Behind the glitz and glamour of China’s luxury growth story, the humdrum business of transporting goods to consumers usually gets little attention.
But now, as China is expected to become the world’s largest luxury goods market in 2015 – reaching US$27 billion from US$10 billion in 2009 – keeping up with demand and getting more high-end brands to mainland shoppers is becoming more important than ever.
While China currently accounts for 27% of the global luxury market, logistics experts argue that the industry is still ill-equipped to transport, package and distribute high-end products throughout the country. The challenges include designer brands’ special handling requirements, the need to deepen distribution to lower-tier cities and how to navigate China’s complex web of import regulations.
Luxury fashion brands often require unique warehousing services, compared with more affordable retailers.
“With a fast-fashion company, timing is most important,” said Andre Suguiura, general manager of LifeStyle Logistics, a logistics company that specializes in high-end fashion. “[Logistics companies catering to fast-fashion] don’t need to be as careful as we do with high fashion.”
Indeed, Stephane Michel, co-owner of the upmarket watch brand Iguzzini Watch Company, said that when it comes to choosing a logistics provider, his primary concern is how well valuable products are protected.
“The handling of the products is as important – or more important – than getting there quickly,” said Michel. “Care is crucial.”
One of the most important requirements for shipping luxury products is maintaining temperature and humidity control, as well as employing highly-trained staff to properly inspect high-value goods, said Raoul Kuetemeier, vice president of Arvato Logistics Services China. In addition, luxury brands often require value-added services, such as gift-wrapping and more aesthetic packaging.
While these special handling requirements mean that luxury brands may experience more difficulties in finding a logistics company that meets their warehousing needs, most agree it’s not impossible. Distribution across the country, however, is another story.
“Right now, it’s basically impossible to get true luxury goods to second- and third-tier cities,” Michel said.
Given that luxury consumers are increasingly found in China’s lower-tier cities, luxury retailers and logistics suppliers need to find a solution quickly. According to a McKinsey report released in March, Shanghai and Beijing account for only 21% of luxury consumption in China. A luxury brand’s ability to capitalize on the entire market is dependent on whether it can reach the remaining 79% of Chinese consumers.
“It’s not enough to just be in Beijing and Shanghai anymore,” Michel said. “Some of the wealthiest places in China aren’t first-tier cities. Brands want to be there, and they need the right logistics for goods to arrive safely.”
Much of the problem lies in China’s infrastructure, which is still developing, and a shortage of transportation companies that are equipped to provide services for high-end brands in lower-tier cities. Suguiura said many high-fashion companies are reluctant to use local trucking companies because the service isn’t reliable. “There’s no single company that has a complete China trucking network yet, so brands have to rely on many distribution companies,” Suguiura said.
As such, many high-fashion brands rely on using air freight or air couriers – both of which are expensive and impractical for transporting high volumes – to move products inland.
Seeing red tape
But there’s hope for improvement. The government has been building out infrastructure to help accelerate western regions’ economic development. And while most luxury brands currently work with foreign logistics companies in China, there are signs that domestic firms may catch up eventually.
“We see more and more local Chinese companies investing a lot in distribution and tracking systems,” Suguiura said. “They’re becoming more reliable.”
While brands like Chanel and Prada are targeting consumers beyond first-tier cities, their products still have to overcome the challenge of actually getting into the country.
Newly-instituted customs procedures, for example, have increased the time it takes to move goods into stores. “Before, we could just do customs clearances for high-fashion products from overseas,” Suguiura said. “The goods would arrive at the border, and within 1-2 days, we could finish [the customs process] and bring the products to a warehouse.”
That changed after the central government raised quality control standards this year: All luxury goods are now required to undergo an additional assessment by China Inspection and Quarantine Services, which involves testing samples from each shipment for pH levels and color fastener.
The whole evaluation is supposed to be completed in 21 days, but sometimes takes even longer. Suguiura said the new process can cause serious delays for luxury retailers, as many prefer to roll out entire fashion lines at once. “Sometimes [pieces] have to stay in the warehouse for more than one month, and they are part of a whole fashion collection,” Suguiura said.
Emerging domestic luxury brands have encountered a trickier problem in finding manufacturing facilities. Chinese factories are required to carry specific permits which allow them to make products that are either sold in the domestic market or exported overseas.
Even though factories are allowed to carry both permits, most do not. “At the moment, in China it’s easier to find high-quality factories for export markets,” said Alison Yeung, founder of Mary Ching, a high-end shoemaker based in Shanghai.
This leads some companies to decide it’s more cost effective to produce goods in a factory designated for international products, export the goods overseas and then import them back to China to sell domestically – a practice that Yeung has turned to in the past.
But as China’s luxury market continues to boom, many retailers will make the extra effort to tap into that potential.
“[Luxury logistics] hasn’t yet been fully developed,” Michel of Iguzzini Watch Company said. “But it will explode now because the demand is there.”