fashion Group.

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This article is adapted from the GLG teleconference “Luxury E-commerce in China: Digitalization and New Competition.” Please contact us if you would like to view the full text of the teleconference or to talk with Zhang Peng or any of the more than 900,000 experts in the GLG expert pool.