Once You Go Down the Wrong Path

Look here, here, here, even on our very own Technode, you can see a detailed description of the fall of Chinese luxury B2C. The high flying industry of yesteryear crashed and burned after several years of rapid growth. In this regard, it is better than the group-buying trend, which buckled almost as soon as it got started. But what’s devastating about the luxury B2Cs is that, almost everyone who was paying attention knows the business model was doomed right from the beginning.

The luxury B2Cs seem to share the vision and business model: China is rapidly becoming one of the biggest markets for luxury goods, and there is a large market untapped. The luxury B2Cs want to reach beyond the nouveau riche. By offering steep discounts to luxury goods, these sites hoped to allure the Silent Majority to splurge on LVs.

So basically, B2C sites will do what the Internet is good at, providing a democratizing experience and make a boatload of money doing good. This all sounds fine, except for one little glitch: this is not how the luxury goods business works.

Tod’s do not spend millions hiring the likes of Anne Hathaway to sell its product in shoes-for-less. While everyone is price conscious at some point, luxury brands usually don’t aim at the shoppers of 99 cent stores. So a person with the most rudimentary understanding of the luxury good business would know that these brands would do everything in their power to prop up the price of their goods.

That’s why famed American journalist James Fallows’ observation that there are no shoppers in Prada stores in China actually makes business sense: making profit is only part of the store’s function. Premiere brands need to have stores in the most exclusive part of the town even if the act itself loses money, because this is the only way to convince consumers the outrageous price of their goods make sense. Once the consumers buys into this logic, the brands can make money many times over.

That’s not to say luxury brands don’t give discount. But even when these brands are cutting price, they want to give off the appearance it is doing so as a special offer, thereby protecting the brands’ exclusive and high profile image.

This is something that Gilt grasped but most Chinese B2Cs didn’t. Gilt makes luxury brands’ discount seems exclusive, thereby enhancing the brands’ image even when it is actually offering a discount to consumers and getting rid of inventories for the brands. Chinese B2Cs, on the hand, emphasized cost saving. This act is almost sabotage against the brands’ efforts.

Therefore, it shouldn’t surprise anyone that no brands would provide these B2Cs with goods. Faced with this hurdle, the B2Cs had to resort to make individual purchases overseas, bring them back to China clandestinely, and then sell them on their sites. In essence, there is no different from individuals who buy from overseas then sell the goods in China, a trend that has been growing long before the B2Cs got started.

Of course, this is also a business model that cannot be scaled. In addition, this business model does not in any way enhance the capacities of the B2Cs. Without anything valuable and distinctive to offer to the brands, no brand will cooperate with B2Cs, and the B2Cs are forever stuck as very small time players. After all, once you go down the wrong path, there is no coming back.

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