This Chinese e-commerce giant is luxury retail's worst nightmare
Mallory Schlossberg
michael kors
(Facebook) Michael Kors rose to popularity because of its handbags.
Luxury retailers have been unhappy with Alibaba, the Chinese e-commerce behemoth that's grown rapidly over the past few years.
Their complaint? That it's a haven for counterfeit products, especially bags.
Alibaba itself acknowledges the problem in its marketplaces, but things boiled this week when Gucci made headlines for withdrawing from the International Anti Counterfeiting Coalition (IACC). Its departure was apparently because of the Chinese e-commerce giant's membership in the organization.
In April, Michael Kors did the same, according to the Associated Press, calling Alibaba, "our most dangerous and damaging adversary."
And then on Friday, the retailers got an inadvertent victory: Alibaba was suspended from the IACC because the organization's president, Robert Barchiesi, has stock in and close ties to the Chinese company, the AP reported. The company blamed "a weakness in our corporate governance procedures."
Alibaba knows that counterfeit accessories are a problem in its business. The retailer has spent more than $61 million trying to eliminate counterfeit goods, which founder Jack Ma has compared to a "cancer."
An Alibaba spokesperson told Business Insider:
Alibaba is proud to have received a unanimous vote from the IACC Board of Directors as the first e-commerce company to join the IACC. We see this membership as another great step in working together with brands and the entire industry to fight the war against counterfeits. We look forward to expanding our work with the IACC and encourage all brands to work with us to find and implement solutions to this global issue.
alibaba counterfeits
(Alibaba) This is what might come up in a search for designer bags on Alibaba.
Luxury retailers, however, don't seem convinced. Alibaba's reputation is deeply embedded, even if the company swears it's cracking down on counterfeiting.
Michael Kors' anger, specifically, came from a letter written by the retailer's general counsel, Lee Sporn, which highlights how the acceptance of Alibaba into the IACC sends a bad, perhaps mendacious, message to retailers. Here's more of the letter, via the AP:
Alibaba’s strategy has consistently been to provide lip service to supporting brand enforcement efforts while doing as little as possible to impede the massive flow of counterfeit merchandise on its platforms. By admitting Alibaba as a member and applauding Mr. Ma's appearance at the Spring Conference, you give Mr. Ma a powerful tool to speak to brand owners and regulators about his efforts to work collaboratively and effectively with brand owners — in the experience of many of your members a shockingly brazen lie.
Aside from the loss of profit related to counterfeit products, many luxury brands already face the challenge of convincing Chinese consumers to pay full price for a designer bag, thanks to the growth of outlet sores.
"I think there's a correlation between outlets and the China market getting flooded with low price, lower quality products, confusing the customer on what they should pay and what the quality of the brand actually is," Brian Buchwald of consumer-intelligence firm Bomoda told Business Insider, noting that Chinese consumers would pay full-price for a high-quality product.
Even in the US, Michael Kors, for instance, has been valiantly fighting to retain its luxury and status as an aspirational brand in the face of general ubiquity from the proliferation of outlet stores.
If outlet stores — and worse, resold outlet goods — denigrate a brand's status as premiere retailer, then counterfeit bags worsen an already sad situation. For luxury retailers, it's a nightmare altogether, since the brand is no longer being accurately represented, especially overseas.
Gucci logo is seen in a store at Fiumicino airport in Rome, Italy, April 11, 2016. REUTERS/Max Rossi
(Thomson Reuters) The Gucci logo at a store at Fiumicino airport in Rome.
Counterfeits may pose such a problem on Alibaba because of its business structure. Alibaba has two networks: Tmall, a business-to-consumer network, and Taobao, the company's primary platform, wherein consumers sell to consumers. The latter is where the brunt of the counterfeit — and Alibaba's poor reputation – resides.
These counterfeits happen in the first place because when Alibaba grew, it was simply trying to be big, Buchwald said. Since then, Alibaba has inevitably achieved breadth — but at what cost? Even executive chairman Jack Ma has said that the business hasgrown "too quickly."
"All they were doing was building something and saying, 'we want as many companies as possible competing for consumer attention and consumer sales, and we don’t care who wins,'" Buchwald said. "Now what they're trying to do is again tip the scale, so that legitimate sellers have greater advantage relative to illegitimate sellers ... but they have a long way to go."
Buchwald likens the issue to "how the industry looked at YouTube circa 2005." But he noted the retailer has a long way to go, which might explain why these retailers remain adamant about their stance against Alibaba.
Despite this dissent, however, Taobao, Alibaba's reselling platform, could prove helpful for tapping into the Chinese market's potential in the future.
"Taobao, which is Alibaba's flagship platform, is right now the largest impediment to brands selling and marketing more effectively to Chinese consumers," Buchwald said. "However, given Alibaba's efforts in technology and marketing and merchandising to improve the seller experience on Tmall, Taobao could very well be a brands' greatest ally in opening up the China market to be more profitable and larger than it is today."
And even though Alibaba is no longer a part of the IACC for now, it swears it is committed to eradicating counterfeits.
"Whether or not we are a member of the IACC, we will continue our productive and results-oriented relationships with brands, governments and all industry partners," Jennifer Kuperman, Alibaba's head of international corporate affairs, said to the AP on Friday.
