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SHANGHAI — “I don’t know that the Chinese realize how futuristic Shanghai is, how much more avant-garde it is than, say, New York was, or Chicago, or Paris, or any of these other big cities.”

That’s the view of Giorgio Armani upon his first visit to this city, and to China, which is becoming a magnet for Western brands. Armani and his entourage — including the actress Mira Sorvino, Lady Helen Taylor and the photographer Roger Hutchings — landed in China to celebrate the opening last Saturday of the designer’s first store in Shanghai, which included a fashion show, party and a stream of tours and interviews.

This story first appeared in the April 21, 2004 issue of WWD.  Subscribe Today.

Armani’s visit came amid rumors that the designer was looking to retire and hand over the reins to Narciso Rodriguez. Armani immediately dismissed any idea of retirement or of selling his company, saying, “I am a typical Italian. I say a lot of things, at the end of interviews, as a part of several options, and people take these as a firm decision. One of the things I could do is sell a minority stake in the company to another big company, but it is one of many options. At the moment, there are no concrete plans. For the immediate future, I feel on the professional level that I still have many things to do.”

As for the Rodriguez rumor specifically, a spokesman for Armani Group laughed it off. “It’s an April Fool’s joke, just a couple of weeks late,” said the spokesman from China. (Meanwhile, other companies are eyeing Rodriguez. WWD has reported in the past that members of the Simon family are considering investing in the fashion house. “Narciso Rodriguez is a great design talent,” said Herbert Simon, co-chairman of Simon Properties, on Tuesday. “I, along with some other individuals, continue to evaluate his vision from a private investment perspective.”)

Generally, though, Armani was focused on the future — specifically the opportunities China offers him for expansion. Armani also stopped in Beijing and Hong Kong, where he has older outlets. “This is a much overdue trip to one of the world’s most remarkable countries. Today, Shanghai certainly qualifies as one of the world’s most talked-about cities,” he enthused in a statement.

The Shanghai store kicks off an aggressive campaign to open 20 to 30 stores in mainland China by 2008, according to the group. This year, along with stores in Wenzhou and Dalian, Armani will debut two more outlets in Shanghai. Another Emporio Armani and an Armani Casa outlet will open at the prestigious mall, Plaza 66, on Nanjing West Road this August, followed by an Armani Collezioni store next door at Citic Square in October. An Armani Collezioni store in Shenzhen’s Tian An International Plaza, along with an Armani Jeans store and five A|X Armani Exchange shops in Hong Kong, are all also on this year’s schedule. In addition, the company looks to launch Giorgio Armani Cosmetics in mainland China in the near future.

Armani’s China retail director Paul Wight clarified, however, that most of the longer-term plans are “still ambitions, and not certain. Of course we are setting high targets, but it is better to have 10 successful stores in China than 30 with some failures.” Wight is part of a staff of 35 overseeing Armani’s China operations, primarily imports and business development, with local franchise and management agreement partners handling daily operations and sales. “Successful stores depend first on finding the right venue, then on finding the right partner. We also have to be sensitive to the unique conditions in each city,” Wight explained.

The just-opened Armani/Three on the Bund store in Shanghai covers 10,760 square feet and comprises a Giorgio Armani boutique, an Emporio Armani store, an Armani Fiori florist and an Armani Dolci chocolate shop. It is Armani’s fifth outlet in greater China.

The Shanghai store will be managed under an agreement with its landlord, House of Three. Stressing the long-term nature of its China commitment, the company declined to release details of its investment in or sales projections for Armani/Three on the Bund, or the terms of its cooperation with House of Three.

“We’re absolutely convinced that this is a good time to be entering this market — you only need to walk around the streets in some of the cities like Shanghai to see that,” explained Robert Triefus, executive vice president of Armani’s worldwide communications. “There is one other city in the world that bears comparison to what’s going on here, and that’s Moscow. It’s at a slightly different place in its own evolution, but you see the same growth, the same understanding, the same — in a way — enthusiasm for what’s become available that wasn’t available. It’s the beginning, as we see it, of a long-term journey.”

The eastern Chinese metropolis of Shanghai aspires to be, among many other monikers, the “fashion capital” of China — if not all of Asia — and is looking to reclaim its pre-Communist glamour as an Eastern Paris. At the forefront of China’s explosive growth and expanding consumption, and obsessed with Western culture and lifestyle, Shanghai has shown an enthusiastic appetite for expensive international names ranging from BMW to Häagen-Dazs. Armani, with its ambitiously spacious outlet at the new high-end shopping and entertainment complex, Three on the Bund, is opening in a city already crowded with international luxury brands. With its plans to expand into mainland China, Armani faces the challenges of rampant piracy, as well as carving a niche out of a saturated, but growing, market.

The Armani group used the store launch and Armani’s trip to release the company’s latest financial figures. The company enjoyed a 9 percent surge in retail sales in the first quarter of this year, with growth rates of 17 percent for greater China and 15 percent in the U.S. The designer noted that sales at his company’s Beijing store climbed 130 percent last year alone. Wight admitted that Armani’s stores in China are not yet profitable. But he said the two-year-old Chater House development in Hong Kong “will certainly prove to be a profitable investment.”

Armani first entered the Chinese market with a Giorgio Armani boutique in the capital Beijing’s Palace Hotel in 1998. It followed in December 2002 with the 32,280-square-foot Armani/Chater House in Hong Kong, Armani’s third multibrand store and its largest outside of Milan. Earlier this year, Armani opened additional stores in the Huaiqiao Hotel in Wenzhou, a wealthy trading port in East China’s Zhejiang Province, and in the northern city of Dalian’s New World Department Store.

Most of Armani’s global competitors already have well-established footholds in some 50 or more high-end outlets on Nanjing and Huaihai Roads. Armani’s Triefus framed the delayed arrival as a deliberate wait for China’s luxury brand market to mature. “If you think of luxury fashion brands, and sometimes how they’re shown by people who might wear them, or carry them, we’re not one of those brands that screams, ‘Here we are.’ We are quite an understated brand….In China, as in Russia, you’re seeing this evolution of consumers and, yes, you’ve got the vanguard, who are perhaps those who really want to demonstrate that they’re ahead of everyone else, in a way, and they’re wearing, or driving, or carrying the latest in global brands. We’re not going to change our philosophy of who we are. Mr. Armani…wants people here to discover Armani for what it stands for and what it’s always stood for, and if that fits in with their lifestyle, then that’s great, and in fact, we already see that now in Beijing.”

However, Armani’s positioning as a more low-key brand contradicts its image in China as the leader in luxury men’s wear. Though the well-heeled and well-connected eagerly collect prestigious trappings, ostentatious displays of wealth are simultaneously frowned on as fostering social instability in a nation where the average yearly income is less than $1,000 and socioeconomic rifts grow ever wider. “No one knows about Emporio, the Chinese just see Armani as Armani, at the top of the pile,” explained Chris Torrens, editorial director of consulting firm Access Asia. “They don’t get the subtleties; the marketing image is lost on Chinese consumers.

“There’s no real heritage of brand names here, so Chinese consumers don’t differentiate much between the luxury brands and the upstarts,” added Torrens. “Anyone can be a luxury brand in China if they market the right image — there’s no difference: It’s a big hot spot and the brands all pile in. They can’t expect the consumers to be educated.” In China, Armani’s direct competitors include Playboy, observers said.

Branding and name recognition should prove easy for Armani in China, but the company is still navigating the learning curve for the Chinese market. Armani cited as the company’s earliest business mistake in China the initial use of a red lacquer Chinese-style door. “The first lesson with the Beijing store was that the Chinese want the Armani that you get in Europe,” the designer recalled. “They want the Armani they see in magazines, on TV. The mistake I made at first in China was that I made the store too Chinese in decoration, and they didn’t like it.”

Access Asia’s Torrens estimated that virtually every international luxury brand has a presence in China, and Boston Consulting Group has released a much cited figure that China currently comprises 5 percent of the world market for luxury goods. Nigel Litchfield of the luxury mobile phone company Vertu estimated the value of China’s luxury goods market at $1.2 billion to $2 billion in 2002. Corporate as well as independent studies suggest that China’s high-end market will only grow. “Currently, studies claim that Chinese buyers who can afford luxury brand goods are roughly just under 1 percent of the country’s population, or 13 million people,” cited Torrens. “They see that rising to 8 percent, or 100 million, by 2010, but that is a very optimistic estimate.”

Arguably more important to the market is what Torrens calls China’s “aspirational middle class.” A 2003 study by Mastercard and Fudan Management School numbered that group at 60 million as of 2002, and said it is likely to grow to 160 million by 2010. A critical mass of upper-middle-class customers who can afford one or two luxury items will provide brands like Armani more of a base in China than the small ranks that can afford regular, repeat purchases.

For Chinese consumers, the primary appeal of brands like Armani lies not in style or quality but in the prestige of the foreign brand name. According to Triefus, prices in Armani’s mainland stores are 15 percent higher than in Hong Kong, due to import duties and luxury taxes. Two-thirds of Armani/Chater House’s customers are from the mainland, but the appeal is the cachet of Hong Kong as much as the lower price. While Armani’s China offerings are drawn from the international collection, “we have been making changes, actually, for the last couple seasons now, thinking that I’m going to be entering these markets, and the Giorgio Armani logo on the bags, and they are quite evident — unfortunately!” Armani lamented.

Wight said one of the company’s strengths is that it offers a variety of labels at different price points. The size of the stores in Shanghai mean that Armani can offer more of its collections to the Chinese consumers than ever, he said, adding, “Whilst the price points will certainly be out of reach for the average shopper in China, we know we have a ready and hungry client base across most of the continent.”

One pitfall Armani faces in China is the country’s rampant piracy, which spans everything from branded clothing to audiovisual materials and software to foods, medicine and cigarettes. While Armani is less blatantly copied than more easily identifiable labels such as Burberry, Gucci and Chanel, Armani imitations and pirates are readily available throughout China. Triefus specified that the company cooperates with the government and a consortium of brands to combat piracy, and that it is among its major concerns, but did not outline a specific antipiracy strategy.

Analysts counter that luxury brands such as Armani lose zero sales to piracy, since those who can afford the original would never purchase imitations, and those who buy the imitations could never afford the real thing. Brands actually benefit from the free publicity provided by the working-class masses sporting their logos on readily available fakes. “All these companies release figures of how much money they lose to piracy every year, and it’s a big joke,” said Torrens. For example, “most people just aren’t going to spend 4,000 renminbi on original Microsoft software. Piracy is good for the brand: It’s the only way to get word out.”

Piracy or not, Armani, like scores of international brands before it, is pegging great hopes on the country’s vast population of potential consumers: Since the 18th century, Western businesses have salivated over the prospects of the market. But as Torrens observed, many foreign companies “are not really looking that closely at China, they just buy into the hype, the big lie” of the so-called China dream.

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