China Consumer

Name and shame

Estee Lauder distributor sues NetEase’s Kaola

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Gucci’s CEO Marco Bizzarri has been resolute about refusing to partner with Chinese e-commerce firms. “Frankly speaking, on most of the platforms there’s a lot of counterfeiting and I don’t want to certify counterfeiting because I belong to these platforms,” he said in Shanghai last October. “Instead of taking a risk, I wait,” he added. “We are in a situation of wait and see.”

Bizzarri might be right. According to a report last week from the Organisation for Economic Cooperation and Development (OECD), pirated goods worth $509 billion were seized in 2016 , representing 3.3% of global trade. The majority were picked up in customs checks that originated in mainland China and Hong Kong.

A related irritant for foreign firms is brand infringement. One victim is New York-based cosmetic giant Estee Lauder, which discovered that it goods under the M.A.C label were being sold on NetEase’s cross-border e-commerce platform Kaola, even though Kaola lacked the distribution rights.

Taking the case to court last July, Estee Lauder’s Chinese distributor demanded Rmb1.2 million ($178,447) in damages. Additionally it wanted the Hangzhou-based company to issue apologies on major media platforms for 30 consecutive days, disclose details of its supply chain and the provenance of its merchandise, and, above all, stop selling goods that abuse the M.A.C brand, according to a filing made with the First Intermediate People’s Court of Chongqing this month.

Kaola held a 27% market share in 2018 for online sales of overseas products, topping Tmall’s 24% and JD.com’s 13%, according to data released last week by iResearch. Regular readers of this magazine will recall Kaola’s Canada Goose incident from the end of last year, when there was a row over the brand’s high-end jackets on the platform, which NetEase had difficulty authenticating (see WiC438).

Last February, the China Consumer Association found that an Estee Lauder-branded serum sold on Kaola was a knock-off. In its defence, Kaola said the products were sourced from abroad and alleged that Estee Lauder’s authorised distributor in China lacked the resources to perform authenticity checks.

Sales of fake goods is a more widespread problem for e-commerce firms selling overseas products in China. “It is actually very difficult for such platforms to gain authorisation for direct distribution of [international] brands,” explained Southern Metropolis Daily, noting that a lot of the luxury brands are sourced instead from overseas duty-free shops or dealers. Checks on their provenance are also much more likely to be cursory or non-existent if the imports skirt official channels. For instance, Xiu.com, a Shenzhen-based e-retailer, was exposed for selling Rmb321 million of goods that evaded Chinese customs between 2012 and 2017.

For more ‘niche’ overseas brands an approved distributor in China often doesn’t exist, and so the e-commerce operators have no choice but to acquire stock from overseas dealers and hope they’re authentic. It becomes more of a legal issue if the brand has entered into a distribution agreement with a local party, as in the row between Estee Lauder’s Chinese distributor and Kaola over merchandising M.A.C cosmetics. (Southern Metropolis Daily added that M.A.C products can also be found on e-commerce sites such as JD.com, Xiaohongshu and Vipshop, even though Tmall and Sephora are the only online distributors authorised by M.A.C in mainland China.)

Regardless of the rulings, the conflicts that have arisen with Canada Goose and Estee Lauder have dealt a blow to NetEase’s reputation among international suppliers, Sohu.com reckons. The crisis might undercut some of its effort to diversify away from online gaming, which still comprised two-thirds of NetEase’s revenues and 90% of its gross profit as of the end of 2018.

The lower profitability of its e-commerce segment – which earned less than a tenth of its gaming business – was largely due to higher customer acquisition costs. Local media has reported that NetEase wants to merge with Amazon’s China unit in a bid to build its credibility (see WiC442). Then again, the US online retail giant acknowledged it has its own problem with counterfeit goods. In February it launched ‘Project Zero’ in an attempt to tackle the scourge, reports the Washington Post.


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