China a la mode

Ground down by a bleak economy at home, Italian brands are looking for relief from afar

In Italy, home of the world's most recognized fashion brands, including Gucci, Prada and Salvatore Ferragamo, the downturn in the fashion industry and the gloomy economy generally are pushing fashion houses to put more effort into emerging markets.

China, the world's largest luxury market, has naturally become the priority for these well-known brands as they try to make up for their losses at home and build their reputation among new customers.

Even though big names are busy increasing investment or adjusting strategies in an anemic market, their lesser-known smaller rivals are also pouring into China, hoping the country's well-heeled can offer them financial respite.

Corneliani, the high-end Italian menswear brand, opened its first fully owned flagship store in Shanghai in April, and its compatriot Damiani SpA, a jeweler, aims to have 12 stores in the country by the end of the year.

Pucci, an Italian high-end female dress label, unveiled its first retail location in the Chinese mainland last year, and Alberta Ferretti, the Italian high-end fashion label, has opened the first store of its Philosophy brand in Hangzhou, Zhejiang province.

New entrants testing the market lag well behind their big rivals, many of whom have poured a great deal of money and effort into China over many years. Nevertheless, the arrival of the latecomers is stoking competition in the Chinese luxury market, one that has gone off the boil.

All the while, big names from Italy are gaining momentum. The fashion house Prada went public in Hong Kong with the largest IPO for the country in 2011. With the opening of its first store in Nanjing, Jiangsu province, in February, it now has 25 shops in China.

Salvatore Ferragamo says that in January it raised its stake in a joint venture with Imaginex of Hong Kong for distribution in China from 50 to 75 percent. It has about 100 sales points in China, and Asia accounted for more than one third of its total revenue last year.

The contrast with what the Italians are facing at home is stark. Sales of domestic brands seem to be in free fall, having dropped 20 percent last year and with predictions of a similar fall this year. Overall, fashion sales dropped 8 percent last year, Italy's fashion association says.

"The recession of the past few years, low consumer confidence, uncertainty about domestic politics and falling purchasing power continue to weigh on Italians' spending habits," says Lin Hong, president of GBMax Ltd of Beijing, a joint venture of the Italian Max Mara Fashion Group, which has opened 250 stores in the Chinese mainland for its seven brands.

The amount of red ink the Italian fashion entry has spilt at home has been kept down thanks to purchases by tourists, many of them Chinese.

"Chinese consumers are making up for some of the drop for these brands in European markets," says Yuval Atsmon, an analyst with the management consultant Mckinsey in London.

"Between 2008 and 2012 Chinese consumers nearly doubled their share of global spending from 14 percent to 27 percent."

Because of lower prices and the advantages of duty-free shopping, 60 percent of luxury spending by Chinese last year took place outside the country, Bain & Company says.

"On major fashion streets, such as Via Montenapoleone in Milan, close to 90 percent of sales are to foreign tourists and over half of them are Chinese," says Philip Guarino, co-founder of the consulting firm Emerging Market Luxury Advisors in Los Angeles.

But Chinese tourists gravitate to the larger, most well-known brands, experts say.

So smaller retailers have not benefited much from Chinese customers' overseas shopping. And they do not want to waste time anymore, but directly enter into the market to reach consumers.

However, breaking into China is no cakewalk, and any retailer with ambitions of doing well needs to do extensive research beforehand to identify the right opportunities and the right places for doing business.

Customers who often go overseas may know of these smaller brands, but compared with big names the number of customers is minuscule.

For some shoppers, particularly younger ones, Italian brands that are well-known are still regarded as superior and are seen as a status symbol.

"In addition, most of the well-known brands have occupied the best store locations in shopping malls," says Jiang Nan, an analyst with China Market Research of Shanghai.

"Once a new brand cannot get an ideal place and is put on the second or third floor, next to second-tier brands, it will be judged as lower-end because customers know nothing about it."

When shopping malls choose brands, they tend to make their decisions based on the sales of the products in their home market or other overseas markets, Jiang says. Since Chinese customers are increasingly being lured by overseas shopping, fashion brands need to be mindful of how they perform in Italy, he says.

Lin of GBMax says: "Retail offerings have to be very much tailored to the Chinese market. The companies that are unsuccessful are the ones that roll out the same format believing China is a uniform and homogenous market."

Such companies fail to consider the huge variations between different provinces in population, per capita GDP, consumer spending habits, education and lifestyles, she says.

Yuval Atsmon of Mckinsey says it is not necessarily too late for new entrants.

"But the high cost in advertising and retailing make it harder for small brands to stand out".

One glimmer of hope for smaller brands is that Chinese customers are becoming more sophisticated and want something different from what the mass is buying.

"Social media and digital marketing, targeting the overseas tourism market are all ways that new entrants can reach the Chinese consumer more cost-effectively," Philip Guarino says.

As Shanghai and Beijing become saturated with big brands, they should begin targeting second or third-tier cities, he says.

They also need to hold on to market share in Italy, he says, where Chinese tourists can be won over to the smaller brands before returning home and continuing to buy them as loyal customers.

Wang Weizhong, founder of AE Boutique, a Hangzhou-based multi-brand menswear boutique that sells Lardini, Guy Rover and other Italian fashion brands, says he is making the most of Chinese customers as they try to work out whether to trade up or trade down.

"What they are looking for is high-quality products that are unique in their style. They're not just after logos and brands anymore."

Although the brands he sells are popular in the Italian mass market, they are unknown to Chinese customers, he says.

"We're spending more time building brand recognition. But I think in the long run smaller Italian brands should get together or form a group to compete with big rivals in the cutthroat market."

As Chinese shoppers seek more discreet luxury, top Italian brands have their own worries.

Some brands are suffering from brand exhaustion, in part due to their great success over the past few years, over-expansion in retail in China and a change in consumer tastes.

Gucci's sales grew 17.6 percent in China last year, compared with 39.1 percent in 2011, and it plans to slow its expansion in China this year, it says.

"Given that 60 percent of luxury is purchased by Chinese overseas, shareholders still disproportionately allocate marketing dollars for China to store expansion," Guarino says.

"As a result, I think we will see a reduction over the coming years."

Large Italian brands have done a relatively poor job understanding and adapting their marketing to the behavior of younger shoppers in China, he says.

"Many of them have largely applied a European business development model to the Chinese market, such as opening stores, buying print advertising and hiring PR firms. All of this helps of course, but the demographic in China is younger, more connected and uses social media and the Internet for their information. Very few top brands understand, or have done a good job at utilizing these tools in the Chinese market."

The good news for the industry is that new wealth in China and the growing middle class are aspiring to buy designer or luxury goods.

For Lin Hong, who introduced the Max Mara fashion label to China 14 years ago, the biggest challenge is how to attract a new pool of consumers and maintain the positioning of its different seven brands in China.

"Any fashion house that enters China has to think carefully about the positioning of their brand to be successful with their strategy. I think that there could be more losers than winners in the long term."

In addition, Chinese consumers' changing attitude toward domestic brands is also creating a bigger challenge for smaller and inexperienced brands with no or small financial support, Lin says.

Guarino says: "I am bullish on the future of new luxury brands in China, with one caveat: that they engage with the Chinese demographic. Nevertheless, those who rush to open stores will find it difficult from a financial standpoint to deliver the returns their shareholders hope for."

yaojing@chinadaily.com.cn

(China Daily Africa Weekly 05/31/2013 page14)