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Chinese e-luxury market to grow to RMB 45.3 billion by 2015

The Chinese e-luxury market, which grew by 71 per cent in 2012 to clock Renminbi (RMB) 18.9 billion, is likely to grow by 43 per cent to be a RMB 27 billion market, according to a white paper released by Observer Solutions, a boutique China market research and advisory firm. The online luxury market in China is expected to be worth RMB 45.3 billion by 2015.

China became the world’s largest consumer of luxury goods in 2012. Likewise, the nation is already on track to surpass United States to become the largest e-commerce market based on market share in 2013, and it is already home to the world’s largest online shopper population with 242 million – equivalent to roughly 73 per cent of the US population.

Furthermore, in addition to everyday purchases like clothing, cosmetics and books, Chinese online shoppers have already demonstrated that they are willing to make ‘big-ticket’ purchases online such as automobiles. According to the white paper, retail e-commerce sales reached RMB 1300 billion (about USD 209 billion) in 2012, accounting for 6.1 per cent of China’s total retail sales.

In 2012, the average Chinese online consumer spent RMB 5,203, an increase of 25 per cent over 2011. Average frequency of online purchases also increased dramatically, to 18 purchases every six months in 2012 from 3.5 in 2011.

The white paper believes that retail infrastructure in lower-tier regions cannot meet the standards of luxury experience stores. On the other hand, penetration and competitiveness of luxury brands in China’s 1st and 2nd tier cities are already high, and there is still huge unmet demand from consumers in lower-tier cities. E-commerce is a more flexible and cost-efficient approach for reaching new consumers in remote areas of China. Thus, the online channel is the only viable way to reach consumers in the Tier-II and III regions.

Luxury brands tend to be conservative when it comes to selling online. They fear e-commerce will tarnish brand image and disrupt the delicate balance between short-term sales growth and artificial product scarcity. The white paper warns that by ignoring the potential of their house-owned online channels, luxury brands create opportunity for unauthorised competitor channels, which can damage brand image and distribution control.

An official online presence is critical to effective brand management in China, the white paper says.

Contrary to popular perception that Chinese consumers are not willing to buy luxury goods online, an Observer Solutions survey found out that nearly 70 per cent of Chinese consumers are open to luxury shopping online.

What prevents consumers from actually shopping for luxury online are concerns about product authenticity and quality. Nearly 50 per cent of Chinese consumers worry that the luxury products they find online are not genuine merchandise.

Due to China’s exorbitant tariffs, the price of luxury goods in mainland China is on average one-third higher than the price of the same products in the US or Europe. This differential bred opportunity for low-overhead middlemen. For instance, as early as 2005, groups of Chinese individual sellers began purchasing luxury products overseas for resale on small stores hosted by Taobao.com. This informal market is still thriving. Since 2010, dozens of vertical B2C luxury shopping sites have emerged, and many, such as Vipshop and ihush, have become household names. JD, the country’s second largest online shopping site, has since opened its coutre-oriented 360Top site.

Despite the risks associated with product authenticity and quality, what drives luxury consumers to shop online is price differential. Nearly 70 per cent of consumers surveyed by Observer Solutions quoted ‘Cheaper than brand storefronts’ as the reason for shopping online for luxury brands.

Nearly 58 per cent felt that online helped them with ‘greater product selection and access to information’ that helped them enhance their shopping experience.

Twenty seven per cent of them surveyed thought that the luxury brands were only available online; and 23 per cent of them went shopping online for luxury brands because ‘no brick-and-mortar locations’ were nearby.

In spite of the tremendous opportunities for luxury brands online, brands face barriers to entry, as Chinese consumers need assurance that the products they buy online will be of the highest quality and authenticity. Luxury brands, according to the white paper should move for short-term growth by partnering with a reputable third-party luxury e-commerce platform, while also beginning to establish a branded online presence for long-term success, which could take much longer than a year to build a reputable brand online in China.

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