Alibaba, the luxury sector and IPOs

Yolanda Regodón. Associate Director of Communications. IE Business School

30 October 2014

The recent floating of Alibaba and Jimmy Choo on the stock market, the success of sites like Tmall, and the interest shown by Twitter in e-commerce have marked the path that the luxury sector will be following in the not too distant future.

New York and Shanghai are always in fashion but over the last few days they have also become a fashionable couple. Whether this happened by accident or by design is not entirely clear. Alibaba and Wall Street. E-commerce and the stock market.  Just in case there is anyone out there who has not yet heard of Alibaba, otherwise known as the Chinese version of Amazon, it is the Chinese colossus of e-commerce. Although it was practically unknown outside China until fairly recently, its debut on Wall Street has blown even the most optimistic expectations for its IPO out of the water and it has now gone down in the history annals of Wall Street.  It raised 21.8 billion dollars in the biggest initial public offering of all time. It has amassed 500 million users and 22,000 employees in only 15 years, along with an 80% share of China’s online sales and its own system of payment guarantees, Alipay, which handles almost half of all online transactions in China.  Its founder, Jack Ma, is one of the richest people in China. At 49 he is worth some US$22 billion due to his 7.3% stake in Alibaba, according to Bloomberg. As a manager he insists that his customers come first, his employees second, while shareholders come third.

Alibaba is a prime example of China’s commitment to the creation of global brands in high tech products. It is a golden opportunity for the luxury industry to embrace online sales platforms and capture potential customers in China. China’s economic growth is impressive, as is the Chinese market. The appearance of a middle class and fast-growing consumption in a country with almost 1.4 billion inhabitants has resulted in a massive surge in online sales. China’s middle class, with an income of between US$9,000 and 34,000 per annum, is set to grow over the next 10 years. Over 75% of urban consumers in China will fall into this demographic category by 2021 according to a study by McKinsey.  Demand for luxury products is expected to rocket, along with a taste for exotic foods that the Chinese middle class have yet to discover and demand.

Over 600 million people in China currently have access to Internet.  Alibaba already dominates the online lives of Chinese consumers. Luxury website Tmall, which sells brands directly to clients, includes the websites of large firms like Microsoft, Lego and Puma. Analysts believe that everything points to the Chinese online market outpacing that of the US by the end of this year, but there are risks involved that have to be addressed and avoided. Many large firms continue to fight imitations on sites like Alibaba, and in recent months imitations have also appeared on Tmall. In fact, just a few months ago a group of luxury brand firms, including Yves Saint Laurent and  Gucci, filed a suit against Alibaba for providing counterfeiters of luxury products with a platform to do business. The suit was quickly withdrawn and the companies pledged to collaborate, but the episode highlights the underlying tensions between the luxury sector and Alibaba. The demand of increasingly sophisticated Chinese consumers is still far from being met. Alibaba’s role in helping firms reach the Chinese market will determine its value and the openings in the Chinese market for both global business organizations and SMEs looking to grow.

Digital innovation is bringing the luxury industry closer to everyone by making it more accessible. Alibaba provides hundreds of millions of Chinese customers with access to luxury brands, and we are talking here about customers who love shopping online. There is no denying that China is now a giant of the e-commerce sector. According to data featured in a report published recently by consulting firm McKinsey & Co., the volume of e-commerce in China now stands at over a billion and a half dollars, and has grown at an annual rate of 21.3%. Moreover, growth is expected to accelerate this year to reach 27.9%, which will mean that e-commerce in China will soon pass the two billion dollar mark. The outlook for the next few years is even better, given that the volume of business could double in 2017, reaching 3.46 billion. 

And from one IPO to another in the luxury sector, that of Jimmy Choo.  UK based luxury footwear company Jimmy Choo, owned by JAB Luxury, has just been floated on the London Stock Exchange. And, although its launch on the stock exchange may have been a little less glamorous than expected, all these stock exchange and online movements augur well for companies in the luxury accessories industry and the online sector that adhere to the rules of the game. Other social media networks have already announced they are going to embrace e-commerce, with the launch, for example, of Twitter’s buy direct button.  These moves are reshaping business relations in the luxury industry. There is still a great deal left to see and do. As Alibaba founder Jack Ma says: “The world doesn’t care what you say, only what you have done.”  To which I would add  “and be sure to enjoy doing it…”

Published by The Luxonomist


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