In 2022, luxury e-commerce platform Secoo Holding Ltd filed for bankruptcy in Beijing. After 14 years of operations, this was a disappointing end to the largest luxury marketplace in the world’s largest luxury market. The company (founded by Li Rixue in 2008) grew out of a second-hand handbag shop. It went digital and found itself well-positioned against the rapidly rising luxury purchases of Chinese consumers. It went public to much acclaim in 2017. And filed for bankruptcy 4 years later.
I was optimistic about Secoo for a long time. I like marketplace business models. I especially like those that are naturally cross-border, such as in luxury products. The merchants are scattered around Japan, Europe and the US. And I liked how luxury was moving quickly into “new retail” / online-merge-offline. The luxury experience has a lot of interesting dimensions that can be digitized. One of my first podcasts (#38) was about Secoo.
Secoo’s collapse in 2022 obviously had a lot to do with Covid and its impact on consumption in China. But it was also about the ongoing struggle to move fashion and luxury into ecommerce. And Secoo wasn’t the only company struggling. JD and Alibaba have also been focusing on the sector and struggling for years.
So I thought today I would update my assessment of the sector and these businesses. Which starts back in 2017 when I visited JD’s big new luxury initiative in China, which was called Toplife.
My 2017 Meeting with Xia Ding, the President of JD Fashion / Toplife
I had traveled to JD’s headquarters in Beijing to look at their major new initiatives (fashion was one). I ended up in the board room talking with the new head of JD Fashion, Xia Ding. She was a really interesting woman, seemingly equally comfortable in both finance and fashion. And she was also equally comfortable in China and the United States. Prior to JD, she worked at AC Nielsen and prior to that she had been at American Apparel (China and the US I believe). You can read an article about her here.
We talked about JD’s big push into fashion. This included an investment and strategic partnership with Farfetch (a cross-border luxury e-commerce site) and the launch of Toplife, their new luxury e-tailer. Toplife was an interesting idea. It was a luxury ecommerce site and mobile app – but with a high-end delivery service. You could buy a Prada bag on your phone and then a handsome man would deliver it wearing a suit and white gloves. He would also show up driving a cool delivery car. Basically, it was an attempt to add some aspect of the luxury experience to buying things on a smartphone.
Back then, and still today, luxury is one of the next big opportunities in Chinese e-commerce. The spending is huge. And it has important spill-over benefits for the rest of JD. Fashion is mostly about women shoppers and that is a valuable group in general. JD has historically been strong in electronics.
But chatting with Xia Ding, I became more and more optimistic about the space. Here are my 3 take-aways from our discussion.
But first a disclaimer.
Fashion and luxury are areas that have always given me trouble. Years ago, I worked on a struggling Saks Fifth Avenue store and was both impressed and baffled by the business. The cash flow was impressive but, as someone with no fashion sense, the source was a mystery to me. I simply couldn’t tell why one bag was worth $500 and another was worth $50. Merchandising and sales process (especially relationships with HNWIs) are the engine of luxury and they are things I have trouble predicting.
Take Away 1: JD is likely the best-positioned for luxury.
We see multiple players going after luxury meets ecommerce. There are the major platforms (Alibaba, JD). There are the specialty platforms (Secoo, Farfetch). And there are the luxury brands themselves, which all have major digital initiatives (mostly in marketing, content and social media). But +50% of luxury purchases globally are often by Chinese consumers. And the luxury brands and artisans are scattered across the US, Europe and Japan. So the natural winners in this space are the marketplace platforms that can aggregate all the brands and consumers in one place. And can do so cross-border.
JD, which is a marketplace and an online retailer, is arguably in the best positioned for the opportunity. It has the marketplace which means scale and global reach. But they are also a retailer. And they have far more end-to-end control of the user experience than a marketplace. This is particularly important to luxury brands who don’t want to be just another thumbnail in a massive marketplace.
Imagine you are a luxury brand based in Milan (say Prada). This is how China looks to you.
- Chinese consumers have emerged as the biggest luxury buyers globally. And they are the biggest source of global growth going forward.
- Chinese consumers are also some of the most enthusiastic users of smartphones and e-commerce globally. Reaching Chinese consumers means reaching their smartphones.
- Retail in China is also particularly innovative. Things are moving rapidly online and there is a lot of OMO experimentation.
So that’s great. Except…
- Luxury brands do not want to live on smartphones. Too much of their value and brand equity depends on a premium shopping experience. There is a lot of psychology and trend setting involved. And recreating all that on a smartphone is difficult (probably impossible). Especially in standardized marketplaces selling everything from handbags to bicycles. Luxury brands don’t particularly want to be listed next to things like books and pet food.
- And while most luxury brands are international, most are also late to the game in China. It’s a very competitive market. And it just tends to be confusing for foreigners. Plus, it’s rife with knock-offs of luxury products (many with quite good quality).
So how does Prada solve this problem? And keep in mind, Prada is a big multinational. This situation is much more difficult for smaller brands.
Enter JD, which has +600M active Chinese consumers (2022), national logistics and delivery capabilities and a brand synonymous with authentic, quality goods. That’s a good partner.
Plus JD has announced a new fashion initiative (2017) so luxury brands can customize and control their presence online (i.e., Toplife). They also have an investment and strategic partnership with Farfetch, the cross-border e-commerce site that can connect smaller brands from Europe with Chinese consumers.
That was the picture in 2017 and I was pretty optimistic. My take at the time was that the stars had aligned and JD Fashion had found itself exceptionally well-positioned against the future of global luxury.
Things actually went downhill, which I will detail. But I still think JD is the best positioned for luxury ecommerce today.
Take-Away 2: “Direct retail plus marketplace” is a good model for online luxury.
Farfetch is a marketplace business model, with a not huge presence in China. They are much stronger in Europe and the US. Toplife was also launched as a marketplace model. And the strategic partnership meant these two platforms had a fairly impressive ability to connect global brands with Chinese consumers.
They gave the brands greater ability to design and control their online stores. They gave them the choice to do regular delivery or white glove service (JD Luxury Express). They combined two marketplaces and supported them with top tier logistics and delivery capabilities. It was a great cross-border platform approach.
Additionally, JD Luxury (shoes, eyewear, clothes, jackets) also operates as direct online retailer, similar to most of JD’s businesses historically. So you have a combined “direct plus 2 marketplaces” approach for domestic and cross-border luxury. That’s great.
Here are the problems this model has to solve.
- The value created by a marketplace platform is in its aggregation of customers and merchants. Plus, it decreases frictional costs and enables transactions. And cross-border luxury transactions have far greater frictional costs to attack with this model. It is a lot harder to enable a small luxury brand in Germany to sell in Beijing than for a book seller in Shanghai.
- There are also more sales and logistics complexities in luxury and fashion. The sales process is more emotional and experiential. The marketing is much more complicated (again, compared to books). Returns can be a big problem, especially in apparel. And so on.
These are some of the reasons ecommerce companies have avoided this sector for so long.
However, a “direct retail plus marketplace” model solves most of these problems. And create some real advantages versus other models. If you are 2x larger than a competitor as an direct online retailer, you can generally outspend your competitor on fixed costs like logistics and sales / marketing. That’s a typical advantage of scale. And you can directly control the customer experience at every touch point. Marketplaces can’t really do this.
However, large marketplaces can usually outspend your rivals in areas like logistics and technology. But JD’s big marketplace lets it do this as well. Their combined model really has the best of both worlds. They can control and customize the luxury experience and can still outspend virtually everyone (except Alibaba). I still think this is the best model for this space.
My Visit to Toplife
Before take-away #3, let me talk about my visit to the Toplife offices and logistics facility.
After the meetings at the Beijing headquarters, me and some other visitors took a train to Shanghai. It was a pretty small operation.
Arriving at the Toplife offices
The first thing I noticed at Toplife was the line of funky cars for their white glove delivery service. Sending well-dressed gentlemen with white gloves around China in funky cars was a cool idea and did get a lot of media attention. The sporty cars were a definite contrast to the typical scooter and trike people driving around with packages.
Entering the Toplife offices, it was like entering a different world. Far different than any other ecommerce business I have visited. The lounge was stylish, with fashion videos playing on big screens. Photos of models and runway shows were everywhere. The inventory was kept in separate facilities. The purses, necklaces and such were all in sealed, dust and temperature controlled rooms. To enter, you needed protective wraps for your shoes. And once in the inventory area, I was immediately struck by how much smaller the number of SKUs was (around 10,000 total). For all the talk about logistics in luxury, it was a fairly empty warehouse.
That’s the kind of business I like. Lots of consumer power but the operations are pretty minimal. It just screams big margins and good economics (not unlike the Saks Fifth Avenue stores). The key is to master the complicated sales and merchandising aspects. Which leads me to my last take-away.
Take Away 3: The OMO customer experience in luxury is the big question and opportunity.
If you move sales out of luxurious and carefully designed physical stores (like Prada and Gucci stores in top malls), you lose a lot of the feeling associated with the brand and the shopping experience. A box arriving just feels very different than shopping in a top mall and talking to highly trained and charismatic staff. And, as mentioned, there isn’t that much operationally behind the scenes. That means it is all about what happens on the smartphone and what happens in the physical locations.
It turns out you can really do a lot on the smartphones. The big luxury brands have been fantastic at short video, influencer marketing and digital marketing. They are now super active on WeChat and Weibo in China. They went from doing no digital marketing to being huge buyers on WeChat. And they have been really innovative with influencers. They fly influencers them out to their fashion shows where the influencers walk the runways. They then issue challenges to their followers to recreate their walks (generating tens of thousands of additional videos). And all of that content is now on smartphones.
But the big challenge is the physical stores. How do you digitize that experience? How do you combine that with the online activities. What will ultimately be consumer OMO experience in luxury? I don’t think anyone has cracked it yet. But I think it will emerge from China.
Ok. Those are my main points. Let me summarize what ended up happening in this space in China – and with JD Fashion.
- As mentioned, Secoo went bankrupt in 2022.
- JD has also pretty much exited the space (for now). Xia Ding exited. And JD ended up selling JD Fashion / Toplife to Farfetch.
- Farfetch subsequently did a partnership with Alibaba in fashion.
- As mentioned, the major luxury brands emerged as aggressive innovators in digital. They have been really aggressive in social media, digital marketing and pretty much everything on the content side. However, most of the luxury sales are still happening in the stores, not online. Luxury consumers are very active online but are still doing most all their purchasing in stores.
Ok. That’s about where I am in my thinking. I think it’s a great space. But it didn’t really work out like I thought it would.
The restaurant in the headquarters has JD chopsticks.
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