At the beginning of November, Ma Yun, the founder and Executive Chairman of Alibaba Group, and Tim Cook, CEO of Apple Inc, have both teased a possible “marriage” between AliPay and Apple Pay in 2 separate talks at the Wall Street Journal Digital conference. Since then, speculation went that Apple Pay would open the Chinese market by cooperating with AliPay. A few days later, on November 11, Cai Chongxin, CFO of Alibaba Group, announced that negotiation between Apple Pay and AliPay is going on smoothly, and it’s very likely that Apple Pay will be introduced to China soon, with integration with AliPay.[1]

But why does Apple Pay partner with AliPay? What are the benefits of their partnership, and what are the problems they might have to face? This article will first explain what Apple Pay and AliPay are, and how they function. Then it’ll take a look at the current payment system in China, and Apple Pay and AliPay’s positions in it, to give a general idea about what’s every party’s job in the payment system. Finally, the article will dissect the competing forces within the system, in order to analyze what benefits and setbacks the “battle” will bring to Apple Pay and AliPay’s cooperation.

• What Are Apple Pay and AliPay?

When I first heard the news about the possible cooperation between Apple Pay and AliPay, the questions that popped up in my mind immediately were: What are they? What are the differences between them? Shouldn’t they be competing with each other if they function similarly?

Snapshots of AliPay’s user interface.

AliPay is a third-party online finance platform, which is available in almost all smartphones. Users can link their cards to their personal accounts and make purchases online. However, instead of being merely an online payment platform like PayPal, AliPay offers financing services as well. Users can transfer money, pay their fees, ask for a small loan, process investments, or even make a donation on it. In other word, AliPay is similar to an online banking system – even more than that.

Apple Pay in iPhones.

Resource: http://cdn.macrumors.com/article-new/2014/09/applepaytouchid.jpg

Apple Pay is more like a digital wallet. It provides a mobile payment service which employs Near Field Communication (“NFC”), a set of standards that allow smartphones and similar devices to realize radio communication when touched or brought into proximity, typically 10 cm or less[2]. Users only need to input their card numbers into their iPhone 6/6+ to put the cards into their “wallet.” Before using Apple Pay, they will have to identify themselves by Touch ID, a fingerprint identification system. Then, users just need to get their phones closer to the payment terminals to finish a transaction, and they can finish this step without Internet. Apple Pay now generates 0.15% transaction fees from banks, but the rate is still being negotiated. Apple won’t remember any card information, and it won’t give away any statistics about the transaction to merchants either. In other word, Apple Pay is completely a third party. It only provides the technology to integrate payment methods, and it’s not involved in settlement process between consumers, banks, and merchants. It functions like Outlook: Users can link different email accounts to it, and Microsoft doesn’t care if they’re using gmail or hotmail.

Therefore, if Apple Pay cooperated with AliPay, the way they worked together would be that users could add an AliPay account into Apple Pay, and they’d be able to use the money in their AliPay account via Apple Pay,

• The Chinese Payment Eco-System

Payment system can be divided into two parts: online and offline. Offline payment system in China is a closed loop consists of consumers, merchants (including retailors, which will be talked about at the end of the article), and banks, and no other party has been able to successfully intervene the process or take another place in it so far.

The structure of the online payment environment is more complicated. In order to understand how it works, it’s important to understand the functions of the government-backed group – UnionPay.

China UnionPay is an industry association founded in Shanghai in 2002, and was sanctioned by People’s Bank of China – the Chinese Federal Reserve. It has brought 18 Card Information Exchange Centers – which used to be non-profit organizations located in 18 different cities all over China – together, and is originally mainly  responsible for establishing and operating a national inter-bank information exchange network. For example, people could only make a withdrawal from an ATM machine from Bank of China if they were using a card issued by Bank of China. But now, they can withdraw money from any ATM machine with a UnionPay sign on it, since Bank of China is a member of UnionPay. In other word, UnionPay is a platform closely related to the government, and it holds banks together and thus can represent most of them.

Resource: http://pic.iresearch.cn/zt/201306/0066@67468.gif

After understanding what UnionPay is, let’s go back and take a look at the online payment system. Online payment service is mainly provided by three types of platforms. The first is online money management platforms, which are led by AliPay. The second is UnionPay, which stands for most banks. Finally, social media based online payment service is now growing by utilizing its huge user base to earn a piece of the pie. However, the most important two are still the third party payment platforms and the bank system. Statistics show that in the first quarter of 2013, more than 87.7% of online transactions were done on the third party payment platform, more than half of which was contributed by AliPay. UnionPay took up 10.5% of the market, and the rest only 1.9%.

AliPay is definitely the bellwether of the whole online payment system. UnionPay is basically monopolizing offline payment, and is trying to gradually take a place in the online payment environment. These two are the most major forces in the current payment system in China. If Apple Pay steps in in the future, it’ll be a third party which not only is able to integrate all payment methods together, but also it’ll help online payment service providers open the door of offline payment system. Obviously, this will bring huge impact to the existing payment eco-system in China.

• The Bright Side of Apple Pay’s to Cooperate with AliPay

Numbers about AliPay that are good for Apple Pay.

In order to understand why Apple Pay and AliPay intends to work together, let’s first take a look at what benefits their cooperation may bring to both parties. The first benefit for Apple is that if it can successfully partner with AliPay, it’ll be a great opportunity for it to open the Chinese market and make a huge profit. Up to the Chinese New Year in 2014 (at the beginning of February this year), the number of AliPay users had reached nearly 300 million[3]. In 2013, there were more than 2.78 billion transactions happened on AliPay. Its annual transaction volume last year broke 900 billion RMB (around $150 billion), and has become the biggest mobile payment platform in the world. To be more specific, as is shown above, the second biggest mobile payment company – PayPal’s transaction volume in 2013 was about $20 billion[4]. If Apple Pay partners with AliPay, ideally, it may attain more than 1/5 of all Chinese to become its users, and according to its current transaction rate, which is 0.15%, generates millions annual revenue.

Resource: http://www.guopu.cc/hysd/2014/08/29/8b436ecb-54fa-4808-8001-7451678dace1.htm

AliPay users can pay taxi fees by simply launching the AliPay app and using the camera to scan the QR (Quick Response) code, the square matrix barcode in the picture.

Resource: http://www.hb.xinhuanet.com/2014-03/16/c_119787896.htm

As for AliPay, its biggest win in the cooperation will be that Apple Pay can bring its business to the offline environment. According to the Chinese E-Commerce Research Center, in the first half-year of 2014, total sales online has reached 185.6 billion RMB (about $30.5 billion), but it’s only 8.7% of total retails sales of consumer goods[5]. The offline market is way bigger than the online one, and that’s why AliPay has been trying to penetrate this market, though it’s already the big shot in the online environment. AliPay’s current major attempt to go offline is “pay by QR code,” which means that users can simply pay by scanning a code using the AliPay app in their cell phones. However, this is not helping AliPay to go completely offline. One of the most obvious reasons is that users still need Internet environment to finish the transaction. For example, in the basement in a department store, where the service signal can be terrible, consumers might fail to pay by scanning the code, because their cell phones can’t connect to the Internet to transfer information. But if there’s Apple Pay, and AliPay becomes a “card” in the digital wallet, users will be able to pay offline, because Apple Pay employs NFC, which utilizes radio to complete transaction instead of the Internet. Therefore, cooperating with Apple Pay can definitely push AliPay further in the offline payment system.

• Potential Problems Apple Pay and AliPay might face in the Cooperation

Resource: http://www.dailytech.com/iPhone+6+Helps+Apple+Regain+Market+Share+But+iPhone+6+Sales+are+Weak/article36954.htm

As mentioned, Apple Pay is only available in iPhone 6 and 6 Plus, and this is a critical problem awaiting Apple to solve. According to Kantar Group, a top mobile market research firm, iPhone market share “hit a low in June, 2014 of 12.8%,” but rebounded to 15.7% in October due to the launch of the iPhone 6/6+[6]. That is to say, even if every Chinese has a mobile phone, only less than 3% of them has can have access to Apple Pay. Even if all iPhone6/6+ users have installed AliPay on their phones, Apple Pay would only be able to utilize around 15% of AliPay’s user base. Of course, AliPay’s user base is still meaningful to Apple Pay even so, but low market penetration of iPhone 6/6+, and the fact that Apple Pay is now only available in the latest issued devices, can’t be ignored if Apple Pay really wants to stand firmly in the Chinese market.

How Apple Pay and AliPay will split interest is another problem. As mentioned, Apple Pay now profits mainly by charging banks for a 0.15% transaction fee. AliPay charges transaction fees from its partners to generate profit as well. For example, JD.com is the second biggest B2C e-commerce online platform in China[7]. AliPay used to be one of its possible payment methods, and JD.com paid 0.5% fees out of every transaction that happened on AliPay[8]. According to the two companies’ profit pattern, Apple Pay and AliPay will make money from every transaction that uses their services. However, if a Chinese consumer buys a $50 product, and he chooses to use AliPay via Apple Pay, the two companies will have to decide how much they will take respectively from the deal.

Speaking of splitting interest, UnionPay can’t be ignored, and conflicts do exist in the two companies – Apple Pay and AliPay – and UnionPay’s interest. As is mentioned, UnionPay is originally meant to be an information exchange hub for member banks. However, now it has become not only an integration platform, but also a supervisor of the bank system. According to the fifth clause of China UnionPay’s business scope, UnionPay can “set the regulations and standards for inter-bank transactions, and negotiate and arbitrate disputes in inter-bank business[9].”

Even more than that, UnionPay has been called a “monopoly empire” by some mainstream media in China[10], because it has become an organization that is not only pursuing profit, but is utilizing its relationship with the government to reinforce its hegemony in the offline payment system. For instance, banks usually charge restaurants 1.25% transaction fee when they use POS (point of sale) machine, and banks know it is a restaurant that is using the POS machine by MCC – Merchant Category Code. For example, “5812” represents restaurants, “5511” automobiles, and “5311” department stores. Since restaurants belong to entertainment category, its transaction fee is relatively high, and thus many restaurants don’t accept cards – this goes against UnionPay’s interest. Hence, in order to gain more market and ensure self-profit, UnionPay allocates MCC that belongs to other categories to restaurants. If UnionPay allocates “5311” – MCC for department stores – to restaurants, then the restaurants will need to pay only 0.78% transaction fee, which is 0.47% less than what it should be. In other word, UnionPay is no longer a neutral third party which is helping communication between banks, but it has already become a supervisor, even a tyrant who is making self-profit even at the costs of its citizens.

Third party payment platforms dominate most of the online payment market. Offline payment system has been shrinking[11], but it still accounts for significant share of total retail sales. Thus the current situation for UnionPay is that, it’s hard for it to expand its service online since competitors are too powerful, and so it’s endeavoring to protect its leading status in the offline payment market. Therefore, it’s easy to imagine that if Apple Pay and AliPay’s cooperation is going to introduce AliPay into the offline payment environment, UnionPay might utilize administrative measures to impede the process. Actually, UnionPay has already stopped AliPay’s first attempt to step in the offline payment market once. In 2012, AliPay announced that they were going to march into the cash on delivery (“COD”) market, and had worked with Shanghai Commercial Bank to produce 30 thousand POS machines to help the business. Traditionally, handling fees generated by transactions that go through on a POS machine will be divided into 3 parts: merchants take 70%, issuing banks 20%, and UnionPay 10%. However, AliPay’s working with the bank directly had bypassed UnionPay, and had denied it of the transaction fees it could originally make. So in July 2013, UnionPay’s board enacted a regulation that at the end of the year, all UionPay-cards-related offline transactions had to be transferred to UnionPay, and third party offline payment systems had to be incorporated into UnionPay’s clearing system. It meant AliPay would have to not only split up its profit from 10% transaction fee to UnionPay, but also publicize information about offline transactions to it. At the end, AliPay stopped its COD service. The reasons behind AliPay’s move were complicated, but as Xing Li, a reporter at Monkey Weekly said, “On one hand, it was a signal of anti-trust against UnionPay; on the other hand, AliPay was avoiding conflicts with UnionPay, because the offline payment service it had at that time wasn’t that big after all.[12]” AliPay didn’t want to front UnionPay, because UnionPay was politically powerful, and this is why it’s important for Apple Pay and AliPay to figure out if UnionPay is a friend or an enemy.

CurrentC is an MCX’s alternative to Apple Pay, which is employed by many huge retailors. Consumers need to launch the CurrentC app in their cell phones, and then use the camera to scan a QR code to pay, or the user can open the app and let the cashier scan the QR code that belongs to him/her to charge money. CurrentC doesn’t take transaction fees from retailors, and that’s why it’s considered one of the retailors’ attempts to kill Apple Pay and credit cards by building their own payment system[13].

Resource: http://venturebeat.com/2014/10/31/why-currentc-is-rightly-demanding-exclusivity-from-merchants/

Last but not least, except for competing forces within different payment service providers, a closely related “outsider” should be taken into consideration as well – the retailors. On one hand, retailors have been trying to get rid of transaction fees from consumers’ using credit cards, and thus they surely don’t want to be haunted by Apple Pay. Now, some leading retail merchants in the U.S., such as Wal-Mart, Rite Aid and CVS, adopt CurrentC, a mobile payment solution provided by MCX instead of Apple Pay, for the reason that they want to eliminate the 2% fee comes with purchases by credit card[14]. If Apple Pay wants to enter the Chinese market, it might have to face the same problem, no matter it’s going to cooperate with AliPay or not.

On the other hand, as mentioned, Apple Pay keeps payments anonymous, which means that retailors can lose valuable information about consumers: what they’re buying, returning, and what might interest them next – data-driven retail marketers won’t be able to stand this. We all know that Starbucks is an Apple-friendly brand[15], but still it shows hesitance in fully embracing Apple Pay. iPhone users are now bale to buy credits via the Starbucks mobile app by using Apple Pay, but there’s no exact timeline for when Apple Pay will be available at the cashier. As Joshua Brustein said in Apple Pay Is Too Anonymous for Some Retailers, “…Starbucks mostly see mobile payments as a way to insinuate itself deeper into its customers’ lives through loyalty programs.” It’s obvious that consumption statistics mean a lot to retailors, and so Apple Pay’s anonymity, which is why some people love it, can actually turn into an obstacle that Apple Pay has to overcome if it’s really going to partner with AliPay and enter the Chinese market.

 

Personally, I’m looking forward to Apple Pay’s partnering with AliPay. However, in order to ensure that the cooperation will work, both of the companies will need to think about potential problems within themselves, and possible conflicts between every party in the payment eco-system in China. But again, as a consumer and frequent AliPay user, I’m looking forward to the day when I can make a purchase offline by simply a touch of my mobile phone and the payment terminal, no matter using a card or my AliPay account, no matter there’s internet or not.

 

 

 

[1] http://wap.25pp.com/view/67286/

[2] http://en.wikipedia.org/wiki/Near_field_communication

[3] http://ab.AliPay.com/i/dashiji.htm

[4] http://www.guancha.cn/economy/2014_02_17_206550.shtml

[5] http://www.guopu.cc/hysd/2014/08/29/8b436ecb-54fa-4808-8001-7451678dace1.htm

[6] http://www.dailytech.com/iPhone+6+Helps+Apple+Regain+Market+Share+But+iPhone+6+Sales+are+Weak/article36954.htm

[7] http://data.eguan.cn/dianzishangwu_172432.html

[8] http://m.zhihujingxuan.com/17325.html

[9] http://cn.unionpay.com/xiamen/col_84284/file_570818.html

[10] http://view.163.com/special/reviews/unionpay0317.html

[11] http://xqimg.imedao.com/149659cfe1df63fe16d2cf95.png

[12] http://business.sohu.com/20130909/n386188299.shtml

[13] http://techcrunch.com/2014/10/25/currentc/

[14] http://www.businessinsider.com/wal-mart-heres-why-we-dont-support-apple-pay-2014-10

[15] https://www.apple.com/pr/library/2007/09/05Apple-and-Starbucks-Announce-Music-Partnership.html

 

App Spring. The name comes from a shopping destination in New York City’s SoHo – “Spring Street.” Similar as most of the stores on Spring Street, the app “is meant for the modern high/low shopper, who buys key luxury pieces and mixes them with fast-fashion[1].”

Source: http://www.wtoutiao.com/a/412770.html

In the middle of August, a new mobile shopping app was launched – Spring, and even the media called it “revolutionary[2].” Two months before its debut, Spring has already gained $7.5 million in its series A financing. According to WWD, a website aims at providing news about fashion, beauty and retail industry, investors includes Groupe Arnault, which is under the charge of Bernard Arnault, the president of LVMH Group; Theory’s former CEO and renowned fashion investor Andrew Rosen; Coach’s former CEO Lew Frankfort; and Rachel Zoe, who is recently a heated spot in the fashion industry.

 

Consumers can make a purchase buy only one click, except for the first time when they’ll need to input their credit card information and shipping address.

Source: http://www.wtoutiao.com/a/412770.html

Spring is a mobile shopping app which adopts marketplace pattern and combines photo sharing app Instagram’s visual elements, dating app Tinder’s compulsive swipe-down design, and Twitter’s “favorite” and “follow” functions. Here’s how Spring works. Brands release selective products on the app, and they are in charge of pricing and display of products. Consumers can make a purchase buy only one click, except for the first time when they’ll need to input their credit card information and shipping address. Spring will collect orders made on the app, and then send back to the order managements systems of each brand to let them process the orders and take care of delivery.

Spring is different because it provides a platform for brands to communicate with consumers directly. There used to be mainly 2 ways for brands to connect with consumers via mobile apps. The first is some popular social networking apps such as Instagram and Pinterest. However, consumers can’t buy directly from these apps. In addition, as David Tisch, one of the co-founders of Spring said, it can get awkward when brands come in social media. The second is social networking e-commerce apps, such as DongXi. Usually, at first, the apps will allow consumers to upload and share photos of the products they like. But later, the “buy” function will be introduced. But still, as Tisch mentioned, “the best shopping experience is not user-generated content and brands then jumping in, but how to capture that feeling of walking 5th Avenue or your favorite mall.”

That’s how Spring is unique. It’s a pure e-commerce app which fills the gap between brands and consumers, but at the mean time, it saves their time to download independent apps from retailors or brands. Instead of pushing all their products to users, brands only release products “with souls[3],” which means products that these brands believe can represent and show their image. It leads brands to focusing more on their products, because products are their advertisements on Spring – this is how Spring enables brands to talk to consumers directly.

Traditional e-commerce platforms, such as Zappos, usually act like an agent between brands and consumers. They carry the brands which grant them rights to sell their products, and these platforms need to take care of the whole purchase process from stocking, displaying, to shipping. Thus, the cost of traditional e-commerce platforms includes inventory and shipping expenses, and they mainly profit from sale.

Brands manage their own accounts, and Spring doesn’t participate in their selling process – it’s only a platform for brands to communicate with their consumers directly.

Source: http://www.wtoutiao.com/a/412770.html

Different from traditional e-commerce platforms, Spring isn’t involved in any purchase process except for collecting orders made on the app and sending them back to every brand’s independent order management system. In other words, it doesn’t have inventory and shipping cost at all – its major expense is the app’s operating cost.

Spring profits from commission from every purchase, which according to Tisch, is less than 8%, and even lower when the product is exclusive on Spring. This measure strengthens the reciprocal relationship between brands and the app. On one hand, exclusive products can help Spring attract more users; on the other hand, brands will be more able to speak their “souls.”

However, another co-founder, who is also the CEO of Spring, Alan Tisch said that the app is able to gather information about consumers’ browsing and purchasing habits. Not only can brands better control their inventory by analyzing the statistics which show the sizes and colors that are the best sellers, but also they can know how to draw consumers’ attention by interpreting the data collected by Spring – this is no doubt a tempting asset. However, Alan Tisch didn’t mention how much they’ll charge for the service.

Spring indeed provides something new to its consumers, but whether it is revolutionary is still, in my opinion, open to discussion. I have to say that, I felt the impulse to make a purchase when using the app, because all the products on it were so selective and the visuals were great. However, if Spring wants to stay in advantage, it has to find out a way to utilize statistics collected from users’ browsing habits and purchasing patterns, because this is something only Spring can do but nothing else can. Spring is the only one pure e-commerce app which has perfectly incorporated beneficial features of social media while avoided its shortcoming – in this case, Spring is indeed revolutionary.

 

 

 

[1] http://www.vogue.com/972293/spring-app-changes-mobile-shopping/

[2] http://www.prnewswire.com/news-releases/introducing-spring-a-revolutionary-mobile-shopping-experience-271227781.html

[3] http://www.forbes.com/sites/alexkonrad/2014/08/14/how-david-tischs-new-app-spring-looks-to-crack-mobile-shopping/

One of the victim babies who had used poisoned domestic infant milk powder.

In 2008, baby formula milk powder scandal broke out in China. Several domestic Chinese milk powder brands used melamine as protein adulteration, and thus affected more than 53,000 babies. Nearly 14,000 kids were severely sick. Many of them became permanently disabled, and four of them even died. Since then, Chinese consumers began to turn to foreign infant milk powder. They don’t even want to buy it in Chinese retail stores, because they’ve lost faith in made-in-China.

Source: World Bank

Source: General Administration of Customs of the People’s Republic of China

Infant milk powder resell industry was thus born. This secondary market has fully utilized Chinese market’s massive demand for infant milk powder to profit. As shown above, according to a report conducted by World Bank, China consumes nearly 1/3 of baby formula milk powder around the world each year. General Administration of Customs of the People’s Republic of China further pointed out that two out of three families in China will choose import milk powder, and 14% of all foreign milk powder comes from informal channel, which means from individual resellers. Fourteen percent might sound like a small number, but it actually accounts more than 60 million cans every year, which means nearly 170 thousand per day – and it finally leads to a business valued more than $3 billion.

A photo taken in a Germany retail store. Many products were sold out on the infant milk powder isle.

As a consequence of Chinese excessive demand, infant milk powder is consistently out of stock in some areas in foreign countries. However, the phenomenon isn’t caused only by Chinese consumers.

The first reason that needs to be taken into consideration is the supply chain of milk powder industry is a typical model of low-elasticity. This means that even if manufacturers want to respond to the massive demand, they can’t. First, it takes at least three years to raise cow from its birth to the day it can produce. In other words, it will take at least three years for manufacturers to increase supply. Besides, manufacturers just won’t take the risk to increase the supply of cows to cope with the unknown market after 3 years. Imagine that if demand dropped after 3 years, it would cost them even more to take care of the surpluses.

The second reason that also leads to insufficient demand is the marketing strategy of milk powder manufacturers themselves. Aptamil and Milumil are 2 sub-brands under Milupa, the best milk powder brand in Germany. These two brands use the same milk resources. Chinese consumers love Aptamil, but they don’t buy Milumil. Usually, milk powder brands distribute their products both online and offline. They’re free to adjust prices online, but not offline, because they’ve signed contracts with retail stores.

Aptamil had been out of stock in retail stores since the beginning of January. However, Aptamil were off-shelf not only because it was sold out. Milupa said that there were problems with Aptamil’s milk resources, and they decided to stop producing Aptamil temporarily.

But interestingly, at the mean time, Milumil, which uses the same milk resources, was still on shelf. Even more interestingly, Milupa was still selling Aptamil online, with an increased price. Around the middle of April, after 3 months, Milupa reproduced its new Aptamil as a new product with a higher price in retail stores. The infant 1 milk powder used to be 15 euro, now it is 23.

It’s obvious that this has increased resellers’ cost dramatically. However, except for strategic price change from foreign milk powder manufacturers, new policy implemented by China Customs has also brought pressure to the secondary market. In order to protect domestic brands and control informal milk powder import, China Customs decided to tax packages that values more than $150 – the number used to be $1,350. To be more specific, in the past, reseller could send 26 cans in one package each time. But now, they can send only 2.

The new policy has further squeezed profit, because shipping companies charge much less for additional pounds. For example, here in Los Angels, the first pound costs $11, and only $4 for each additional pound. How does shipping price affect infant milk powder resellers’ profit? Resellers in the U.S. used to be able to earn more than $13 a can; now the number is around $9.

The existence of infant milk powder second market is no doubts an interesting phenomenon, which reflects many problems in Chinese market. The government’s move to protect domestic market is understandable. However, if it doesn’t reinforce food administration in China to gain back consumers’ trust, its attempt to solve the problem merely by isolating external forces will be eventually in vain.

Sephora, one of the most famous cosmetics shops in the world, just finished its semiannual sale on November 10. The 20% off event was for VIBs and VIB ROGUEs, who have, respectively, spent more than $350 or $1,000 in the past year. However, many qualified accounts with Asian surnames were blocked during the sale this year. Sephora released an official announcement on its Facebook page on Nov. 7, stating that they were deactivating accounts to stop reselling. But the company is facing possible charges not because their attempt to regulate its market. Many accounts with Asian surnames were deactivated, though the owners claimed that they’d never resold any items. Some of them even said that they didn’t buy anything on Sephora.com during the sale this year, yet their accounts were still locked. Now there’s an outrage on Sephora’s Facebook page.

Many Asian consumers are now complaining on Sephora’s Facebook page about their accounts’ being deactivated for no reason.

It seems that the reselling phenomenon is the key issue here. However, Sephora actually has its stores in China. Why do Chinese purchase oversea? This article will look into the reasons why people resell Sephora products to China.

As mentioned, Sephora has its stores in China, but people still buy from Sephora.com. There’re mainly 2 reasons: Some brands that are exclusive in the U.S., and more importantly, it’s much cheaper to buy directly from the website. For instance, the price for the Rose Mask produced by Fresh is $58 on Sephora.com. Chinese Sephora stores don’t carry the brand. If consumers turn to Fresh stores – which now only exist in Beijing and Shanghai – to make a purchase, it will cost them￥500, which is about $82 – the price is 41.4% higher than it is in America. This is because Chinese government places high customs tax on import goods.

Besides, it is said that the quality of skincare products sold in manufacture countries is much better than those sold elsewhere, which is considered an open secret in the cosmetic industry – and Sephora sells a lot domestic products. Last but not least, Chinese Sephora also doesn’t do well in marketing itself, so few people actually go to stores and make a purchase – these are all the reasons why Chinese consumers turned to Sephora in America.

However, high customs tax, low product quality and diversity, and poor image of Chinese Sephora are not the only reasons why resellers exist. One of those whose accounts were banned decided to file a class action against Sephora for discrimination against Asians. He made an announcement on Weibo, encouraging people whose accounts had been unfairly deactivated to leave their contact information to the lawyer in charge. Interestingly, he mentioned that he had asked certain promotion account to help him tweet the message, but he was refused because there’s interest conflict between helping him and the account’s relationship with Sephora.

The Weibo announcement made by a Chinese consumer whose account was deactivated for no reason. He’s now working with a lawyer to file against Sephora for discrimination against Asians, especially Chinese.

It’s interesting because, many promotion accounts on Weibo constantly tweet about sales going on on Sephora.com. However, Sephora.com explicitly points out on its website that international shipping only includes Germany, Japan, Netherlands, Norway, South Korea, and the United Kingdom. So it doesn’t ship to China, yet it’s advertising on Chinese promotion accounts, where most of Chinese consumers get the latest promotion information.

Shipping policy on Sephora.com.

One of the Weibo accounts which had tweeted about promotions on Sephora.com. According to Rise_Against_Sephora, it is this account which has refused his request for help with the class action.

 The same promotion account had publicized information about how Chinese can buy from foreign websites such as 6PM and Saks, which shows that its target audience includes those who are living in China, though its account description is “looking for deals for Chinese who are living in North America.”

Now that Chinese consumers have seen the promotion information, they want to make a purchase. Since Sephora doesn’t ship to China, consumers use transshipment companies to deliver their products. Here’s how it works. They buy things on Sephora.com. The address they leave on the website belongs to a transshipment company. The company will receive the orders, and will send them to the buyers. Everything looks perfect, until Sephora began to ban transshipment addresses. From more than a year ago, consumers started to complain that their orders had been declined due to detected transshipment addresses.

 

A consumer was complaining about the fact that Sephora doesn’t allow people to use transshipment companies to purchase.

 Since consumers can no longer make a purchase on their own, they start to look for individuals to help them place an order. This is the most major reason why there’re resellers targeting at Sephora. Some people said that resellers might hoard hundreds of the same products while they’re on sale, which is not fair to other consumers. However, on one hand, there’s a limit on the number of the same products that one can purchase online, so it should be hard for one to hoard. But on the other hand, though Sephora has made a limitation online, it doesn’t limit the quantities that one can purchase in stores, except for some limited-edition gift sets.

All in all, Sephora has banned all possible means by which Chinese consumers can make a purchase on their own; but at the mean time, it’s advertising in China. Sephora said that some accounts were locked due to the purpose to control resell, but it’s actually implementing different rules online and offline. It seems that Sephora is blaming resellers, but the company itself is one of the reasons that contribute to the phenomenon. Some even argue that Sephora is hypocritical, because it wants to utilize huge purchasing power in China, but at the same time, when it’s short of supply, Asian accounts are the first to be locked with “justified reasons.[1]”

It’s not suggesting that Sephora is guilty. However, the contradictions in the company’s rules do make it seem suspicious. Regardless of the fact whether Sephora is discriminating against Asians, the company obviously has a lot of PR work to do if it still wants to stable the Asian market, especially the Chinese market.

The latest update on the issue is that the promotion account which advocates Sephora and has refused to help with the sue, has contacted the management of Weibo, trying to filter some of the tweets that the person who raised the class action publicized. Obviously, this is not the best PR it can do.

The anti-Sephora Weibo account @Rise_Against_Sephora claimed that Weibo had hidden some of his tweets. In the picture, it is his conversation history with the promotion account which advocates Sephora. Actually, in one of the tweets he publicized last night, he mentioned the exact name of the promotion account – but that tweet can’t be found now.

Another tweet just publicized by Rise_Against_Sephora, stating that his tweet was filtered again.

[1] Resource: http://www.douban.com/group/topic/66540865/

When Russia revealed vast diamond reserves in 2012, the diamond market was expected to suffer terribly. The Russian government kept the mine – whose deposit may last the next 3,000 years – classified for nearly half a century in order to protect its national benefit in diamond industry. However, two years have passed since the revelation and the price of diamonds doesn’t seem to have been affected much. On the contrary, the price has continued to rise, as we can see from the chart below.

Source: www.ajediam.com

This might prove the famous slogan: A Diamond is Forever. But what exactly does it mean? Indeed, the price of diamonds seems to be impervious to anything – from recessions, the laws of supply and demand, to even Antitrust Laws. This article will look into how the De Beers Group is able to dominant the diamond market by controlling supply, establishing a unique distribution system, evading antitrust laws, and positioning diamonds as a necessity of life, and thus reveal the secret of the whole diamond industry – why “A Diamond is Forever.”

• Are Diamonds Scarce?

Adam Smith put forward the paradox of value in his book Wealth of Nations: Water is extremely useful, yet people can trade diamonds – which are of little use – for a large amount of goods, but not water. It is the scarcity of diamond that endows it with such high value – the supply of water is abundant, but that of diamonds is rare.

Diamonds were rare in the eighteenth century. At that time, only a few kilograms of gem quality diamonds were yielded around the world every year. The royal families monopolized them because diamonds are solid, long-lasting, and beautiful. However, later in the nineteenth century, diamond mines were discovered in Canada, Russia, and Australia. According to Does Scarcity Make Diamonds Expensive, an article written by Zhuojun Xu in SWEEKLY Magazine, nearly 25 tons of diamonds were mined in 2011, but the price of diamonds kept increasing steadily.

Why? In 1970, Carl Menger, William S. Jevons, and Leon Walras, three economists from Austria, Vienna and France, separately but almost simultaneously developed the idea of marginal utility. They came to the same conclusion that price or exchange value is based on marginal utility, not total utility or use value. In other words, the more difficult it is to get one more unit of a certain product, the more expensive it will be.

Snap Lake Mine, located in Canada, the De Beers Group’s first diamond mine outside of Africa.

Resource: https://www.canada.De Beersgroup.com/Mining/Snap-Lake-Mine/

Soon after the De Beers brothers found the vast diamond mine in South Africa in 1870, British financiers who were in charge of keeping the mining business running realized that the price of diamonds depends solely on the fact that it’s rare. They then began to control diamond output to create an illusion of scarcity. Due to absolute control of resources, the public could only know what the diamond giants told them: Diamonds are rare, and so they’re expensive. The De Beers Group further put forward the Peak Diamond Theory in 2010. According to the company, the total existing diamond reserves on earth are about 3 billion carats, which will last for only another 30 years according to current mining rates. We all know that it doesn’t matter if something is scarce or not, but whether people believe so – this is even more true in the diamond industry, which is purely built upon “people’s vanity and greed.”[1] The Peak Diamond Theory throws the public in deeper fear of extinction of diamonds, and has further convinced them that diamonds are expensive for a reason. As long as they believe that diamond is becoming harder and harder to get, they’ll be willing to pay higher and higher prices.

• Iron Hand

Now we know how diamonds are made rare, then how is the illusion of scarcity maintained? The De Beers Group introduced a way of controlling circulation of diamond in the open market, which is called Central Selling Organization (CSO). Since then, De Beers Group had been able to monopolize both production and distribution of diamonds for a very long time.

A flow chart of how CSO works. DTC (Diamond Trading Company) is the organization which holds the “sight” event.

Resource: http://www.allaboutgemstones.com/diamond_pipeline.html

The CSO worked through a corporation called Diamond Trading Company (DTC). The CSO employs “supplier of choice (SOC)” system. It sells to 125-250 sightholders selected by the company at sight visits, which are held by DTC every five weeks. Each of the sightholders is a leader in the industry, who owns large-scale factories and a huge distribution network. However, even these magnates are not able to negotiate with De Beers. The company puts diamonds in sealed boxes according to their quality. Sightholders can only see the price on the box but not the diamonds. They either take the entire box or none – De Beers Group has sole power to determine how many diamonds to sell and at what price. The founder of Harry Winston, a top fine jewelry brand in America, was once kicked out of the “sightholders list”, because he said CSO was “a most vicious sytem.[2]” However, he wasn’t able to find another diamond supplier, so he had to apologize in order to go back to the list again.

Matthew Hart wrote in Diamond: A Journey to the Heart of an Obsession that, in order to reinforce the CSO, if any small diamond producers try to sell diamonds without De Beers, the group will put a large number of diamonds onto the market to lower the market price to bring the competitor to the ground.

Under strong control of resources from De Beers Group, the diamond trading system is able to keep running, and that’s how the value of diamonds is kept stable.

• Battles Against Anti-Trust Laws

It seems that nothing can stop De Beers from taking control of the diamond market. However, it had been encountering setbacks for nearly 60 years when it tried to extend its branches in America, the largest diamond consuming market in the world. However, De Beers always seems to be able to find a way to regain its control of the market, directly and indirectly.

Since the mid 1940, De Beers had been sued again and again in the U.S. Court for violating antitrust laws, which prohibited the group from selling diamonds to American market directly – even appearance of employees from the company was forbidden in the U.S.. During that time, De Beers distributed only through intermediaries in the U.S. – for example, Harry Winston, as mentioned earlier. De Beers had been eager for transforming from supply-side to demand-driven management as more and more mines were discovered. Therefore, though De Beers was still controlling the market in effect at that time, it wanted to sell diamonds via its own brand.

A turning point took place in 2001 when Nicky Oppenheimer took over the position as CEO of the De Beers Group. He came up with an idea which helped the company bypass antitrust laws in the U.S.. De Beers created a joint venture with LVMH, a worldly renowned luxury retail conglomerate, and successfully opened its first retail store in Manhattan, New York. It doesn’t violate the laws because technically, it is LVMH who is selling diamonds as an agent of De Beers’s own brand, not the De Beers Group itself.

The De Beers Jewelry retail store in New York.

Resource: http://www.2luxury2.com/the-jeweller-of-light-opens-first-store-in-canada/

The move means that after disappearing in the U.S. for almost 60 years, De Beers was finally able to return to the American diamond retail market officially. De Beers used to monopolize the raw diamonds market since it controls majority of resources, but now it no longer needs to lean solely on limiting supply. Its legitimacy in selling at retail level grants the group not only a longer value chain, but also a new profit point. Henceforth, the De Beers Group has transformed from merely a monopoly in diamond production and distribution, to a giant who also has a place in the retail market.

• Higher investment value than gold?

Elizabeth Taylor and her 69.42-carat pear-shaped diamond – Taylor Burton

Resource: http://www.jointventurejewelry.com/blog/2011/03/the-many-jewels-of-elizabeth-taylor

Speaking of impervious pricing, we have to talk about the investment value of diamonds, because people are likely to invest in things with stable value, such as gold. But are diamonds the same case? The public is constantly fed with stories of making money by reselling diamonds. We all know the story that Richard Burton gave Elizabeth Taylor one of the biggest diamonds in the world whose price was $1 million, and Taylor auctioned it for more than $3 million. Jewelry companies and the media always claim that diamonds weighed more than one carat have high investment value, and it keeps increasing by 5% every year – but is this true?

In 1970, a London magazine company spent 400 pounds on two 1.5-carat diamonds, in order to verify if their value would go up. Eight years later, when the chief editor Dave Watts tried to sell the 2 diamonds, most of the stores refused to pay in cash. The highest offer was 500 pounds for 2 diamonds. Taken the inflation at that time into consideration, the 2 diamonds only worthed 167 pounds if it had been in 1970.

The Netherland Consumer Organization had conducted a similar experiment. They bought a diamond weighed more than 1 carat, and tried to sell it to the top 20 jewelry brands after 8 months. Nineteen of them refused to purchase. The only one company who was willing to buy the diamond offered a price much lower than it cost.

Zihong Wan is the founder of MAKELUMER, the first diamond retailor in China. According to him, if consumers buy diamonds in traditional department stores, 25% of the market price goes to the store, 42% to the brand, and 33% to the supplier. He also pointed out that the retail price of diamonds of general brands is 4 times the factory price, with a markup rate of 300%, and that of luxury brands, such as Cartier and Bulgari, can reach as high as 500% to 700%. Suppose a consumer buys a diamond ring for $20,000 in 2010, and he wants to sell it after 10 years. According to the pricing structure, he can only sell it at around 20% of the diamond ring’s market value in 2020 at most. Even if he just wants to not lose money –not taken inflation into consideration – he will need to sell it for more than $100,000. This means that the market price of the diamond ring in 2020 has to be 5 times that in 2010. However, if we take a look at the first graph in the article, we can easily find out it used to take price of diamonds about 30 years to quintuple, and then another 20 years to double. From the calculation, it seems that investing diamonds is not that profitable, especially that we were not considering inflation. Lack of reselling channels and the pricing structure of diamonds bring doubts to the investment value of diamonds.

• Will the Price of Diamond Fall?

As mentioned earlier, the value of diamond depends not only on its actual value, but also how much people believe it is worth. Since Harry Oppenheimer hired Ayer – an advertising company – in 1938, it has been trying to associate diamonds with timeless love, upscale fashion, and unique art. It employed celebrities, designers and famous paintings from Picasso, Derain and Dali to reinforce advertising effect. In 1947, the most renowned slogan of De Beers Group was born: A Diamond is Forever. Since then, diamonds’ status as a symbol of “eternity” has been well establishd. Besides the illusion of scarcity, people believe that diamond is no longer merely a “product,” but a synthesis of love, status, power and wealth. Consumers are willing to pay for not only what diamond is, but also what it means. Moreover, the De Beers Group is trying to position diamonds as a possible form of heirloom, to encourage people to keep their diamonds instead of selling them for profit, which will further stabilize the market price.

One of the advertisements for De Beers Group’s “A Diamond is Forever” campaign.

Resource: http://www.globalchange.umich.edu/globalchange2/current/workspace/sect008/s8g7/diamond_general.htm

As mentioned earlier, Zhuojun Xu, a journalist from Sweekly Magazine, stated that vanity and greed are the two essential factors that keep the whole diamond industry functioning – one day they exist, the industry will keep flourishing. However, since the whole industry lives on a beautiful bubble, diamond merchants have to keep it from shattering by ensuring people’s desire for diamonds and their willingness to keep them. Edward J. Epstein, the author of the Rise and Fall of Diamonds, told people not to sell their diamonds, or the market price won’t be stable – maybe, that’s what “A Diamond is Forever” really means.

 

 

 

[1] Zhoujun Xu, Does Scarcity Make Diamonds Expensive, SWEEKLY

[2] http://edwardjayepstein.com/diamond/chap18.htm

Carol He is a 32-year-old Chinese female, who has been living in America for 25 years. She is the boss of a “fashion company.” After deducting all costs, including wages, production cost, operation cost and all the other necessary spendings, the “company” makes about $150,000 net profit every month – and mounting. There’re 12 people in her “company” now, including her. You may be wondering: how can such a small company earn so much? Well, what I haven’t told you is, Carol’s “fashion company” sells faked luxuries. From my interview with Carol, I knew that if we only consider about profitability, this is indeed a great business.

Carol started selling faked goods 8 years ago. Back in 2006, she just graduated from university and found her first job in an airline company. When working there, she happened to get to know a Chinese handbag factory manager, Wang, who told Carol that his factory manufactures faked Chanel Classic Flap handbags, and that they’re exactly the same as the authentic ones, but with a much lower price. Carol told her friend. Her friend bought one and said to Carol that she walked in the Chanel store with the counterfeit, and no one recognized it. Since then, more and more people asked Carol for pictures of the bags by email or cell phone. Carol then created an account on MySpace to upload photos of newly manufactured handbags. People ordered by commenting or sending messages to her. By the end of 2007, Carol was able to sell about 10 bags every week, and earned around $3,000 monthly. At that time, the price of medium Chanel Classic Flap in lambskin was $2150, and the faked one was $300.

At first, Carol sold counterfeits just to make some extra money. “However,” she said, “soon I had a feeling that I was the only one in this business, and people were all asking me for bags.” According to her, most of her customers were Asians at the very beginning. But in the first half year in 2008, the number of people contacting her suddenly increased dramatically. In August 2008, she sold 128 Chanel Classic Flap handbags in different sizes and colors to customers all around the U.S., and her customers expanded from only Asian to Hispanic, Caucasian, Africa American, etc.

I asked her if she think the boost in her business has something to do with the Great Recession in 2008, she smiled and said:” Well, I don’t know much about economy, but thank god recessions never happened to me.” Carol decided to focus on the business and quitted her job at the end of 2008. The faked Chanel sold so well that she had to quit her job to take care of the business – she even hired an assistant to help her with customer service.

Though the Great Recession didn’t impact Carol’s business directly, there was indeed a huge change – which she didn’t realize till now – that was emerging in 2008. “I remember it was in that year that a large number of competitors began to appear in the U.S. and China out of a sudden, to the extent that in 2009, the U.S. Customs had been very strict about import packages from China for quite a while, even non-business ones” – and that was when Carol officially started her “company.”

Carol went back to China in August 2009, and stayed there for six months. During that time, she realized that there was much more demand for faked luxuries in China than in America. “There were so many people, they had so much money, yet they didn’t know where to spend.” At that time, Chinese economy was developing rapidly and led to dramatic rise in the population of millionaires. Luxury brands noticed the potential in China and were all trying to take a place in the market. Together with the emergence of various kinds of social media, such as Weibo – the Chinese Twitter – people got to know more brands. More importantly, they had the ability to make a purchase.

The number of luxury products is always limited – the more “luxurious” it is, the more limited it will be. Therefore, even if people have the money to buy a product, they’re not necessarily getting it. “So I wondered, what if I can sell various brands’ counterfeits that are identical as the authentic ones? Besides, the number of people who can’t afford to buy luxuries but still want one is always larger than that of people who can arbitrarily buy whatever they like.” Therefore, Carol met Wang again in China, and negotiated with him about expanding their production from only Chanel flap bags to all famous international boutique brands, such as Hermes, Christian Dior, Bottega Venetta, Celine, and so on. Carol buys authentic products from stores in America and sends them back to China, and Wang’s factory will take care of disassembling and dissecting them, in order to make identical counterfeits.

Carol decided to change the way she sells as well. She still took care of the American market, but she became a supplier in China. As I’ve mentioned, there’re 11 people working for her directly. One of them is in Los Angeles helping Carol. Four are in charge of recruiting “sales associates (SAs)” in China – these “SAs” do not work for Carol; they simply purchase from her and sell in their ways. These four people in Carol’s group are responsible for communicating with SAs and making orders. Each of the four people has a staff who takes care of sending products to SAs.  Of the rest 2 people, one bookkeeper, and one who transports goods from Wang’s factory to Carol’s warehouses in China.

“We have 2 major problems now,” Carol said, “The first is that we’re short of staff.” Each SA recruiters now has to take care of more than 30 SAs, which is too many for them. Therefore, Carol might nominate one SA recruiter as the team leader, and he will be in charge of keeping necessary staff on his team. “The second one is more crucial – competitors are getting stronger.” Carol told me she didn’t feel any pressure competing with others even just a year before. But now, some “companies” are targeting higher quality, some lower price, while Carol’s marketing strategy has no obvious feature except for the mature distribution system. “Since I have a relatively large business in this field, I’m wondering segmenting the SA recruiters into different lines. For example, some recruits SAs whose customers are looking for better styles, others can be about lower price, rare products, etc.” Carol is also considering creating a new line exclusively for Hermes, since it’s the most profitable products that many people – from normal consumers to resellers who claim to sell authentic goods – are looking for.

Speaking of Hermes, Carol laughed and said, “If I know anything about economy, it should be that scarcity prints money, and Hermes is the best example.”

 

 

History tells us that recessions and Hollywood is like Oreo and milk – the perfect combination. Why? The above graph shows yearly changes in Gross Domestic Production (GDP) compared to the previous year and the number of movie tickets sold in the U.S in recent years. We can easily tell that, in most cases, consumers’ desire for movies is negatively correlated with the general economic environment. Namely, when people are “rich,” they’re more likely to splash out in town; while “they lose where they are, they go into the movie,” said Jeanine Basinger, a film historian and chairwoman of the film studies department at Wesleyan University in Connecticut.

Surely there’re exceptions, but Box Office doesn’t depend solely on GDP. Factors like the annual movie market situation and the quality of movies cannot be ignored. In 2008, the Great Recession began. However, from the first graph at the beginning, it seems that people didn’t go to theatres much at that time – but did they? According to Box Office Mojo, the number of movie tickets sold in 2008 was $1341.3 million, which was the lowest since 1996. But if we take a close look at statistics from the highest grossing movies in 2001 to 2013, American’s spending on The Dark Knight, the top box-office movie in 2008, has taken up 53.2% of the global market, which was the highest since 2001 – even Avatar was defeated! Perhaps the general movie quality  in 2008 was just so-so, and that was the reason why people wouldn’t watch more movies. However, no matter what reason it was, we can see that in most of the time, recessions give Hollywood kisses and hugs.

Some might argue that they watch fewer movies now than they did before recessions. Indeed, a poll conducted by Harris Interactive shows that 55% of people go to movie theaters much fewer than before. But another factor that affects box-office should be taken into consideration as well – the changes in ways of how people consume movies. At early times, people could only enjoy movies at cinemas. Then, Digital Video Disk (DVD) was invented – people could buy or rent movies to watch at home. Now, there’s Netflix!

Netflix, Inc. is one of the top providers of on-demand Internet streaming media. It offers Hollywood another way to take a place in consumers’ life. Just take a look at how fast it’s been growing. Netflix’s revenue in 2013 was $4374.56 million, which was 28 times that in 2002. Up to the end of 2013, the number of subscribers of Netflix has reached 31.7 million. But it doesn’t stop there. Netflix has topped Q2 domestic subscriber growth targets in 2014 by 9.6%, and added another 570,000 U.S. streaming customers to the company – and counting.

“Many feel like recession still hasn’t ended,” this is the headline of a news report written by John W. Schoen on January 1, 2014 in USA Today. However, it seems that people’s passion for movies doesn’t fade even so. Maybe for a large number of people, going into “another world” by watching movies, or an inexpensive night at home with couple of drinks can be an escape, a solution or some kind of comfort against influences they get from the not-so-promising economy. Perhaps we can say that Hollywood is shelter for people to hide in, especially when they’re suffering from gloomy economic environment.