3 Things I Learned about JD Fashion from President Xia Ding and Toplife (Pt 5 of 5)

This is the fifth in a series about my 3-4 days at JD’s facilities in Beijing and Shanghai – and from meetings with their management. In the previous articles, I discussed JD Logistics (here), their latest technology initiatives (here), their crazy growth (here) and their robotics lab (here). And I’ll be releasing a more serious article on their general strategy for "new retail" shortly.

But for this article, I wanted to talk about one of JD’s big initiatives this past year, which is in fashion.

Meeting with Xia Ding, President of JD Fashion.

In JD’s Beijing board room, we had a fascinating discussion with the new head of JD Fashion, Xia Ding. We talked about JD’s push into fashion, their recent acquisition of Farfetch (a cross-border luxury e-commerce site) and the October launch of Toplife, their new luxury e-tailer (with high-end delivery service with white gloves and really cool delivery cars).

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, a mystery to me. I simply couldn’t tell why one bag was worth $500 and another was worth $50. The merchandising and sales process (especially relationships with HNWIs) is the engine of luxury and are things I am not good at.

Ok. back my story.

Ms. Ding is a really interesting woman, seemingly equally comfortable in both finance and fashion. And these really are different worlds. She is also equally comfortable in China and the United States (North Carolina to be exact). Prior to JD, she worked at AC Nielsen and prior to that she was at American Apparel (China and the US I believe). You can read a recent article about her here.

Luxury is one of the next big battlegrounds in Chinese e-commerce right now - and the e-commerce leaders are moving rapidly into the space. It also has important spill-over benefits for the rest of JD. Fashion is mostly about women shoppers and this is a valuable group in general. JD fashion currently has about 1,000 associates.

Here are my lessons learned from the day.

Take Away 1: JD is exceptionally well-positioned for luxury.

Sometimes the stars align and you find yourself in the perfect position for a big opportunity. I think that’s pretty much how luxury looks to JD right now.

Imagine you are a luxury brand based in Milan (say Prada). This is probably how China looks to you right now.

• Chinese consumers have emerged as the biggest luxury buyers globally, representing about 32% of sales last year. And they are a big part of global growth going forward.
• Chinese consumers are also likely the most enthusiastic users of smartphones and e-commerce globally. Retail in China is moving rapidly online - and to online plus physical retail. There is no other future.

Basically, the world’s most advanced e-commerce market is also becoming the largest luxury market. Great. Except…

• Moving online is a big problem for luxury brands. Much of their value and brand equity depends on a premium shopping experience. And recreating that experience online is difficult. Plus, they don’t particularly want to be listed next to things like books and pet food.
• And while most luxury brands are international, most are late to the game in China. It’s a competitive market. It’s confusing for foreigners. And it's also rife with knock-offs of luxury products (many quite good quality).

So how does Prada solve this problem? And keep in mind, Prada is an multinational. This situation is much more difficult for smaller brands.

Enter JD, which has +250M active Chinese consumers, national logistics and delivery capabilities and a brand synonymous with authentic, quality goods.

And JD has just launched a marketplace site where you can create and control your own presence online (i.e., TopLife, launched in October). They have also bought a cross-border e-commerce site that can connect smaller brands from Europe with Chinese consumers (i.e., Farfetch).

My take is that the stars have aligned and JD Fashion has found itself exceptionally well-positioned against the future of global luxury. Is it a surprise that Toplife already has deals with La Perla, Emporio Armani and others?

Take-Away 2: I really like the “direct plus marketplace” model for online luxury.

Farfetch, an e-commerce luxury goods platform, is a marketplace model, with only a small presence in China today. Toplife is also a marketplace model. Both give brands greater ability to design and control their online stores. Brands and merchants can also do regular delivery or with white glove (JD Luxury Express). Or they can use an outside delivery group.

So both are marketplaces and they are tied to logistics and delivery capabilities that are also being widely offered as a service. It’s a platform approach, which is powerful.

But JD Luxury (shoes, eyewear, clothes, jackets) operates as direct online retailer, similar to most JD’s businesses historically.

I really like a combined "direct plus marketplace" approach for luxury. Here's my argument.

1. The value created by a marketplace platform is that it aggregates customers and merchants. But it also decreases the frictional costs and enables transactions. And cross-border luxury transactions have far greater frictional costs to attack. It is a lot harder to enable a small luxury brand in Germany to sell in China than for a book seller in Shanghai to sell in Shanghai.
2. 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.
3. The net result of 1 and 2 is you have greater costs. Greater fixed costs and greater capex are required (per unit) than when shipping things like books from a warehouse outside Shanghai.
4. A combined marketplace plus direct model lets you get some real advantages in this situation. 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. But when you combine a direct retailer with a marketplace, you dramatically increase your ability to outspend your rivals. You can hyper-scale your retail, logistics and delivery. As JD attacks the described costs of luxury e-commerce, their combined model should let them outspend virtually everyone (except Alibaba).

A visit to Toplife

After our meetings at the Beijing headquarters, we took a train to Shanghai and visited JD's main fulfilment center there, which I wrote about here. After that, we went down the street to the Toplife offices.

The first thing you notice at Toplife is the line of cars for their white glove delivery service. Sending well-dressed gentlemen with white gloves around China as delivery agents is a cool idea and has been getting a lot of media attention. The sporty cars are a definite contrast to the typical scooter and trike people driving around.

Entering the Toplife offices (see our group above), it’s like entering a different world. The lounge is stylish, with fashion videos playing on big screens. The inventory, which is separate from other JD facilities, is in a sealed, dust and temperature controlled rooms. To enter, you need protective wraps for your shoes. And once in the inventory area, you are immediately struck by the much smaller number of SKUs, around 10,000 I believe.

It’s the kind of business that just screams big margins and good economics (not unlike Saks Fifth Avenue stores). Of course, to get that you have to master the complicated sales and merchandising aspects, which I cannot. Which leads me to my last take-away.

Take Away 3: The customer experience in luxury “new retail” is the big question.

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.

But much of luxury is also about media and entertainment. The fashion shows. The advertisements. The photographs. And all of that is now on smartphones. So the online aspects are also critical.

The most interesting question is how do you put it all together. How do you combine the physical and online aspects of luxury retail? What will ultimately be consumer experience in this business?

It’s a cool question. It will probably a struggle for most luxury brands going forward. But it all seems pretty great for JD.

***

After Toplife, our group headed back into Shanghai and that was the end of visit. Overall, it was a fantastic few days. A special thanks to Josh Gartner, Ella Kidron and Lori Chao of JD for all their support. I really appreciate the invitation.

The restaurant in the headquarters has JD chopsticks.

• My Visit to JD Headquarters and What I Learned About China's Retail Revolution (Pt 1 of 5)
• JD's 4 Game-Changers in Chinese E-Commerce (Pt 2 of 5)
• What I Learned from JD Mgmt About China’s Crazy E-Commerce Growth (Pt 3 of 5)
• Why JD's Automation Plan is Both Better and More Difficult Than Everyone Thinks (Pt 4 of 5)

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I write and speak about the fight for Chinese consumers and digital China.

If you would like to read my posts, please click 'Follow'.

If you would like my recommended China reading, you can get it at www.jeffreytowson.com. You can also get a free chapter of my One Hour China Book there as well.

Some previous posts Include:

• I Took 20 Chinese Students to Meet Warren Buffett. Here's What Happened.
• Stop Calling Me an Introvert. I Prefer "Power Thinker"
• How I Went From NYC to Working for Prince Alwaleed
• My Favorite Map for Understanding China

About: I am a Professor of Investment at Peking University Guanghua School of Management in Beijing. I am also an investor, speaker and former executive / slave to Prince Alwaleed.

Photos by jeff