HONG KONG -- They are not your typical deliverymen: Clad in black suits with ties and white gloves, they collect products from special warehouses controlled for temperature and humidity, then fan out across Beijing to deliver them by hand. They are taking the experience of shopping at a luxury boutique to consumers' front doors -- part of a strategy by big Chinese e-commerce companies to cater to the increasingly affluent Chinese.
JD.com and Alibaba Group Holding have widened their high-end offerings and paired them with premium service, in a sign of how competitive the business has become. JD.com together with Internet conglomerate Tencent Holdings said Dec. 18 it would invest $863 million in cash in China's apparel e-tailer Vipshop. The company hoped the move would "further extend the strong inroads that we have made with female shoppers, and will expand the breadth and reach of our fashion business," said JD.com Chief Executive Richard Liu Qiangdong.
Vipshop carries brands in household items to high-end designer fashion such as Salvatore Ferragamo, Versace and Lanvin. Its rival, Mei.com, operates on a similar platform but with greater focus on luxury brands. Mei.com was swept into the Alibaba stable in July 2015.
The intensifying retail war has pushed the two e-commerce conglomerates to launch sales platforms dedicated to luxury brands. JD.com in October set up the Toplife platform, following Alibaba's earlier launch of Luxury Pavilion that sells Burberry, Hugo Boss, Guerlain and La Mer.
True luxury experience (online)
But Chinese e-retailers are not the only players the two e-commerce giants need to watch out for. Prada on Dec. 21 launched its official website in China, following in the footsteps of Louis Vuitton, Dior and Gucci, all aiming to reach the consumers directly. These companies have incorporated their platforms with Tencent's messaging app WeChat and mobile payment service Alipay, operated by an Alibaba affiliate.
"Chinese consumers are hungry for a true luxury online shopping experience," said Belinda Chen, general manager at JD.com's fashion business. According to Chen, Toplife's sales performance so far has proven that Chinese e-shoppers "are willing to pay the full price and want to be sure that they are getting authenticity," referring to genuine goods.
The trend is especially apparent among the tech-savvy millennials who make up 16% of the population thanks to China's rising disposal income. Consultancy firm McKinsey & Company said that 38% of that population believed that expensive products were better, compared with 25% of the overall respondents. The report also revealed that 42% of the age group said that they were proud to be able to afford small luxury items to show they had good taste compared with 33% of respondents overall.
Across the world, Chinese consumers will drive the future of the luxury goods sector. McKinsey estimates that by 2025, 7.6 million Chinese households will purchase 1 trillion Chinese yuan ($150 billion) worth of luxury goods, which translates to 44% of global sales. Chinese consumers' spending in 2025 will be equivalent to that of the U.S., U.K., French, Italian and Japanese markets combined in 2016, McKinsey said.
Online sales of premium goods remain small, but the trend is steadily surging. Consulting company Bain & Company says online sales of luxury goods jumped by 24% in 2017 while wholesale channels only grew 3% in the same year compared with a year ago, and online sales of personal luxury goods is estimated to account for 25% of the market by 2025.
Jean-Claude Biver, president at LVMH's watch division that oversees the three brands Zenith, Tag Heuer, and Hublot said that Chinese consumers "have a better acceptance to buy luxury online." On Nov. 11, designated by China as Singles' Day and a day of retail discounts and promotions, it took only 15 minutes for Tag Heuer to surpass last year's sales on JD.com's platform. Although Tag Heuer and Zenith just started online sales in China and "currently only account 10% of our [total] sales, this percentage will increase every year," Biver added.
By collaborating with Chinese e-commerce conglomerates, high-end brands gain access to the massive trove of customer data owned by Alibaba and Tencent-backed JD.com. Alibaba boasts 529 million monthly active users while JD.com has existing 266 million customers plus users of Tencent's WeChat.
Jason Lee, a business analyst at China Market Research Group, said that Chinese consumers' willingness to shop online comes from what they perceive to be "stricter government policies in scrutinizing the products and supply chain."
Indeed, that reliance stretches even into cars. Earlier this year, Italian automaker Alfa Romeo sold 350 of its Giulia Milano models in merely 33 seconds on the Alibaba-owned platform Tmall. Last year, Maserati sold 100 of its Lavente SUV (priced at 999,800 yuan) in just 18 seconds on Tmall on Singles' Day which fell on Nov. 11.
Companies are also keen to continue to offer the experience of luxury shopping, such as personal assistants, to convey the idea of exclusiveness even for their online products. To cater to such needs, Alibaba invites some consumers to celebrity events, promotes limited editions online only, and customizes platforms with personalized recommendations. These "allow brands to deliver experiences and services typically reserved for shoppers offline," said Liu Xiuyun, general manager at the apparel unit of Tmall.
JD.com, on the other hand, provides next-day delivery to customers who buy luxury goods in six different cities at no extra charge, in addition to suited delivery men and customized platforms.
Promising but not explosive
Nonetheless, the development of the luxury online sector will not be explosive. A report by McKinsey in August showed that only 7% of Chinese luxury sales occur on official online channels. "We don't expect this situation to change much in the near future as only 16% of wealthy Chinese luxury consumers expect to increase their online luxury spending in 2017," it noted.
As a result, Chinese e-tail is seen by luxury brands as a tool to "build brand awareness instead of stimulating sales," said Tony Lau, managing director at Fung Omni Services, an e-commerce service provider in China.
China's notorious and thriving counterfeit market is another headache for luxury brands that want to enter the market. While China's trademark protection is increasingly sophisticated, counterfeiters are also becoming better at the game.
It is not rare for international brand owners to be denied entry to the Chinese market, or in the worst cases, face lawsuits by third parties in China that have preemptively registered those trademarks in the country.
Edward Chatterton, a lawyer at global law firm DLA Piper, also said that not every brand owners are aware of the rule that trademark protection in China lapses after three years of unuse. This means that counterfeiters can re-register those brands.
Nikkei staff writer Nikki Sun in Hong Kong contributed to this story.