3/07/14

China’s anticorruption campaign forces a luxury goods e-retailer to adapt

5Lux.com introduces more mid-tier brands and courts its most loyal customers as luxury goods sales cool off.

Frank Tong , Senior editor, China

Since assuming China’s presidency a year ago, Xi Jinping has cracked down on corrupt practices, such as businessmen bribing government officials with expensive watches. That’s reduced the demand for luxury goods and hurt sales for online retailers like 5lux.com.

“The new government policy depressed the demands for upscale products,” says 5Lux.com founder and CEO Sophie Sun. “The high-end watch market in China actually declined in 2013.”

Luxury goods sales in China had been growing at 7-15% annually, but slowed to only 2% in 2013, according to consulting firm McKinsey. For 5lux.com, sales grew by about 20% in 2013, much slower than the roughly 50% growth of previous years, Sun says.

5lux.com, which launched in 2009, has responded by adding to its selection of high-end brands, such as Louis Vuitton and Prada, more moderately priced products from names such as Diesel and Hugo Boss. The average price of an item on the e-commerce site has fallen as a result from $500 to $350, Sun says.

She says 5lux.com is authorized to sell products from more than 300 brands, including Chanel, Prada and Coach. As an authorized reseller, the e-retailer has to pay the hefty customs duties and sales taxes on imported luxury goods.

However, there is a thriving “grey market” in China, of products arriving from abroad in ways that avoid import fees and taxes. It’s called “haitao,” which translates as “buying from overseas”.

“In order to save up to 50% of the product price from customs duties and sales tax, or to access some products only available from the overseas market, Chinese consumers like to buy directly from an overseas site and ask their overseas friends or small agents to ship the package back to them,” Sun tells Internet Retailer.

This grey market size reached $3.3 billion in 2012 and is doubling each year, according to a research from Alibaba Group, which operates the two largest online marketplaces in China, Taobao and Tmall. 5lux.com sells on Tmall, and gets about 10% of its revenue from that storefront, but Tmall customers are particularly intent on obtaining merchandise at a discount, Sun says.

To address these challenges, Sun says 5Lux will focus more on serving customers who care more about service quality, such as fast delivery, than those who only seek low prices. Sun says the best way for 5Lux to attract new customers is word-of-mouth marketing and that 5Lux will invest more smartphone apps, e-mail and social media marketing as it seeks to interact more with its loyalty customers in 2014.

5Lux.com ranks No. 72 in the new released Internet Retailer China 500.

Topics:

5Lux.com, China 500, China anticorruption, Grey market, luxury goods in China, luxury watches, Sophie Sun

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