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Why aren’t luxury goods selling online in China?

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Luxury goods sales growth has centered on China for some time, so it's surprising how underdeveloped Chinese online luxury shopping platforms are. Few brands offer a compelling experience.

"In the broad sense of luxury goods, there is not yet a brand aggressively pursuing online sales in China," said Jiaqi Ding, an e-commerce analyst with iResearch, a leading online market research company in China. Currently luxury brands are still at the toe-dipping stage in Chinese e-commerce.

In early 2011 international fashion retailers Neiman Marcus, Net-a-Porter, and YOOX ( YXOXF , quote ) all took the dive, either cooperating with established Chinese platforms, launching their own Chinese sites, or setting up an independent online store. This May department store Macy's ( M , quote ) invested $15 million in Jiapin.com. Neiman Marcus previously invested $28 million in Glamour Sales.

"In some ways the opportunities seem to be like the perfect storm. You've got luxury goods sales increasing rapidly in China, you've got e-commerce sales increasing rapidly in China, but there are a few factors that are impeding the growth of luxury e-commerce in China," said Zia Daniell Wigder, vice president and research director at Forrester Research.

While China's online security has been greatly strengthened, the march towards an e-commerce market is not a smooth one. Counterfeit concerns, poor service quality, and price competitiveness plague the few brands that have entered China's burgeoning online luxury goods market.

Online sales of luxury goods make up a miserly 3% of total Chinese sales, compared to 12% in the United States according to Boston Consulting. While online retail sales are expected to triple to more than $360 billion by 2015, luxury goods are only expected to be a small fraction of that.

The foremost challenge is the perception that online is for discounted products. The most popular online retail platforms in China offer discount services like Gilt and Rue La La, where shoppers visit to scoop bargains. Brands opening their own online stores find full-priced items hard to attract eye balls.

Neiman Marcus' partnership with Glamour Sales is one such effort. It's a membership-based flash sale site offering name brand clothing and accessories by everyone from Tom Ford and Moschino, to foreign cosmetics brands Chinese consumers are not necessarily familiar with, such as Korres.

Many affluent upper middle class Chinese shoppers can travel internationally and purchase the same luxury goods at much lower prices compared with in China. For LVMH ( LVMUY , quote ) brands the price difference can be as high as 47%, a premium Chinese consumers are unwilling to pay given abundant alternatives.

The Global Buy service of the Taobao website, where independent sellers serving as purchasing agents buy overseas products and ship them to Chinese buyers is expected to grow by 30% to ¥20 billion ($3.1 billion).

Within the Chinese online luxury goods market, counterfeits abound. Only a few luxury goods brands such as Armani, Cartier, and Dunhill have direct selling sites. There are reports over 90% of Chinese online luxury goods sales are unauthorized, making concerns over authentication another serious challenge.

Many do emphasize authentication and offer quality guarantees. But a remark by Hermes CEO Patrick Thomas in June didn't help, stating that as many as 80% of Hermes products purchased online in China are counterfeit. A bold accusation elsewhere, but quite believable in China, a country with a reputation for counterfeiting and piracy.

The brief marriage of Coach and LVMH's Benefit Cosmetics with Taobao's Tmall is indicative of the challenges. Coach opened its first online flagship store on Tmall last December and shut down after one month's trial. While the reasons behind Coach's exit are unknown, it was obviously not a huge success.

"Some luxuries brands are concerned, because they don't want to be the first ones necessarily (to experiment with Tmall), particularly if they feel they are going to be competing with some lower-cost sellers there -- they want to make sure that they are maintaining all aspects of their brands," says Wigder.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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