China’s Covid-19 Challenge Could Boost Luxury E-Commerce Again
The first coronavirus lockdowns in 2020 proved a major turning point for services like Tmall’s Luxury Pavilion. General manager Janet Wang weighs in on what’s changed and what’s next as Shanghai enters lockdown again.
When Janet Wang returned to Alibaba as general manager of its Tmall Luxury Pavilion in early 2021, she found much had changed since she had left the Chinese e-commerce behemoth five years before.
In 2014, when Wang helped bring Burberry on board as the platform’s first luxury brand, the idea of selling on Tmall was still anathema to most top-end players.
Today, almost 200 brands operate stores on Tmall’s Luxury Pavilion, a dedicated space for the segment which the platform first launched in 2017.
The clambering by luxury brands to join China’s biggest e-commerce platform has been particularly heated since the beginning of 2020, when the country first entered widespread lockdowns to stem the spread of Covid-19. That year, an average of one new flagship store per week opened on Luxury Pavilion, which is now home to brands including Cartier, Gucci, Prada, Armani and Hermès.
“The first outbreak accelerated the penetration of online luxury, which doubled or even tripled,” Wang explained. For brands, “it’s more than just a sales channel. It’s a vehicle that they can use [to harvest] consumer insights and then build their strategies around it.”
The platform’s broad reach and immediacy can make it a bellwether for how the interests of China’s luxury consumers are evolving: Today, Wang says, watches have overtaken handbags as the preferred luxury category among online shoppers from lower-tier cities, with even sales of million-yuan ($157,000) Vacheron Constantin timepieces becoming an increasingly regular occurrence.
In first- and second-tier cities, sales are increasingly driven by young women who use the platform to access niche designer brands that are not widely available in China. This trend has been accelerated by the opening of multi-brand giant Farfetch’s store on Luxury Pavilion 12 months ago, which brought 3,000 labels to the platform.
Owner Alibaba doesn’t routinely break out growth rates for Luxury Pavilion, but early last year Tmall told local media outlets that the unit’s quarterly sales had more than doubled year-on-year, rising 159 percent in a signal that one year into the pandemic, the relevance of online sales for luxury in China showed no signs of abating.
In 2022, online luxury platforms like Tmall’s Luxury Pavilion and its 900 million active users are once again poised to see an increase in attention, and investment, from luxury brands, Wang says. As the wave of coronavirus’ Omicron variant fades in much of the world, its belated spread in China is making physical retail and events in the country more fraught than they have been at any time since the initial wave of lockdowns and store closures over two years ago.
On Sunday evening Shanghai authorities announced the city of over 25 million would begin locking down its population (half the city is locked down for five days beginning Monday this week, the other half enters lockdown on April 1) in order to calm record high infection rates in the commercial capital.
On hold are not only Shanghai Fashion Week (which was due to begin on Mar. 25) but also brand’s events, in-store launches and activations that have become an increasingly regular fixture in the city, as global brands look to tap surging domestic demand from Chinese consumers who, since the pandemic, rarely enjoy the opportunity to travel and shop abroad.
Shanghai’s lockdown comes weeks after another first-tier city and important luxury hub in the country’s south, Shenzhen, home to 17.5 million, also effectively closed for business due to a seven-day lockdown. With the more-contagious (if less lethal) Omicron variant now getting a foothold in China, it’s a fair bet that the country’s “Covid Zero” strategy will lead to further disruptions for physical retail in the months to come.
But unlike the first half of 2020, luxury brands now have two years of experience operating under pandemic conditions. As a result of this experience, as well as a more robust e-commerce infrastructure, they may see only a “modest headwind” from China’s outbreak, according to Luca Solca, head of luxury goods research at Bernstein.
“I think brands should only be concerned to a point: over the past two years, brands have perfected remote selling and digital distribution,” he said. “It will be a matter of going back to that, this time having accumulated useful experience on how to run these operations.”
History repeating?
Indeed, even as Covid-19 propelled China’s luxury industry—data from The State of Fashion 2022, a report co-published by The Business of Fashion and McKinsey & Company, showed domestic sales surging 70 to 90 percent above 2019 levels by the end of last year—growth has been uneven across both luxury brands and shopping channels.
Online sales of personal luxury goods in China grew by almost 56 percent last year, while offline sales grew 30 percent, according to consultancy Bain.
In 2021, online’s share of China’s luxury market had reached a total of about 19 percent, excluding duty-free shopping, Bain said. With duty-free penetration included, total luxury online penetration in China accounted for approximately 26 percent of total sales.
Still, brick-and-mortar remains a key channel for brand building and discovery.
This is one of the problems with the hypothesis that China’s current outbreak and resulting lockdowns will boost online luxury even further in 2022, according to Pablo Mauron, China managing director and partner at Digital Luxury Group (DLG). The absence of the luxurious world created by physical stores and events means there are fewer opportunities for brands to entice consumers in the real world, which is often a key step before they complete purchases online.
Even online players, including Farfetch, have pointed to the importance of offline contact and connection to its Chinese consumers, treating its “Private Client”, top tier customers to exclusive experiences, such as a behind-the-scenes visit to Dior’s Shanghai exhibition, dinners in Chengdu and master classes in Beijing.
In a world without physical experiences, staying connected naturally becomes more of a challenge.
Luxury’s growth — both online and off — could also be thwarted by the uncertainty sparked by the current outbreak, which has seriously dented the confidence of China’s middle class.
“Generally speaking, the [Chinese consumer] confidence is low and a lot of the middle class will be financially, economically impacted by the situation,” Mauron said. “The old notions about ‘revenge buying’ aren’t relevant at the moment [as] people are just trying to make sure they can get enough food if their city goes on a wider lockdown [and] people aren’t necessarily seeing any compensation from their employers or the government [to soften] the economic impact.”
The confidence of high-net worth consumers has also been dealt a blow by the weakening of China’s property and stock markets.
For Tmall’s Luxury Pavilion, another challenge is the acceleration of consumer interest in rival Chinese e-commerce channels such as Douyin (China’s version of TikTok, known for its unbeatably addictive algorithm), which last year launched its own brand flagships. JD.com has also made major luxury sector moves over the pandemic period, notably partnering with certain LVMH brands that have long hesitated to join third-party platform players.
According to Wang, the impact of the current outbreaks will depend on their length and severity. Still, as the gap in brand building and experience between online and offline channels has narrowed in recent years, it has become easier to engage luxury consumers digitally.
“Consumers have to get what they want right away. A lot of these digital services and offerings we are seeing [in 2022] also have a very luxurious experience, so I don’t think this will cut off [the growth in online luxury shopping]. In fact, I think that brands will only invest further in online to further their connection with their customers,” she added.
Navigating a Difficult Period
The current situation in China, while difficult, is best navigated by brands staying close to their customer base and offering them the best and most luxurious experience they can, Wang said.
Livestreaming can help, she says, as well as one-on-one video services, which have recently been launched by several brands on Luxury Pavilion. Brands can use Tmall’s data about search history and product interest to better target individual customers during those appointments.
Brands including Cartier have also utilised 3D product rendering within their livestreams to give consumers a view of products as close to reality as possible. Next on the agenda, according to Wang, are further explorations of the metaverse and NFTs, called “digital collectibles” in China or XR: with brands experimenting with “extended reality” experiences for luxury retail.
Brands may be well-served to offer livestreams and other services late into the night, as Luxury Pavilion sees an uptick in browsing activity among younger consumers after midnight, Wang says.
While much of China rues the ways in which 2022 feels like 2020 all over again, and as key physical retail remains interrupted in major centres like Shanghai, luxury brands and the online platforms they partner are hoping history will repeat itself in another way: by providing a similar boost to luxury sales during a difficult period.
Fortescue and E.ON sign deal to replace Russian gas with Australian green hydrogen
MoU agreed to deliver 5mn tonnes of carbon-free fuel to Germany and the Netherlands
Australian billionaire and Fortescue chair Andrew Forrest has pledged to produce and export enough green hydrogen to Germany to replace about a third of its gas imports from Russia, in an ambitious plan he said would require $50bn in investment.
The move to produce 5mn tonnes of hydrogen, part of a memorandum of understanding between Forrest’s Fortescue Metals and German energy group E.ON, would mean building from scratch enough renewable energy capacity to power a country roughly the size of the UK.
A solution would also have to be found to the problem of liquefying and shipping vast volumes of hydrogen from one side of the globe to another at a viable price.
Under the MoU signed on Tuesday, Fortescue and E.ON agreed to develop a feasible hydrogen supply chain between Australia, Germany and the Netherlands, described by E.ON chief executive Leo Birnbaum as a “hydrogen bridge”.
E.ON would distribute the hydrogen to its 50mn customers as replacement for gas in heating and industrial processes.
Green hydrogen is produced using renewably powered electrolysers to split water into hydrogen and oxygen, a process entirely free of carbon emissions. However, it is considerably more expensive to manufacture than traditional carbon-intensive “grey” hydrogen, which is made from natural gas.
In the past year, Fortescue has agreed billions of dollars of green hydrogen supply deals but has yet to start commercial production of the zero-emission fuel. It has, however, started construction of the world’s largest manufacturing facility for electrolysers and expects to produce its first green hydrogen in Tasmania by 2024.
Forrest, who is Australia’s second richest person, told a press conference on Tuesday that the company was on an “emergency footing”, following Russia’s invasion of Ukraine and Europe’s subsequent commitment to reduce dependence on Russian gas imports.
He insisted that the considerable cost hurdles to creating a viable market in green hydrogen would be solved, claiming: “Liquid hydrogen will become the largest seaborne trade in the world.”
Forrest said the energy required to manufacture the hydrogen would be generated in Australia from a mix of wind and solar but gave no precise details of where those projects would be built.
Fortescue has previously promised to produce a total of 15mn tonnes of green hydrogen by 2030, requiring 200 gigawatts of wind and solar to be built, through its green energy subsidiary Fortescue Future Industries (FFI).
Forrest has told Fortescue investors that the company will pump 10 per cent of its annual after-tax profits into FFI, which recently appointed Guy Debelle, former deputy governor of Australia’s central bank, as its new chief financial officer.
The EU is targeting 20mn tonnes of hydrogen production and imports by 2030 under its new plan to reduce dependence on Russian gas.
E.ON is not the only German company to sign a hydrogen deal with Fortescue. Bayer spin-off Covestro announced in January its intention to procure 100,000 tonnes of green hydrogen equivalent per year from FFI, starting in 2024.
The German government said last week that a faster ramp-up of hydrogen infrastructure would be necessary to achieve its aim of being largely independent of Russian gas by the summer of 2024.
Robert Habeck, economics minister and vice-chancellor, also announced that Germany had accelerated and expanded its hydrogen partnership with the United Arab Emirates.
Habeck, who was present at the Fortescue announcement, endorsed the deal.
“The race for large scale production and transportation of green hydrogen has taken off,” he said. “The agreement between E.ON and FFI is a major step forward and puts them in pole position for the delivery of green hydrogen to German industry.”
Australia’s huge tracts of unused land plus plentiful sun and wind resources have made it a popular location for green hydrogen projects and the government claims it has “the largest pipeline of announced green hydrogen projects in the world”.
Steven Mnuchin’s private equity group buys cyber security company
Former Treasury secretary under Trump launched Liberty Strategic Capital with $2.5bn last year
Steven Mnuchin’s private equity group has made its first buyout since he stepped down as US Treasury secretary in the Trump administration, taking a controlling interest in mobile cyber security company Zimperium for $525mn.
Liberty Strategic Capital, Mnuchin’s firm, has focused on cyber security with four minority investments since its launch last year. Mnuchin raised $2.5bn from a group of backers that included Japan’s SoftBank, Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala.
Zimperium, founded by two Israeli security experts, provides companies with technology to stop criminals from hacking the mobile devices of their employees to obtain sensitive information.
The Dallas-based company claims it is capable of thwarting mobile attacks such as the one carried out by NSO Group’s Pegasus, the Israeli military-grade spyware manufacturer that created software to trace the phones of journalists and human rights activists around the world.
“It’s clear that mobile is the new front line for cyber security,” Mnuchin said. “We believe Zimperium has positioned itself as the leader in securing mobile endpoints and applications.”
Prior to joining Donald Trump’s administration, Mnuchin worked for several years on Wall Street, climbing to the top ranks of investment bank Goldman Sachs.
He left Goldman in 2002 and later launched hedge fund Dune Capital Management and a film studio called Dune Entertainment. Following the 2008 financial crisis, he went on to turn around the failed California-based lender IndyMac, which was later acquired by CIT Group for $3.4bn.
Mnuchin was not the first Treasury secretary to have previously worked at an investment bank. Many have then left government to join the lucrative world of private equity buyouts.
John Snow, who served under President George W Bush, moved to Cerberus Capital Management, while Tim Geithner, Barack Obama’s first Treasury secretary, is president of Warburg Pincus, which will sell its stake in Zimperium.
Jack Lew, Obama’s second Treasury secretary, is a managing partner at private equity group Lindsay Goldberg, and Hank Paulson, who also served under Bush, is executive chair of a climate investment fund at TPG.
Are China & Saudi Arabia Selling Treasuries?
The Good News Out of the Ukraine
The good news is that Russia is sending all sorts of signals that their intent is now to focus on the Donbass and Eastern Ukraine. They seem to be pulling back from their attack on Kyiv. That is positive and dovetails nicely with peace talks scheduled to take place in Turkey.
The Questions on Ukraine
General (ret.) Walsh raised two questions on peace talks and the purported Russian pullback yesterday:
- Have the casualties reached a point where Ukraine is willing to sacrifice this region now, when they weren’t willing to before the war? Since the Ukrainians are holding them at bay, that will be a difficult decision for Zelensky. Furthermore, the pretext that the Eastern part of Ukraine would welcome Russia has proven to be false, and one can only believe that many in the East want even less to do with Russia, now than they did before?
- Is Russia just executing a better battle plan? Virtually every member of Academy’s Geopolitical Intelligence Group questioned how Russia carried out the initial assault (too few troops, too many points of attack, multiple extended supply chains, etc.). So is there a risk that Putin is biding his time, to take this region, secure his footing, and then resume pushing West?
The fact that senior Russian officials are commenting and that the Russian media is discussing it, are positive signs.
For now, it seems likely that we see more localized fighting, which is good, but too early to expect any sort of “business as usual” in the region.
Now We Can Focus on the Fed and Rates?
The potential “bad” news for markets is that we may now fully turn our attention to the Fed, rates and Quantitative tightening.
We hit on a lot of those subjects in this weekend’s “Collecting Our Thoughts” report.
The one that has sparked the most conversations since then is the possibility that some countries, like China and the Kingdom of Saudi Arabia are selling treasuries. Given the poor depth of liquidity and how much of the front-end selling seems to occur in the overnight sessions, this concept seems worth exploring. While we won’t get any TIC data that covers the post-invasion post-sanction world until May (there is a 2 month lag in the reporting), it would mean that much of the front end move can be explained by positioning and selling rather than anticipating all the rate hikes. It would explain why the front end hasn’t acted at all like a “risk-off” asset.
Higher treasury yields have been supportive for credit, as they should be, with “yield-bogey” buyers stepping in, but the resilience in stocks might be tested. Stocks are now almost done climbing the Russia wall of worry and might keep climbing the Fed wall of worry, but a lot of resilience has been priced in and the short squeeze has been quite painful, but positioning should be more balanced by now.
Next-gen Materials Saw $2.3B Investments — With Growth Ongoing, Report Finds
Kombucha, mushrooms and microbes? Move over traditional materials, there's been $2.3B invested in next-gen alternatives.
Nonprofit Material Innovation Initiative released its annual state of the industry report Tuesday — showcasing a steady $2.3 billion invested in next-gen materials since 2015.
The buzzy phrase, next-gen materials, means innovative inputs like non-animal, non-plastic alternatives to leather, fur, silk, viscose, polyester and the like. Despite only a small replacement potential being realized today, a lot of money is pouring into the space.
In 2021, $980 million was raised across 187 investors and 95 companies for next-gen materials, which is double the amount raised in 2020, at $504 million, by MII reports. Giving a “conservative” estimate, MII puts the global wholesale market for next-gen materials at approximately $2.2 billion by 2026.
The report catalogs the state of next-gen materials, outlining the innovators (at this point, familiar faces like now-public Spinnova, Pangaia, Natural Fiber Welding or Bolt Threads), investors and industry brands with a vested interest in the latest cohort of next-gen replacements. A series of case studies and consumer insights from North Mountain Consulting shape the study, alongside MII’s own evolving database.
And even despite the pandemic, financing remained unaffected.
“The fundamental ‘why’ of moving to these replacements is climate change [or that] industrial animal agriculture is not working,” Elaine Siu, chief innovation officer at Mii, said in an interview with WWD. “That is not affected by [COVID-19], because COVID[-19] almost made it even clearer that ‘this is really not working.’ We really need these replacements faster.”
Of the 95 companies analyzed, the majority (or 49 companies) use plant-derived materials as their main inputs. From there, processes rank by microbe-derived materials, blends, mycelium, recycled material and finally, cultivated animal cells.
While mycelium (mimicking a mushroom’s root-like growth) leather alternatives have been all the rage, the report identified another up-and-coming trend: microbe-derived materials. These materials utilize cellular engineering approaches such as cell culture or fermentation.
Siu made a callout to the microbe-derived kombucha cohort, including companies like Bucha Bio, ScobyTec and Kombucha Couture that employ the bacterial nanocellulose in Kombucha — a natural polymer created by bacteria strains like Gluconacetobacter xylinus. The process uses a smaller footprint to make leather and silk replacements with high-performance capabilities.
Huntington Beach-based Newlight Technology — behind “AirCarbon,” a material derived by essentially capturing carbon in the air — was another highlighted mention. The company saw its first commercialized accessories drop with its owned label Covalent, in September 2020.
While the material innovators are hard at work improving qualities like drape, malleability, tensile strength and water resistance, Siu dubbed the brands “gatekeepers,” for the increasingly competitive next-gen material landscape where a brand “spending time and resources is basically placing their bets.”
If that’s the case, then celebs like Natalie Portman and John Legend (both investors to MycoWorks), and luxury houses like Hermès have already placed bets on MycoWorks, as noted in the investor breakout chart in the report. Per MII’s findings, Adidas, Ikea and Bentley are the biggest buyers and users of next-gen materials.
MycoWorks recently held its press and client preview at its “Freedom of Creation” exhibit in New York City last week.
There, amid an exhibit complete with a tower of mycelium trays, a bio-leather craftsman studio and gallery-style swatch displays, Sophia Wang, cofounder of MycoWorks, artist and dancer, described the luxury hook.
“Well, fashion brands really appreciate our story — that we were founded by artists because they recognize we value craft and aesthetics and excellence in the materials we’re working with and bringing a creative eye in bringing out the potential in these natural materials,” MycoWorks’ Wang told WWD. “So in that sense we really share our values with luxury fashion brands.”
The material innovator is expecting to announce more partnerships this year.
As storied craftspeople and tanneries familiarize themselves with their next-gen material counterparts, tanneries also arise as a point of contention as to whether customers may use their own tanneries for finishing or employ the biotech firm’s tannery partners.
In the processes therein, the MII report called out sustainability white spaces regarding innovation needed for finishes, resins and binders which may not be all-natural.
On what identifies a good brand partner, Siu described a certain scenario: “I think it’s very difficult to put a [criteria] like you have to work together for how many years, because sometimes if it’s not a good fit — it’s not a good fit. I also think that’s not just the requirement of the materials — but also the people. You choose to work with people who have the same kind of vision you have.
“I would say it’s brands that are almost ‘dating around’ with many different material innovators that show material commitment because it takes a lot of time and energy and resources to engage with the start-ups, or these material innovators,” Siu said.
With this investment money, scaling up material innovations is the goal as both Siu and Wang noted.
End products offer proof to success if the now-nascent industry is to grow quickly to take up 3 percent of the $70 billion leather materials market by 2026, as MII projects.
Elliott and Brookfield to buy TV ratings group Nielsen for $16bn
Private equity buyers remain confident in company being the ‘gold standard for audience measurement’
A private equity consortium led by Elliott Management and Brookfield Asset Management has agreed to acquire television ratings group Nielsen for $16bn, including debt, the largest buyout since Russia invaded Ukraine.
The US and Canadian investors will pay $28 per share in cash to Nielsen shareholders. The revised offer is 10 per cent higher than its earlier bid and represents a 60 per cent premium to the company’s value before reports of a potential sale first emerged.
Elliott and Brookfield’s take-private of Nielsen highlights how financing markets, particularly in the US, remain active amid rising interest rates and concerns of a prolonged war in Europe. The consortium will inject $5.7bn in equity and the remaining $10.3bn will be provided by large banks and private lenders.
As part of the agreement, Nielsen’s advisers still have the opportunity to seek a higher bid from another buyer under a “go-shop” clause that is valid for 45 days. In past years, several private equity groups, including Blackstone and Carlyle, had expressed interest in buying the TV ratings group but ultimately walked away.
Tuesday’s deal signals that Nielsen’s private equity buyers remain confident in its core business of measuring advertising reach on cable and broadcast, despite being threatened by the rise of streaming platforms such as Netflix. For years, Nielsen has struggled to retain its dominance as an intermediary for buyers of advertising and battled cable and broadcast networks over its measurement data.
However, industry observers have said there was an opportunity in the market for companies that could offer more sophisticated audience data about streaming services.
Elliott highlighted Nielsen’s new measurement product, Nielsen ONE, which cuts across network television and streaming media in unveiling their deal.
“After months of deep market analysis, industry diligence and management reviews, we are firmly convinced that Nielsen will continue to be the gold standard for audience measurement as it executes on the Nielsen ONE road map,” said the firm’s managing partner Jesse Cohn and senior portfolio manager Marc Steinberg in a statement.
For Elliott, the Nielsen takeover represents the second largest buyout this year involving a company it has long held a large public stake in. Best-known for buying minority positions and waging bruising activist campaigns, Elliott is now becoming the architect of some of the private equity industry’s largest buyouts.
In January, Elliott and software buyout firm Vista Equity Partners led the $16.5bn takeover of Citrix, which had been a longtime holding of the firm’s activist hedge fund. In the fall, Elliott sold Athenahealth — a business it had waged war against and then taken private — to a consortium of private equity buyers for $17bn.