Chinese Luxury Online Retailers Woo Venture Capitalists

Luxury online stores are doing very well in China. The Chinese luxury market is on a quick growth path, which bodes well for luxury retail websites. However, the expanding market has given rise to numerous such e-commerce stores that specialize in luxury goods and competition is fierce. The only way for online luxury retailers to outstrip their nearest rivals is by going in for capital infusions. Thus, venture capitalists have entered the fray and are pushing money into luxury online stores to help them reach the top of the pack.

A year ago, this was unheard of in the luxury e-commerce sector. But of late, increasing numbers of companies are wooing venture capitalists for capital infusions. Fifth Avenue Globe Inc., China’s first luxury online retailer, jumped on to the venture capital bandwagon in June this year. This marks a first for the company that has been in business since 1 January 2009. Fifth Avenue Globe Inc., sources products from over 200 luxury goods agents. The firm has a special deal with Versace involving discounts of up to 70 percent. But in an increasingly competitive Chinese luxury market, this may no longer be enough.

These days, luxury goods are available online at discounted prices from various sources. Luxury brands, sales agents and malls offer high discounts on luxury goods ranging from bags and shoes to apparel and more. How do luxury online retailers ensure that they stand apart from other online sellers of luxury goods? One tactic is “hunger marketing”. Under this system, luxury retail websites add exclusivity to their products by either selling to members only or limiting the availability (whether through time or quantity) of products. In the case of popular products, the online retailer is able to maintain high prices, thereby increasing profits.

This tactic is essential for the business success of online retailers. Retail outlets and shopping malls only provide out-of-date items. Hence, luxury online stores have to create direct ties with brands and designers. But in order to build those ties, a luxury retail website has to increase its bargaining power. At this moment, that can be easily achieved through venture capital.

In recent months, several luxury online stores have received capital infusions. Members-only site got its third round of capital on 27 July, a sum amounting to $50 million. The money will be invested in expansion of product sources and improving customer service.

A ChinaVenture report found that 2010 saw a dozen rounds of financing worth $108 million. 2011 has already crossed that barrier with 12 rounds worth $283 million. The turnover of luxury online stores is expected to more than double to $310 million over the next couple of years. The question is, will venture capitalists help or harm the business. Most investors look for performance requirements when investing in a company. An impatient investor could persuade online luxury retailers to drop prices in order to meet performance requirements. This could give rise to price wars, which could prove detrimental to the business. This is the reason why some luxury online retailers are being cautious before choosing investors. Because even though they need to extra funds, they require venture capitalists that would be committed to consistent, long-term growth for the businesses.

Via: China Daily

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