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Italian Firms Weigh In on China Business

Executives see huge growth opportunities in China, but also discuss soaring rents, increasingly knowledgeable consumers and steep marking costs.

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FLORENCE — Growing demand for high-end, but logo-free, leather goods and accessories; increasing average sales receipts, and ever-better informed consumers: These are just a few of the ways the Chinese market is evolving, according to executives assembled here Tuesday for a conference titled “Options of Luxury — The Voice of China.”

But while the Chinese market offers what the heads of Gucci and Salvatore Ferragamo, among others, agreed are huge opportunities, it also carries some risks, such as high rents for stores, increasing competition from local brands and customers who are not necessarily known for their brand loyalty.

“There’s a strong aspirational base of Chinese customers” drawn to fashion products with big logos, said Gucci chief executive officer Patrizio di Marco at the 10th edition of the Milano Fashion Global Summit, hosted by Italian publishing company Class Editori. Yet, he added, “there’s also a swathe of consumers who are moving up into higher-end leather goods which don’t have logos. We see this demand especially from Chinese customers buying in our shops in Europe.”

Having a strong brand is important in China, di Marco said, adding that the country represents some 30 percent of group sales. Given that Chinese consumers are not yet very brand-loyal, “it’s very important to work on customer loyalty.”

Ferragamo ceo Michele Norsa agreed that in China there is a shift taking place in high-end consumers’ preferences towards logo-free leather accessories. The Ferragamo chief pointed to the challenge of keeping up with the rapid changes taking place in the Chinese market. “Everything which has to do with China evolves so quickly that you need to adapt quickly,” he said. According to Norsa, in China — which generates about 20 percent of Ferragamo’s sales — part of the rapidly changing landscape is also a consequence of the fact that a large swathe of luxury goods buyers are young, in the 20- to 40-year-old age range. Despite their young age, Chinese consumers are very well-informed and look for depth in their brands.

“Consumers want heritage, long history and authenticity,” Norsa said, adding that many luxury buyers shop in Hong Kong because they see in the former British colony a “guarantee of authenticity.”

Part of China’s allure is its demographics: Norsa pointed out that while in the U.S. there are only about 10 cities with a population of about one million, in China there are at least 150 such cities. Ferragamo, which already has 58 stores in the country, opened 10 new locations in 2011 and closed one; the group has opened 28 locations in the country since it celebrated its 80th anniversary in Shanghai in 2008, an event that created “great awareness” for the brand and helped Ferragamo gain greater insights into the market, the executive said.

He also said that, in a certain sense, the group’s Chinese shops are now setting the trend for its other stores around the world: “Today, stores we’re opening in China are often nicer than those we have in Europe and even the U.S., where some have been open for 15 to 20 years.”

But designers don’t necessarily need to go to China to sell to Chinese consumers. Industry executives pointed out that Chinese tourists traveling to Europe and the U.S. are an increasingly important market of their own. “Chinese tourists are helping offset some of the decrease in luxury goods sales in mature markets,” Norsa told WWD, adding that, despite the uncertain economic outlook for 2012, the firm sees markets “which continue to register positive growth.” The U.S. has potential for strong growth also next year, the executive said.

During his presentation, Norsa said retail locations in preferred Chinese tourist spots like Hawaii, Venice and New York and in gambling resorts like Las Vegas, Macau and Singapore are strong growth drivers for luxury goods sales. The travel retail channel, like airports, also offers excellent opportunities, the executive said, adding that in China this segment could soon become a key driver of luxury goods sales following massive infrastructure investments.

China offers more good news, as brands may discover that their pricing power in the country is stronger than elsewhere. Renzo Rosso, founder and chairman of Diesel jeans owner Only the Brave Srl, said that in the Asian country the average price in his group’s stores is almost 30 percent more than anywhere else in the world. But, while retail prices may be higher, costs are rapidly catching up with Western levels in some areas.

“Rents are very high, so you need a high average ticket to be able to pay them,” Rosso added.

Communicating the brand is also expensive, not only because of the huge geographic size of the market, but also because Chinese consumers are, in some ways, more complex. “Brand communication needs to be done in terms of total look, more than in terms of the brand itself,” Rosso said, and this also requires interacting “in a 360-degree manner” with consumers on the Internet.

E-commerce is increasingly an important driver of luxury and fashion goods sales in China. In order to succeed in the market, it’s important to be localized, Federico Marchetti, founder and ceo of Italian online fashion e-tailer Yoox, said. Yoox debuted in China at the end of last year, opening the Armani mono-brand online store.

“Our strategy in China is simple. Since Armani we’ve opened other mono-brand online stores, followed by a localized version of Thecorner.com,” he explained, referring to Yoox’s edgy, design-focused multibrand online store. “Next year, probably towards the end, we will bring a localized version of Yoox.com to China.”

By localized, Marchetti meant that, for example, the Web sites are in Chinese, that consumers can pay in local currency, that products on offer are stored in the country so as to avoid lengthy delivery times (which would defeat the purpose of buying online), that consumers can also find a selection of local brands and that even the sizes and the packaging are country-specific. “In terms of retail,” the executive said, “the Internet is anything but global.”

Even services need to be targeted to local customers, Marchetti said, pointing out that Yoox has a deal in China with FedEx whereby the express delivery service’s couriers wait outside a customer’s home for 10 minutes to allow the buyer to try on the purchased products and either keep them or return them right away. “The key is to be perceived as a Chinese luxury goods site,” he said.

Aside from a virtual place to buy, Chinese consumers also use the Web as a way to compare prices and get the best deal. Sometimes, according to Norsa, price differentials between Hong Kong and Europe can reach 30 percent and up to 50 percent with China. So companies have to be ready to deal with customers who go online and know they can find the product they want for less.

Chinese consumers are increasingly informed about the products they seek out and buy. In a video-link from Nola, near Naples, where he was participating in the launch ceremony of new Italian high-speed train operator NTV, Tod’s SpA chairman and majority owner Diego Della Valle said that “every day Chinese consumers know something more. They are increasingly world citizens, traveling, seeing and knowing what they want.”

The perception of “Made in Italy” in China is “excellent,” Della Valle said, adding that “there’s a desire to buy and know about everything that has to do with high quality.” But he warned that as more and more competitors pile into the market, store opening costs in China could increase and margins there — while likely to remain “excellent” — may come under some pressure.

In another video-link interview, Gian Giacomo Ferraris, Versace’s ceo, confirmed that the company recently approved a five-year plan which calls for doubling its retail network in China from the 30 locations it currently has.

The appreciation of the high quality of Italian workmanship is behind a new venture involving Caruso and China Garments Co. Ltd. Umberto Angeloni, ceo of the Italian high-end men’s wear brand, said that the Chinese company asked Caruso to produce a line for men which will carry the China Garments Co. name but the “Made in Italy” label. The new products will be made exclusively with Italian fabrics and will be designed and manufactured in Italy, the Caruso executive said. The official presentation is scheduled for Dec. 20 in Beijing, Angeloni said, and the products will reach Chinese consumers starting next year.

 

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