Will Alibaba steal Hong Kong's luxury lustre?

Alibaba is tapping more affluent households with its new Luxury Pavilion for high-end brands.

Hong Kong’s enduring appeal as the go-to destination for affluent luxury shoppers in

Asia is facing a tough competition as e-commerce giant Alibaba forays into luxury sales with Luxury Pavillion. In August, Alibaba unveiled the Luxury Pavilion, its dedicated portal for luxury brands like Burberry, Hugo Boss, Maserati, Guerlain and Zenith. This has been viewed by analysts as a smart move for the e-commerce giant and, more worryingly for the Hong Kong economy, a potential blow to tourist-driven luxury retail sales.

“Alibaba’s Luxury Pavilion is expected to open later this year. When it does, Hong Kong will have to brace for its detrimental impact on tourist arrivals,” said Josh Holmes, consumer analyst at BMI Research. Luxury customers will likely find the idea of shopping at the comfort of their homes more appealing especially as the government cracks down on the “Daigou” trend or hiring personal shoppers to buy Hong Kong goods and luxury brands begin to harmonise price differences across global markets.

“State officials have stepped up airport checks, imposing taxes, and even smuggling charges, on luxuries brought into China by travellers, whilst at the same time cutting import duties on luxury goods brought in via official channels. This, combined with price harmonisation strategies by major luxury brands, has reduced the incentive of luxury shopping trips to Hong Kong by Chinese tourists,” said Holmes.

The stakes are high for the luxury market. By 2025, 7.6 million Chinese households will represent RMB1t (US$151b) in global luxury sales, doubling from 2016, and equivalent to the combined market size of the US, UK, France, Italy and Japan in 2016.

Online luxury wars

Whilst Hong Kong remains the top destination for luxury purchase in 2017 according to a McKinsey report, the breadth of its online competitors are rising. Aside from Alibaba’s Luxury Pavilion, in June, luxury conglomerate LVMH also launched an e-commerce platform in more than 70 countries globally called 24 Sevres, offering over 150 luxury labels, like Louis Vuitton, Dior and Fendi. Smaller independent brands, who do not possess the financial resources or economies of scale to offer their own online platform, will look to partner with luxury e-commerce players such as Farfetch.

To win the brewing online luxury war, it is important to understand the buying behavior of wealthy Chinese consumers. Lambert Bu, partner at McKinsey & Company, said quality and authenticity of purchases are two of the top considerations for wealthy Chinese shoppers when selecting where they buy. They also remain price sensitive despite their increasing affluence, which explains their willingness to travel and or hire personal shoppers if price discrepancies between Mainland China and overseas markets are big enough.

“This need for reassurance and competitive pricing means that wealthy Chinese luxury consumers tend to shop either at official channels, such as department stores or brand stores, or at duty free shops,” said Bu.

In contrast, online purchases of luxury have yet to take-off, with only 7% of luxury sales occurring in official online channels, although there is a window of opportunity for smarter brands and retailers.

“We don’t expect this situation to change much in the near future,” said Bu of this hesitance to patronise official luxury online channels, citing a recent survey where only 16% of wealthy Chinese luxury consumers expect to increase their online luxury spending in 2017.

“Nevertheless, as luxury brands further develop ‘O2O’ initiatives that bridge the online and offline worlds into a seamless experience, it is likely that more luxury sales will be conducted online,” he added.

Holmes echoed this assessment, “Luxury brands that are successful in e-commerce will be those that combine the online and offline worlds, maintaining the level of exclusivity, personalisation and price point traditionally associated with luxury purchases.”

For smaller independent brands that do not have the financial resources or economies of scale to create their own online platform, a good option would be partner with luxury e-commerce players such as Farfetch and Alibaba’s Luxury Pavilion.