July 25 (Bloomberg) -- When serial entrepreneur George Ji Wenhong and private equity investor Huang Jin launched luxury goods and fashion clothing online retailer Xiu.com during the global recession in 2008, they relied on word-of-mouth to generate interest. “Huang was data-driven and convinced that advertising couldn’t positively impact sales, particularly in the short-run. He thought our competitors were stupid for spending so much on ads,” recalls Ji, who first met Huang when the two were roommates in college in Beijing in 1988.
Eschewing ad spending, they invested some of the $15.5 million they had raised in hiring a team of global buyers from New York to Paris to procure foreign brands. While Net-a-Porter ships to China, many popular luxury-fashion sites, including Rue La La and Gilt Groupe, still don’t. Because the companies lack mainland presence, the shipping fee for each of their items would likely be prohibitively high for shoppers. Ji and Huang’s message to Western companies: Why open 50 brick-and-mortar stores in China when Xiu.com can market and sell your product?
In China, possession of luxury goods is one way to show off one’s status. China is the fastest growing luxury market in the world, says Claudia D’Arpizio, a Milan-based partner with management consulting firm Bain & Co. According to its May Luxury-Goods Worldwide Market Study Spring 2011 Update, mainland China will become the third-largest luxury market in the next five years. “China’s traditional retail stores are rental-based; [it] doesn’t have a Macys.com (M) or a NeimanMarcus.com ... so that’s the role we want to play,” says Ji.
PRICING AND RELIABILITY
Luxury goods sales in mainland China reached $13 billion in 2010 and are expected to hit $16.5 billion in 2011, according to the study. Internet sales constitute only a small portion of the market share, says D’Arpizio. Most Chinese purchases of luxury goods happen overseas because of China’s high tariffs. Before mainstream adoption happens in China, online retailers “need to get themselves in the right price range and assure the Chinese luxury consumer that the product is the same quality and is authentic versus what they get overseas or in the stores in China,” says Sam Mulligan, director of DDMA Market Research & Consulting in Shanghai.
Those are the reasons why Huang and Ji, now both 41, shifted Xiu.com’s strategy in early 2010 from exclusively vending luxury goods to also selling mid-range clothing and accessories, as well as more Chinese brands. “We realized that Chinese consumers are still price sensitive,” Ji says. “Users won’t necessarily buy the most expensive products, but they’ll buy the most fashionable ones.” Xiu.com also reorganized its offerings on separate channels. An individual searching Xiu.com for a summer dress can peruse the channel for all the dresses available, go directly to a page devoted to one brand, or tempt fate on the sales page.
The strategy is working. Ji says the 600-employee Shenzhen company increased its revenue to 250 million renminbi ($38.8 million) in 2010, up more than 500 percent from 40 million renminbi in 2009. It has 300,000 daily unique visitors and close to 2 million registered users. Xiu.com carries 20,000 stock-keeping units of in-season products -- several times more than its competitors, which sell mostly off-season products, according to Ji -- and has about 2,000 brands, 40 percent of which are foreign. It adds new luxury offerings each month and has exclusive China sales rights on several foreign brands.
FIRST CELEBRITY SPOKESPERSON
The founders’ thinking on how to mold the company’s brand image has also evolved. As more competitors entered the market, Ji and the marketing team tried to persuade Huang that advertising could increase consumer trust and boost brand awareness. They prevailed this spring when, three years after launch, Xiu.com began its first major advertising campaign, using doe-eyed TV and film actress Yang Mi as its spokesperson. “She’s like our consumers. She’s not the biggest star, but she’s working hard and rising upward. She takes care of herself. She treats herself but doesn’t always have to buy the most expensive things,” says Ji.
The ad campaign cost $1 million and Xiu.com is now working on a second major effort, into which it will sink $3 million. Part of the funding will come from the $20 million that Xiu.com received in March from venture capital firm KPCB China. Xiu.com will spend most of the money on inventory and is in talks with dozens of brands; it hopes to score Paris Hilton shoes by September. Efforts are underway to hire an additional 400 staffers by year’s end, and Ji expects a second round of funding to close soon.
Xiu.com’s new ad, on display in the subways of Beijing and Shanghai, shows Yang’s seemingly naked body as she relaxes in a bathtub bubbling with luxury goods. “We originally had an even gutsier photo,” says Ji, “with a lower neckline to express that our prices were the lowest. But the government reviewers rejected it, so we adjusted it.”
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