China syndrome 2 - why luxury retail consumers in China are likely to find US tariff threats far-fetched

Profile picture for user slauchlan By Stuart Lauchlan May 20, 2019
Summary:
Cracking the luxury e-commerce retail market in China is a task that will trump US tariffs, reckons Farfetch.

A theme among retail e-commerce companies over the past year or so has been the importance of cracking two major international markets, India and China. The former has home-grown issues of its own that non-domestic providers are watching with interest/concern; as noted by Walmart and Macy’s, the latter is currently on the front line of President Trump’s enthusiasm for a trade war with China.

But for those firms, the issue is around the potential impact of tariffs due to their dependency on sourcing from China. For others, pushing into a market which Alibaba execs last week pitched as being in transition to a consumption-based and digital-enabled economy, it’s more a case of how souring relations between Washington and Beijing might slow-down the opening up of a formerly closed market.

The allure of China is particularly strong at the high-end of the retail e-commerce industry, an area of the market that as we’ve noted on many occasions has been among the most laggardly in Western economies., But the rise of the new generation of Chinese middle-class consumers leaves the country full of potential for the taking.

According to McKinsey, in 2018 Chinese shoppers accounted for over a third of global spend on luxury items. But if the Chinese economy were to be hurt in the way that Trump boasts it will as a result of his tariffs - a far from certain hypothesis, of course - then what’s the impact on non-Chinese e-commerce firms?

One thing that’s certain, according to Jose Neves, CEO of luxury retail e-tailer, is that the long-term Eastern promise remains undiluted by early morning Twitter-storms from the Oval Office:

I think China remains an absolutely strategic priority for all the brands in the industry. It is the fastest growing luxury goods market accounting for something like 85% of the of the growth in the industry last year. As such, brands know that they need to crack China and they need to crack China digitally. As we all know, the Chinese consumer in terms of digital payments and mobile payments is well ahead of the West.

With that in mind, he adds:

We remain more enthusiastic than ever. There is a great opportunity ahead of us to create the premier luxury gateway to China. According to Bain, China will represent about 46% of the luxury market by 2025, up from 33% in 2018, representing approximately $80 billion of incremental spend over the next six years. Bain also estimates that half of those purchases will be made domestically in mainland China.

Consumers 

The Chinese target demographic is specific, says Neves: 

Our Chinese consumers very sophisticated. The age is younger, which is really interesting. Last time I checked, I believe, around 29 years old on average, so we are appealing to the millennial and even Generation Z cohort of customers. This is incredibly powerful, because this is exactly the customers that brands must capture. We’re being seen by our brand partners as a great media channel and obviously sales channel to penetrate the new Chinese luxury customer.

One of Farfetch’s pitches to luxury brands has been to help them to crack the Chinese market, he adds, something that’s been a major focus of investment for the past four years, with tangible outcomes, including in-country data centers, local teams for data science, engineering and product management and what Naves boasts is “unrivalled logistics capabilities, able to both cross border in a record lead times consistently, and also domestic delivery. . The firm has also acquired CuriosityChina which powers the WeChat channel for 80 luxury brands.

It is, he argues, a package of offerings that positions it as the best way for non-Chinese luxury brands to get over the Great Wall:

I think this is a 360 degree gateway to China and the beauty of it is that it's a turnkey solution. So once you have one integration with Farfetch, you are live in China. That's the case for the 3000 brands we have on the marketplace. They are now able to The Chinese customer directly through Farfetch.

That ‘gateway’ opened up further earlier this year when Farfetch expanded its relationship with China’s largest retailer JD.com  to roll the latter’s TopLife offering into the former’s platform, while granting Farfetch ‘Level 1’ entry point on the JD.com app, which the two companies say gives JD.com’s 300 million customers “instant access to more than 3,000 brands via Farfetch’s network of more than 1,000 luxury brand and boutique partners.” Neves explains:

All the JD app users if they’re searching for a particular brand that we have, we will be available to the entire population of users, all the 300 million users. The level one button we have requested with JD [will] be shown to customers that the data science engines [show] that have high propensity to buy luxury. So we want to elevate the channel, obviously, very mindful of the positioning of our brands and in the industry…it will be the most powerful solution. So absolutely available to all 300 million users with a button visible when we know [people are] likely to be luxury shoppers…We now have unrivalled, technical and logistics capabilities that are very difficult to replicate, and delivering an excellent customer experience to our Chinese customers.

As for Trump’s trade war, Farfetch is confident that it’s insulated from negative exposure, says Neves:

From a trade perspective, 90% of our sales in China are coming [sourced] from Europe. Then there are other markets that are also not affected by these tariffs, like Middle East supply going to China, Austrian supply going to China. So the US is really a tiny fraction of our supply into China and from China to the US is zero literally. We have domestic supply in China, but that is just for the domestic market in mainland China. So from a pure trading perspective immaterial exposure, I personally believe that it's a very resilient market and that remains.

My take

A ‘keep calm and carry on’ assessment of the likely impact of the US tariffs that mirrors the confident stance of Alibaba last week. As noted then, the US consumer seems more likely to be the loser in this bit of making America great again than the Chinese consumer looking for somewhere to splurge his or her disposable income.