China

Chinese carry out by heathrowkennedy

Today's UK Times newspaper has an article by Carolyn Asome which gives further evidence of the dynamic at play in the world of luxury fashion provided by the Chinese consumer.   In Britain, not a country with particuarily easy visa access for the Chinese, the numbers visiting will rise in 2014 to 204,000 from 89,000 in 2012.   Moreover their spend is high.   She quotes a figure of £1601 (USD $2628) as the average value of a single transaction by a Chinese visitor within the luxury shopping districts in London of Mayfair, St James and Bond Street.  Little wonder that both growth and tastes are being influenced by this powerful group of consumers - her particular focus is their impact on couture.  

The Chinese love to travel.   The Chinese love to shop when they travel.    It's that maxim that drives the figure quoted by Bain & Company in their 2013 "China Luxury Goods Market Study"  - two-thirds of Chinese luxury spending is being carried out abroad.

None of this is a surprise and yet some brands seem to be sluggish to respond to a luxury growth slow down in China from 7% in 2012 to 2% in 2013.    Over expansion of their retail footprint instead of genuinely engaging with the consumer has seen footfall decline and profitability plummet.   All of this in the context of a trend to more restrained (government enforced) displays of wealth.   Nowhere is this exhibited more than in watches where growth has declined by 11% over a year.

All of this pushed me to sneak a look at an article I had written last May for Luxury Briefing's June 2013 edition.   The editor and I opted for the headline "China - Reasons to be cheerful" because my prognosis was, and still is, for a positive performance for luxury brands who enage the Chinese consumer.   However, in that article I argued for nuance of approach and suggested that brands had to change their ways.   Nothing I've read or observed recently suggests I was wrong.  For some brands it might now be too late.

Cracks in the China (Strategy) by heathrowkennedy

Today's WSJ carries a powerful quote from Pierre Pringuet, CEO of Pernod Ricard "When a country falls from double-digit growth to 7.5%, there are repercussions".   He's talking about China and it's impact on his group's performance - alcohol beverage brands have the ability to flex their offering and Pernod is already trialling less-expensive products on a younger demographic as demand for expensive Cognacs - and they have global reach which means they can squeeze more growth out of another market. Some luxury brands that have ridden the Chinese wave will not have that option.   They have neglected other markets, or just found their offering unpalatable to a wider (Western) customer base.   Their growth has begun to dip and they will find it difficult to replace it elsewhere quickly enough.    Combine this with the fact that the Chinese audience is changing tastes and you have a perfect storm of reduced volume and a quest for new brands.    These brands, already seeing a reduction in footfall will be faced with retrenching their retail footprint and shrinking their ATL activation.   It's a toxic mix.    One that could drive a person to drink. Something that would certainly please Mr Pringuet !

China matters by heathrowkennedy

Earlier this week the CEO of Hugo Boss, Claus-Dietrich Lahrs, made some interesting observations on China one of which was that the commercial landscape in China was becoming just as competitive as anywhere else in the world.   The report in the WSJ goes on to quote an estimate from CLSA Asia Pacific Markets which suggests that there are now nearly 1,000 luxury retail shops in China today which represents a doubling on the number five years ago. Back in May I outlined six areas for consideration by brand owners who trade in China for the publication Luxury Briefing and I am happy to share them here. Since writing the article and it's publication I've avoided commenting on China - but I am glad to say that my remarks have stood the test of time - 6 weeks can seem like an eternity - and I've shared the article below.

LUXURY BRIEFING JUNE 2013 - IZATT CHINA ARTICLE

China whispers by heathrowkennedy

It is hard to imagine what life would be like for many luxury brands if it was not for China. Put bluntly many of them would have ceased to exist if the financially empowered Chinese consumer had not developed an increasing appetite for luxury goods at the very moment the rest of the world was going into economic shock.    The baton of demand was passed and, other than the Lehman Brother's collapse "dip", most Luxury brands did not skip a beat. Indeed the last 4 years have been good ones for all brands with high sticker prices, all have floated upwards on a rising tide but to take the oft used analogy further - it's only when the tide recedes do you find out who has not been wearing swimming trunks.

The Chinese demand for luxury goods is not going to end - why would it - but there are some dynamic forces at play which will determine which brands will prosper and which will fail.

Assessing the state of the Chinese economy is beyond me, and I won't even try.   But last week there were a couple of indicators that I do understand.   The first were announcements by Pernod Ricard and then Remy Cointreau that a drop in demand for their high-end whiskies and cognac in China was impacting their performance.    The reason for a decline in performance is, to quote the Financial Times Louise Lucas "..distillers’ pricey spirits are falling foul of Beijing’s frugality campaign, as officials obey orders from the top to reduce conspicuous consumption – a move already denting sales at high-end restaurants and luxury goods makers. The new government’s anti corruption drive is also hurting gifting".  

The second was a report in the WSJ that the Chinese Air Carriers were experiencing a fall in profits, currency and fuel prices aside, due to a falling of in international demand which neatly links (are you still with me ?) to an illuminating article in today's Independent newspaper by Laura Chesters advancing the theory that Chinese HNWI are changing their buying habits and seeking not only less overt expressions of luxury but would rather purchase these closer to home.  She quotes HSBC’s luxury expert Erwan Rambourg as saying “Chinese shoppers have become more sophisticated and discriminating, which means some established brands may lose market share - we call this a ‘first-mover disadvantage.”

So what do I make of all this;

(1) With a new, more austere, government, overt luxury will be played down - that's apparent in the short-term but time will tell if it becomes a sustained change in behaviour - brands need to develop products and rituals which are less flamboyant.

(2) Take the Chinese luxury consumer for granted at your peril.   What sold yesterday, will not sell today.    (1) is obviously linked to this but so is an emerging sense of esthetic.   That's changing desires quickly.  Heritage brands have an advantage here and need to draw on their reserves of craft based legitimacy.

(3) Luxury brands, no matter where headquartered, should have marketing personnel from China working alongside the global team.   A quarterly "state visit" to Hong Kong and Shanghai no longer cuts it.  The same goes for new product development teams.

(4) Luxury brands who have grown overly dependent on Chinese tourists shopping at their flagship stores need to diversify their audience.  Reconnect with their European base.  Fast.