Shangpin knows Chinese luxury consumers' secrets

September 14, 2011: 3:03 PM ET

The rapidly expanding Beijing-based startup sells luxury goods to affluent Chinese consumers. What it knows about them could become the envy of established luxury brands around the world.

By Reena Jana, contributor

ShangpinFORTUNE -- Despite global economic turmoil, the Chinese luxury market is still expanding at a dizzying rate -- by 16% in 2010 according to McKinsey. Not surprisingly, Shangpin -- a new Beijing-based, members-only e-commerce site -- is growing dramatically too.

The company's name refers to the Chinese characters for "fashion" ("shang" is a shortened version of "shi shang," the full character for "fashion") and "taste" ("pin"). Considering the nuances of the second character, the name also translates as "quality." Shangpin launched in July 2010, and offers top European labels, such as Gucci, to Chinese consumers during limited-time online sales. In the first four months of operation, the start-up had signed up 1 million members and reached $1.56 million in sales, according to the company. Growth has been startlingly quick. Shangpin started with 3 employees a year ago; now it has more than 300. In November 2010, it got $10 million in Series B funding by Morning Side Ventures, and this July, Chenwei Capital put in a stunning $50 million in Series C funding.

Despite all of the early investor and consumer excitement surrounding Shangpin, the site's concept might seem very familiar to Web-savvy fashionistas in the United States, Europe and Japan, where stylish shoppers can order and receive designer fashions from the sites Gilt Groupe and Vente-Privee. Shangpin is also planning to offer a section of its site that offers full-price, just-off-the-runway goods as well, more parallel to the e-commerce site Net-a-Porter, which is owned by luxury conglomerate Richemont. What sets Shangpin apart, though, is of course its affluent, ambitious Chinese clientele. Its intimate understanding of those customers could become the envy of established luxury brands around the world.

Shangpin has scaled so quickly, in part, because it's still hard for Chinese consumers to buy designer goods outside of major cities such as Shanghai. There are many "inconveniences for Chinese luxury shoppers," Says David Shi Cheng Zhao, Shangpin's Chinese-born CEO.  "Most luxury brands run brick-and-mortar stores just in tier-one cities such as Beijing and Shanghai, while in the USA, the distribution channel is not an issue." Zhao adds that "the uniqueness of Chinese luxury shoppers lies in strong demand or high potential from second or third cities." He's referring to urban areas such as Dalian, which is getting some attention this week as the site of a World Economic Forum meeting known as "the summer Davos" (taking place from September 14-16) and other cities such as Nanjing or Shenzhen. They aren't as well-known or populous as Shanghai or Beiing, but have reliable infrastructure and growing industries in place.

These cities are filled with potential luxury customers hungry to improve not only their lives but their lifestyles, suggests research from management consulting firms. The Boston Consulting Group surveyed consumers' intentions worldwide for a 2010 report and found that 37% of their survey's respondents in China planned to "trade up," or buy according to aspirations. That's compared to 25% of respondents in Russia and India, and only 18% in the U.S. and 13% in Europe.

Shangpin offers plenty of aspirational offerings. The site sells its members handbags, shoes, clothing, lingerie, accessories, jewelry and watches by brands such as Dolce & Gabbana, Mont Blanc and Versace. They're all "authorized" by these labels as authentic -- an important aspect to selling designer products in China, known for its rampant culture of believable knockoffs.

But the company's service is what might be the most luxurious aspect of the Shangpin experience. Goods arrive in elegant black shopping bags with sumptuous gold lettering and logos. There are offline shopping and networking events only for Shangpin members. There's free FedEx two-day delivery anywhere in China. And if anything goes wrong, there's in-house customer service available, seven days a week. Customer service phone lines operate for 12 hours a day each day, and will soon expand to 24 hour service, Zhao told Fortune.

Numerous outside data and analyses suggest that Shangpin's launch and growth are timed well to cash in on increasing luxury sales in China. Management consulting firm Bain & Company published a report in May noting that the luxury goods market in Mainland China will see 25% year-over-year growth this year. The report added that Greater China, which includes Hong Kong, Macao and Taiwan, is positioned to possibly exceed luxury sales in Japan for the first time (it should be noted that diminished sales in Japan could be due to the 2011 earthquake). And a March 2011 report from McKinsey predicts that by 2015, luxury sales in China will reach $27 billion, up from $16 billion in 2010.

There are obstacles, of course. "Compared to those from around the world, especially luxury shoppers from USA and Europe, Chinese online shoppers need more coaching time in terms of interpreting the culture, the story of luxury and fashion brands, especially for emerging high-end brands," says Zhao. What this means is that the new Chinese fashionistas might not know what they really want, even if they can afford to buy almost any high-end label.

So on September 15, Shangpin will try to address this obstacle by launching an online editorial magazine. The company has actively been recruiting fashion editors in New York and Europe who can also speak and write in Mandarin. This strategy for providing style-related content could prove lucrative if it steers Shangpin's readers toward purchasing. In a survey conducted this year among 1,200 middle class respondents in 24 cities in tier-one and tier-two cities mainland China, audit and advisory firm KPMG found that nearly 70% of respondents said they search online for information on luxury brands at least once a month. Thirty percent do so more than once a week. These stats suggest that Shangpin's target customer likely will be hungry for the type of online editorial content Shangpin plans to provide and, ideally, buy it as shopping advice.

ShangpinZhao pays attention to trends not only in fashion but also in business. His initial experience was not in the rag trade, but in the world of Chinese financial institutions. Having moved to the United States in 2000, he worked at Hewlett-Packard (HPQ) and other U.S. companies, focusing on e-commerce during its early days. In the mid-2000s, he returned to China as an entrepreneur and decided to apply what he learned and the connections he made in both finance and e-commerce, forming a company called Vansky, which worked with Chinese banks to create online software and services.

Then, inspiration struck: he came up with the idea of Shangpin, which in itself is a business idea with obviously huge potential, simply given the optimistic trends in China's luxury market. But the real innovation behind Shangpin is Zhao's idea of inviting lists of wealthy customers of three banks he worked with -- China Construction Bank, China Minsheng Banking Corporation (China's first privately held, and not state-owned bank) and Hua Xia Bank --  to become members of Shangping. This exclusive membership to the shopping site is pitched as a special service to them, and they are encouraged to invite friends to become members too. This luxury-focused special service for affluent bank customers echoes the concept of Citi Private Bank Art Advisory & Finance, which since 1979 has offered art collecting advice to wealthy, private banking customers of Citi (in fact, Shangpin vice president M. Claire Chung, based in Europe, once worked for this arm of Citi in New York).

Given the tactics that Shangpin has borrowed and adapted, it might seem to some observers that the company is an example of an ultra-high-end, entrepreneurial version of what in China is known as Shanzai culture, or the practice of copycat innovation.  But to be fair, top American companies such as Google (GOOG) and Apple (AAPL) are not always the first in their fields of success, either; Google wasn't the first search engine, and Apple wasn't the first to create MP3 players—they improved on the work of their predecessors. Zhao will say specifically that the company is "inspired from the success of Gilt and Vente Privee" but that he and his colleagues "are not just copying; we made a lot of other innovations or micro-innovations to fit the nature of online luxury shopping." These include Shangpin's extensive customer service offerings and the idea of creating a content arm that would educate high-end Chinese buyers about the labels that they plan to purchase.

Besides, looking at the data on the rise of luxury consumption in China, it might turn out that trailblazing e-commerce sites such as Gilt Groupe, Vente Privee, Net-a-Porter and countless others would be wise to learn from Shangpin, too.

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