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Luxury Brands Step Up Expansion in China

Lanvin, Christian Dior, Louis Vuitton and Chanel grow presence in Asia.

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Only a few years ago, it would have been unthinkable for a designer brand to leapfrog the fashion capitals of New York and Milan and open a boutique in Shanghai first.

But as fast-growing China surges to become the top expansion priority for a wide swath of European brands, that’s exactly what Lanvin is doing this week.

“It’s an urgent opportunity,” said Thierry Andretta, executive vice president of Lanvin, which on Friday will open a boutique in Shanghai’s Plaza 66 shopping complex — and is hunting for a Beijing location for 2010. “I was at Plaza 66 on [a recent] Saturday, and morning and afternoon it was full of people with shopping bags.”

The coming months will see a flurry of openings and events in the world’s most populous — and increasingly affluent — nation. WWD has learned Christian Dior and its couturier, John Galliano, will mount a fashion show in Shanghai in the spring in tandem with a doubling of the size of its Plaza 66 flagship and a new unit in the IFC complex in Shanghai’s Pudong financial and commercial district. The date, venue and format of the show have yet to be confirmed.

“[China] is going to be the top priority for investment,” said Sidney Toledano, Dior’s president and chief executive officer. “There’s an urgency to get the right locations in cities as they are emerging. It’s like when Manhattan was built. The ones who decided to be at Fifth Avenue and 57th Street made an incredible choice. Being in the right corner is going to be key.

“It’s the fastest-growing market, with an impact on all the region,” he continued. “The potential is huge.”

Bain & Company expects the luxury market in China to grow 12 percent to 6.6 billion euros, or about $9.9 billion, this year.

Look out for Louis Vuitton, a pioneer in China with 30 store locations, inside the French pavilion at Expo 2010 in Shanghai — the only French luxury brand to have a presence. In the grand tradition of universal exhibitions, Expo opens May 1 and is expected to attract some 70 million visitors over its six months with the theme of “Better City, Better Life.” Meanwhile, Vuitton is also said to be plotting twin openings in Shanghai next year.

Ermenegildo Zegna, which already operates 75 stores across 35 Chinese cities, plans to open its second “global flagship” on Shanghai’s Huaihai Road in the spring — along with large-scale “national flagships” spanning 6,000 square feet each in four or five key cities over the next 12 to 18 months.

“It remains one of our major focuses for investment,” said ceo Gildo Zegna, noting its business in Greater China is already equal to that of North America. “We are encouraged by sustainable indications that the Chinese economy…is back on a track of robust growth, particularly in consumer spending. We are furthermore emboldened by how well we have performed there throughout the last year of market uncertainty.”

Bruno Pavlovsky, Chanel’s president of fashion, said China ranks alongside Russia and the Middle East as priority emerging markets as all three are posting double-digit growth “in existing doors and new doors.” However, China, including Macau and Hong Kong, is outpacing everything: “This area is now booming, and in terms of growth is number one for Chanel,” he said.

On Dec. 3, the French brand will open a 5,160-square-foot boutique in the Peninsula Hotel in Shanghai in tandem with a showing of Chanel’s luxury pre-fall “métiers d’art” collection in the presence of Karl Lagerfeld. A Chanel boutique in Hangzhou is also slated to open this month.

“We hope to have seven or eight stores on the Mainland next year,” Pavlovsky said. “We now feel more comfortable to start to open boutiques in other regions. We think that five years from now, we will have 15 to 20 boutiques in Mainland China.”

Executives acknowledged doing business in China is complicated, especially as the dominant strategy is direct control of retail networks.

Floriane de Saint Pierre, who runs an eponymous executive search and consulting firm in Paris, said many brands have recently established entities separate from Asia-Pacific offices for Mainland China, each with its own management, marketing, retail and merchandising directors. “Now China is a region unto its own, reporting to the head office,” she said. “For the companies, it means a lot of investment, but the growth rate and the demographics of this economy fully justifies this strategy.”

On the plus side also, China, unlike Japan, was not a licensing market, making it a “more pure” market in which to establish direct operations, noted De Saint Pierre, who opened a regional office in Shanghai in April.

Gucci Group has been allocating more than 60 percent of its total expansion investments to the Asia-Pacific market, and China in particular, “and we will continue to invest here as long as the growth trend remains strong,” said Robert Polet, president and ceo of Gucci Group. “Brands without a strong and balanced global presence are facing even greater difficulty. These brands are now trying to improve their performance by speeding up development in countries with the highest growth rates.”

The group operates 38 stores on the Mainland: 29 for Gucci, seven for Bottega Veneta and two for Balenciaga. Polet declined to divulge 2010 expansion projects, but cited consulting firm McKinsey & Co. estimates that China has already overtaken the United States as the world’s second-largest luxury market and should surpass Japan and become number one within five years.

The conglomerate’s broad strategy is to enter China with directly operated stores and franchisees — or in partnership with selected retailers.

To that end, Boucheron recently linked with Sparkle Roll Group Ltd., a distributor of luxury watches and automobiles in China, to open between six and 10 boutiques in the next five years. Sparkle Roll already took over Boucheron’s Shanghai boutique, while the first flagship is planned to open in a prime location in Beijing in early 2010.

Valérie Hermann, ceo of Yves Saint Laurent, said the brand registered 22 percent growth in China in the third quarter, underscoring the “great promise” the market holds. YSL operates two franchise boutiques — in Beijing and Shanghai — and three directly owned stores in Hong Kong. “In terms of retail expansion, China is a key priority…and where, in due time, we will continue to expand and invest in the correct positioning of the brand,” she said.

Michele Norsa, ceo of Salvatore Ferragamo, said China has reacted “faster” to the global crisis and “we are convinced that shortly, China will surpass Japan both in sales and in brand recognition by the consumer.”

Present for 15 years in the market, Ferragamo today counts 38 stores in 23 cities. “We will open two more by yearend and 10 stores in the next three years,” Norsa said. “China is the country that is investing more than anyone else in infrastructures such as roads, airports and shopping malls. There are shopping malls that do better than most in other countries, both in terms of traffic and revenues. Our Chengdu store, for example, does much better than the London one. However, the knowledge of the market and its local management is fundamental.”

Lanvin’s Andretta noted leather goods and logo products have enjoyed early success in China as such items are relatively affordable and convey status. He cautioned luxury ready-to-wear, by contrast, targets a smaller demographic and many second- and third-tier cities in China — with the exception of Shenzhen — are likely not ready to support brands devoted to that category.

“Every brand needs to have a different approach,” he stressed. “We need to accelerate [in China] but in the right way. The most important thing is to be consistent in the location you choose.”

Pavlovsky added chief challenges include setting up an internal organization and training staff. “You have to build your customer base for each boutique, and that takes time. It takes longer and it’s more expensive. Loyalty is quite expensive in the ready-to-wear business,” he said.

According to Dior’s Toledano, heritage is key in China. “They don’t just want to buy fashion. This is explaining the success of the top French names. They’re really based on a long history, excellence of savoir faire and integrity today with their past history,” he said.

Toledano described Chinese customers as bold and curious, eager to see the entire product universe a brand has to offer. To that end, Dior’s expanded Plaza 66 unit will include displays of watches and jewelry and even cell phones. “When they come to a store, they go to all the rooms,” he said.

Chief among challenges in China is the vast size of the country, making it tough to gain efficiencies, plus a dearth of suitable locations, especially in second- and third-tier cities.

Patrick Thomas, ceo of Hermès International, characterized its stores in smaller Chinese cities as a “communication investment, rather than a commercial investment. Our strategy in China is to open stores in major cities, because growth is more moderate in provincial cities.

“There are no luxury centers, or very few, so it’s difficult to find the right location. That’s why we are moving slowly into the provinces,” he added.

“All brands have opened stores in Beijing, Shanghai and Guangzhou, because that’s where the money is now, but expansion into secondary cities will be inevitable,” noted Patricia Pao, founder of New York-based fashion consultancy The Pao Principle. “There are around 300 million ‘consuming’ Chinese, who live in the largest cities, but there are still around one billion ‘surviving’ Chinese who earn less than $300 a year.”

Still, brands continue to push deeper into new territories. Last month, Vuitton and Zegna christened new stores in Ulan Bator, Mongolia, and Vuitton is next eyeing and opening in Hohhot, in north central China.

French luxury brands today are present in 69 Chinese cities with 1,600 doors, compared with just 500 doors in 2005, according to the luxury association Comité Colbert.

“In the last four years, the number of our members’ own stores has grown 60 percent to 272, spread across 38 cities,” said Comité president Elisabeth Ponsolle de Portes. “The efforts of the Chinese government to build a strong infrastructure and promote urban growth away from Beijing, Shanghai and Guangzhou mean that the sky is the limit when it comes to finding real estate. We are even solicited by Chinese developers to open stores in their malls.”

In her view, it’s not too late for brands to enter the Chinese market, given high interest in Western brands — however, smaller brands are more likely to rely on collaborations with Chinese partners. “Success for newer entrants will depend on each brand,” agreed Pao.

“Tiffany, for example, is a relatively new entry, having arrived in China around seven years ago, but it’s now the number-one jewelry brand in the country. It shows that if you have the right product at the right price and are willing to educate customers, the disadvantage of being a latecomer disappears,” said Pao.

Pao noted distribution deals in China help release the financial burden, but pose some image risks because the distributor is in charge of opening shops and training staff.

According to Zegna, second- and third-tier cities are driving overall market growth in China today, meaning brands must pick the right locations, engineer effective marketing and cultivate “homegrown” management talent to sustain customer relations.

“Failing to get any of these factors right can quickly lead to a spinning of the wheels for retailers who are unable to get the momentum and leverage they need to be successful,” Zegna said. “For those who have not adequately built their brands or presence in China, surely they are eager to catch up in order to offset revenue declines in Japan and American. Between speed and quality, though, I would counsel quality.”

Retail and brand executives also counsel not to underestimate the consumer. Andrew Keith, president of Joyce, said its strongest-performing brands in its two-year-old Plaza 66 location — which include Alexander Wang, Balmain, Givenchy and Azzedine Alaïa — echo its business in Hong Kong. “We have witnessed a fast-developing level of consumer sophistication,” he said.

“You have to make sure you have your own identity that is recognizable beyond a logo,” noted Jacopo Etro. “We organized lots of small, intimate sit-down events where we introduced shoppers to the world of Etro. Now we’ve built up a loyal clientele, especially in men’s wear, and we’re doing exceptionally well in China.”

Detractors, however, characterize expansion on the Mainland as mere marketing investments.

Paul French, director of the Shanghai-based market research firm Access Asia, said the real value in China’s market is in marketing, advertising and brand recognition. Luxury goods taxes in China make products particularly expensive, but having hundreds of stores across the country gets brands in front of Chinese consumers who might travel to Hong Kong and elsewhere to make actual purchases. Brands don’t need big sales numbers here to stay afloat, he explained, as overhead and staffing costs are low.

“The number of staff in Louis Vuitton doesn’t cost anything more than your staff in KFC. You only need to sell a few things to break even,” said French. “Then [when consumers] get on a plane to Hong Kong, they know what Burberry is.”

Kong Shuhong, economist with the University of International Business and Economics, said he believes brands are doing particularly well in smaller cities in western and northern China, where there is a mix of new wealth and previously limited options.

French said he expects brand expansion in China to continue, and Chinese investors and companies to start snapping up sluggish divisions of luxury brands that are underperforming elsewhere in the world. “There’s no shortage of Chinese firms that want to buy any and every brand that comes on the block,” he said.

 

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