TO TMALL OR NOT TO TMALL

TO TMALL OR NOT TO TMALL

19 May, 2015 - Uncategorised

The topic of conversation for many luxury brands for some time now has been Tmall, or more broadly,tmall-new-logo2 China’s booming e-commerce industry and how to get in on the action. For those unfamiliar, Tmall is China’s behemoth of a B2C e-commerce platform akin to Amazon. Along with sister sites Alibaba (B2B e-commerce) and Tabao (C2C & B2C e-commerce similar to eBay), the three sites are part of Chinese internet giant Alibaba Group and collectively represent a whopping 80% of China’s annual US$550 billion worth of e-commerce industry. Tmall alone has over 350 million active buyers which is 60% market penetration of China internet users.

After western attempts to crack the China e-commerce market all failed to varying degrees (eBay, Amazon, Net-a-porter and ASOS to name but a few), many brands have been quick to jump onto the Tmall bandwagon as a route-to-market for China domestic sales. Popular brands such as Clinique, Nike, Converse and Gap all have Tmall “virtual store fronts” on the site and an increasing number of higher end luxury brands have joined including Coach, Estee Lauder, L’Occitane, and even Burberry.

(Images from TMall)

However, with more than two thirds of Chinese luxury sales occurring outside of China, what can luxury brands expect from Tmall? Are there any risks? From a sales perspective there is very little risk, aside from an initial setup fee ranging from as little as US$8,000 to US$24,000, annual service fee of approximately US$9,000, and commission on sales paid to Tmall. The actual investment required to sell products in China via Tmall is much simpler and more economical then having to set up a trading entity in China, open stores, pay rent, pay salaries, ship wholesale goods, warehouse costs etc. So what’s the catch?

The biggest concern for medium sized independent brands, especially those not already trading in China (or in popular shopping destinations such as Hong Kong and South Korea), is brand perception. Though Tmall takes great effort to protect a brand’s image on the site with various customisable store front options available (for a fee). Just like Amazon, one can essentially buy anything on Tmall be it baby milk formula, tooth brushes or batteries alongside luxury goods. Without a strong pre-existing high-value brand recognition, brands run the risk of devaluing their brand from the moment that they enter the China market.

1381795902_00318100Larger  name brands don’t need to worry so much about this, especially if they already have a physical presence in China and their Tmall e-commerce offering represents just an extension of their existing China product offerings, often limited to lower price point and mass market items. Higher price point items run the risk of being undercut by the global grey market sales agent trade, known in Chinese as “daigou”. So prolific is the industry that global transactions by “daigou”represent 15% of Chinese global luxury sales. The catch twenty two is then that even if your brand is highly sought after in China, is it sought after enough by Chinese residents to cough up the extra 20%-30% in import taxes? Or would they rather enlist the services of a “daigou”, or even plan a holiday abroad and make the purchase physically themselves.

(Images from n.cztv.com)

Third party sellers on Tmall and sister site Taobao selling brand name products at heavy discounts also threaten to undercut the sales from official brand storefronts. Which has led to an expectation of discounts on Tmall by Chinese consumers. Estee Lauder products can be found discounted by as much as 50% on the site. This lead to LVMH brand Benefit Cosmetics and Japanese retailer Zozotown shutting down their Tmall stores. Christian Dior products are also prolific on Tmall via third party retailers, but the brand itself has never authorised such sales. Whilst Alibaba Group is actively attempting to tackle these issues, little progress has been achieved and the company is facing even greater pressure to tackle the issue of counterfeit goods on Alibaba and Taobao. This has now even come to the point that Gucci owner Kering has recently brought a legal suit against Alibaba Group after years of failed attempts to address the issue.

All-companies-in-Alibaba-Group

From this one can see that simply selling products on Tmall is not a golden ticket to Chinese consumer sales and is riddled with all sorts of China specific challenges and long-term brand implications. Successful use of Tmall retailing by brands are those that have used it as a touch-point extension of an extensive existing diversified retail network strategy, rather than a route-market strategy that smaller brands are attempting. Smaller brands should therefore approach Tmall with caution, weigh up the cost-benefit analysis between China sales and Chinese brand perception. They should focus on maintaining existing levels of international sales from China outbound tourists and market the brand strategically before jumping into the world’s largest consumer marketplace, regardless of whether that be through ecommerce or more traditional brick and mortar routes.