Tmall Already Dominates Online Fashion. What Can JD.com Do About It?

The fight between JD.com and Tmall over clothing may really be a fight over who rules Chinese e-commerce.

JD.com once forced its way into books and large appliances with loud price wars. It brings the same ambition to clothing.

Over the past year, hundreds of international brands, including GAP, New Balance, Levi's and Hugo Boss, have opened stores on JD.com, and on average a brand holds a launch event there every month. Last October, JD.com became title sponsor of iQiyi's fashion reality show Falling for Supermodels (《爱上超模》). In March this year, it worked with the China Fashion Designers Association to set up an online platform supporting designer brands. In August, it announced that it had picked three designers to show at Milan Fashion Week...

On top of that come the two fashion shows it has staged every year since 2014, one in spring and one in autumn, under the name "Shang JD." Opinion on the shows themselves is mixed, but for JD.com their main job is to keep telling the world one thing: JD.com sells clothes.

Fan Hui, senior director of marketing and promotion in JD.com's Apparel and Home Business Unit, told QDaily that the shows serve several purposes. First, they show merchants how committed JD.com is to investing in clothing. Second, they show the industry, the media and users what JD.com has achieved in signing up merchants and building the platform. In practical terms, they also let JD.com secure more fashion stock at the change of seasons, so that online and offline sales can support each other.

The three designers selected for Milan Fashion Week, and their work

JD.com is title sponsor of iQiyi's fashion reality show Falling for Supermodels

Five years ago, JD.com selling clothes would have been hard to imagine. The company started out selling 3C products (computers, communications and consumer electronics). In its early years, nearly all its users were men, used to buying phones, computers, cameras and other gadgets there.

In 2011, JD.com began expanding into every category. Large appliances, books and general merchandise all became priorities. The third-party open platform (POP) was set up the same year. Founder Liu Qiangdong's plan was for JD.com's own direct sales and the open platform eventually to account for 50% of total sales each.

Clothing is a textbook many-SKU product (usually non-standard), and people buy it again and again, so it became the most important part of the open platform. In the reorganization JD.com carried out in August, clothing was also given more weight. The Apparel and Home Business Unit became one of four new business units (the other three cover 3C, home appliances and consumer goods). It oversees the business formerly run as the third-party open platform (POP), which also means more autonomy and more power to allocate resources.

According to JD.com, more than 38,000 merchants have joined "JD Apparel City," and flagship stores of well-known clothing brands make up more than 60% of them. Beyond clothing, the main category, big names in luxury goods, luggage and cosmetics, such as Samsonite, Sephora and Luxottica, have also signed up.

According to iResearch's 2015 China Online Shopping Industry Annual Monitoring Report, in 2014 Tmall held 60.4% of the B2C market (which corresponds to the third-party open platforms of Tmall and JD.com), and JD.com held 19.5%.

For an e-commerce company that came from 3C, getting into clothing is hard, especially with a giant like Tmall already in the market. So the question becomes: how to attract more merchants to JD.com, and how to keep them.

"The company's resources and policies, including logistics, the thing users value most about us, are all being tilted toward apparel," Fan Hui said. During Singles' Day (Double 11) in 2013, JD.com's subsidy for the broad apparel category (men's and women's clothing, shoes, sports and outdoor, jewelry and bags, luxury goods and so on) was free shipping on every order delivered by JD.com. Last Singles' Day, JD.com gave some clothing brands traffic subsidies.

In the JD.com app's product categories, men's and women's clothing also sit near the top:

For merchants, joining JD.com is mostly about adding a sales channel. Offline, big brands open stores in different malls for the same reason: a brand survives by reaching as many consumers as possible and being seen as often as possible. Taobao-native brands such as Liebo, Inman and Handu Yishe, for example, have all opened stores on JD.com.

Liu Hong, general manager of the apparel department in JD Mall's Apparel and Home Business Unit, told QDaily that more than 90% of the merchants now on JD.com came to JD.com on their own. The rest were recruited: JD.com compares itself with rivals to find which brands it lacks, then goes after them. It also approaches some new brands, or international brands just entering China, that may have little market share and are not yet on any other e-commerce platform, if they fit where fashion is heading.

"Given how fast JD.com has grown over the past two years, brands in the market will notice these changes," Liu Hong said. To make sure merchants notice what is happening in JD.com's clothing business, JD.com tours clothing manufacturing hubs such as Changshu, Haining, Guangzhou and Shenzhen every year to give presentations.

But what merchants care about most is how much they can sell. And in scale, JD.com is still far behind Tmall. In the second quarter of 2015, JD.com's gross merchandise volume (GMV) was 64.7 billion yuan for its direct sales and 49.8 billion yuan for its third-party platform. In the same quarter, Taobao's transaction volume was 427 billion yuan and Tmall's 246 billion yuan.

A clothing brand that opened stores first on Tmall and then on JD.com told QDaily that its JD.com sales still lag far behind its Tmall sales, at roughly 1:5. It opened on JD.com mainly because it did not want to "put all its eggs in one basket."

This is also why brands negotiating with JD.com care most about how much traffic, exposure and prominent placement it can offer: when sales volume is small, these are what guarantee sales.

"We push brands for more new products and exclusive products, and in return we give them resources such as traffic, brand-event slots, and placement on WeChat and Mobile QQ. All of this is settled through commercial negotiation. But we also respect the brands' own channel plans," Fan Hui said.

Because its third-party platform is smaller, JD.com is far less crowded than Tmall. Tmall has 200,000 merchants; JD.com has only 80,000. As a result, merchants on Tmall already fight hard for traffic, and many have no choice but to pay for it, while traffic on JD.com is basically free, so brands get it more cheaply. "It's not that we deliberately refuse to charge. We'd like to charge too. We have plenty of traffic, but not yet that many merchants."

While it keeps adding brands, JD.com has also started paying attention to every point where it touches users. Every page users open, every promotional slot, every online and offline event is used to tell them one clear thing: JD.com sells clothes.

Merchants have noticed the change in how JD.com runs its clothing business. "JD.com used to be a buyer, with the mindset of the party holding the purse strings. Now they are gradually treating us as customers, and we can talk about deeper cooperation," said Liu Shichao, general manager of e-commerce and online marketing at the women's clothing brand Goelia. The case appears in the book Chuang JD: Liu Qiangdong on His Startup Journey (《创京东 - 刘强东亲述创业之路》). According to the book, JD.com also has yardsticks for judging whether a merchant takes its platform seriously: whether new products go up as fast as on Tmall; whether senior management assigns dedicated staff to deal with JD.com; and whether there are styles sold only on JD.com.

The homepage of JD Apparel City

The homepage of Shang Tmall

In 2013, JD.com's clothing transaction volume compared with Tmall's was 1:18. In 2014 it was 1:9, and 1:7 for menswear. According to Analysys's China B2C Market Quarterly Monitoring Report, in the second quarter of 2015 Tmall and JD.com held 73.4% and 10.4% respectively of clothing transaction volume in China's B2C market. Two years earlier, the figures were 74.68% and 2.29%.

From the day JD.com started selling clothes, it faced an overwhelmingly stronger rival in Tmall. "But back then, Tmall didn't think JD.com would become a competitor," Fan Hui said.

From 2013, however, Tmall took note of the momentum at JD.com and Vipshop, and began tightening its grip on merchants through measures such as exclusivity agreements. In May this year, Tmall held an apparel strategic partners launch event and signed strategic cooperation agreements with more than 160 clothing brands from more than 110 groups worldwide; Taobao-native brands, international brands and traditional offline brands came in a ratio of roughly 1:2:4. More than 20 brands, including Decathlon, Timberland, E-Land, TEENIE WEENIE and the Inditex group, announced that Tmall would be their only third-party e-commerce platform.

"How to arrange distribution channels is, I think, the merchants' own business. Merchants go wherever the users are. They are not so foolish as to stop doing business everywhere else just because they do business on Tmall," Fan Hui said. She said many brands she talked to did not want any one channel to dominate: "They won't plan to sell 10 over there and only 1 here; they hope that 1 will gradually grow to 10. They won't treat JD.com as a secondary front, but as another fast-growing channel, and they want all their channels to be in balance."

In recent conversations with an international clothing brand, QDaily learned that it sometimes finds itself caught between JD.com and Tmall, unsure which way to turn. In truth, there are not many good brands that draw users, and to win them, both platforms are likely to offer terms that are hard to refuse.

Liu Hong explained that when a brand joins JD.com, the two sides estimate how much traffic JD.com can provide based on the brand's average order value and how similar brands have converted before, and from that set six-month and one-year sales targets. The targets are tracked weekly, and expectations are adjusted regularly according to actual sales. Big brands basically get "one-on-one" service.

In June, JD.com teamed up with Bestseller, La Chapelle, Xtep and Li-Ning to launch an apparel O2O model: customers order online and the nearest store delivers

JD.com has said repeatedly that a few brands coming or going will not affect its overall growth. Still, when Uniqlo, once seen as a major draw, pulled out a month after joining, it was clearly a blow.

After all, JD.com and Uniqlo had prepared extensively: negotiations measured in years, two to three months of back-end technical work, special treatment in a dedicated warehouse, and a signing ceremony attended by Liu Qiangdong himself. Both sides plainly put great effort into the partnership. By JD.com's account, Uniqlo sold more than 10 million yuan in its first three days on JD.com, beating both sides' expectations. Even so, Uniqlo ended up shutting its store in a hurry.

JD.com says Uniqlo was a one-off with little effect on the business as a whole, and that it does not expect a repeat. "We won't get stuck on fighting over whether a few brands open stores with us. That isn't something that decides the company's future. Think how many people in China have still never bought clothes online," Fan Hui said. "We'll focus on the bigger market, such as JD.com's current push into lower-tier cities and its campus program. If we get those channels right, the competition won't be about whether a few stores open or close." But JD.com is not the only one that has spotted these channels. Its rivals are moving into them too, and the competition JD.com faces remains fierce.

At that May launch event, Tmall also announced a "Potential Customer Program" for its strategic partners: Alibaba's big-data algorithms identify potential customers inclined to buy a given brand, and then turn those potential customers into buyers.

For example, users who have browsed or searched for brand A, or who have bought brand A somewhere in the Taobao ecosystem but not from its flagship store, all count as brand A's "potential customers," and Tmall steers them to the brand's store. According to Er Ding, general manager of Tmall Apparel, Alibaba has started running the program with six strategic partners, including Decathlon, GAP, Peacebird and Adidas. By running tests with different brands, it tags users by their buying behavior. If a group of users is price-sensitive, the brand store receiving that traffic should show them a discount section rather than put new arrivals on its homepage.

This is an advantage Tmall has built up over years. It reads the market well and can give merchants useful advice on page layout, promotions and engaging users. This is what JD.com needs to learn from Tmall in clothing. JD.com's advantage in logistics, meanwhile, is something Tmall is racing to match.

"If you run into enemies in a game, it means you're on the right path." So goes a famous, highly upvoted answer on Zhihu, and it is also how JD.com describes where its clothing business stands today.

And behind the fight between JD.com and Tmall over clothing may lie a fight over who rules Chinese e-commerce.