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What’s stopping luxury goods groups in China moving from bricks to clicks?

China's luxury consumers are moving beyond bricks and mortar and going online for their next python-skin handbag fix, and high-end fashion houses and retailers will have to follow them, analysts warn.

"The e-commerce story in China is changing," Winston Chesterfield, Wealth-X Research Director, told CNBC's "Squawk Box Europe."

"Traditionally so far (luxury firms) have stayed away from e-commerce because they've been worried about diluting their brands – they've been wanting to have bricks and mortar, to having a very traditional luxury image in China."

Not only do physical shops act as points of sale, but they've become "significant marketing tools for luxury" by having the power to "bring (a) brand to life" through design, service and new technologies, Euromonitor International's Head of Retailing Research, Michelle Grant told CNBC via email.


Playing catch-up

Rather than relying on a physical store, luxury brands are realizing that they have to keep up with changing consumer tastes combined with macro-economic headwinds, such as rising property prices in parts of China and Hong Kong.

Outside of luxury, e-commerce has become "a runaway train" in China, with around 15 percent of all purchases being made through the online process, Chesterfield explained over email.

And this isn't expected to slow down either, with eMarketer predicting that by 2020, around 25 percent of China's population will shop digitally for foreign products.

Pedestrians walk past a Christian Dior SA store on Canton Road in the Tsim Sha Tsui area of Hong Kong.
Brent Lewin | Bloomberg | Getty Images
Pedestrians walk past a Christian Dior SA store on Canton Road in the Tsim Sha Tsui area of Hong Kong.

However, it appears luxury e-commerce isn't advancing at the same rate as mass-market brands, Chesterfield explains.

One reason for this is that many Chinese consumers still prefer to shop overseas for their top-end items: luxury goods bought on a trip overseas have an extra level of authenticity, there's more choice and potentially lower prices than those charged in China.

On top of this companies are a little wary of adopting e-commerce, particularly when it comes to pricing and security. Consumer-to-consumer selling online has encouraged daigous – "agents" who source goods from markets outside China at a lower price than what they usually go for.

Plus, not only would luxury companies be entering a market that's dominated by popular low-cost mass-market brands, but firms would be stepping into an arena where counterfeit goods are prevalent, despite recent crackdowns.

Traditionally, luxury consumers like product exclusivity – something that cannot be obtained by everyone – therefore certain prices and a limited number of stores have been seen as beneficial.

But this means companies could be missing out on one important market segment.

"The millennial generation in China expects e-commerce," Chesterfield told CNBC's "Squawk Box Europe" two weeks ago, adding that e-commerce provides "an opportunity for a luxury brand to take the bull by the horns and actually create an authentic online channel for luxury goods for that generation."


Finding the right fit

Analysts suggest luxury goods groups should find a healthy balance between its physical and digital representation; giving customers the best of both.

One option for China could be the "soft e-commerce launch," according to FDKG Insight. Companies sometimes may decide to release a new service to a small number of people, before rolling it out to the wider public to see how it is received.

According to FDKG's "Luxury Insights China: 4th Quarter 2015" report, these soft launches allow brands to "test the water and minimize risk", by letting its loyal customers provide feedback early on.

Brands could also establish themselves with the digitally-savvy consumer by promoting their products on Chinese social media. This could then give brands a leg up if they choose to partner with trusted, authenticated online channels.

Hill Street Studios | Blend images | Getty Images

Of course some luxury labels are already out there embracing Chinese e-commerce. Burberry chose to open up an online store on Alibaba's website "Tmall" in 2014, and has since launched its own site in China, introducing new payment options such as China Union Pay and Apple Pay, while making use of social media campaigns.

Despite it not being the easiest ride, Burberry was recently recognized as one of the top two luxury brands in China on L2's "2016 Digital IQ Index: Luxury China", beating the likes of Coach and Gucci, when it came to digital innovation.

E-commerce all the way?

When looking at the size of today's wider e-commerce market and its forecasts for growth, it seems "inevitable" that luxury brands will have to embrace e-commerce in China, Chesterfield said over email, adding that online shopping is "fast becoming a lifestyle preference" for consumers.

"If existing luxury brands don't have a place at the table, they risk being excluded from the burgeoning virtual marketplace with its fanbases built through social media and immediate purchases and quick delivery," he added.

"Whilst it is true that luxury experiences are so much harder to recreate online, the success of some multi-brand online retailers in a variety of markets suggests that luxury and e-commerce can co-exist without doing serious immediate harm to brand equity."

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