1436 & Shang Xia Case Analysis

Natalie Zajeski
Luxury Marketing
November 27, 2017

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Business Model Analysis

In 2008, Shang Xia was founded as a Chinese luxury brand with the support of French
luxury brand Hermes. Shang Xia’s mission is to create a luxury brand that is rooted in traditional
Chinese history. The initial product offerings were centered around modernizing Chinese ritual
tea ceremony. They sold luxury tea sets, furniture, and clothes all inspired by Chinese dynastic
royalty. The company opened its first store in 2010 in Shanghai, with the goal of slow and
strategic growth and control. They are focused on creating strong brand equity as a luxury
company, and value the foundation of the brand rather than intensive growth.
1436, a Chinese luxury brand, was founded in 2007 as an extension of the Erdos Group
brand portfolio. 1436 was influenced by Erdos’s success in the cashmere industry. With very
limited competition from other Chinese luxury companies, 1436 aspired to be the first true
Chinese luxury company without international brand support. They offered high quality
cashmere products, for both males and females, who cared about the origin of the product and
the traditional Chinese craftsmanship behind every garment and every design. They had initial
rapid expansion in China, and one of their main goals is strong and fast growth, although they
recognized the danger in fast growth as a new luxury company.
Shang Xia and 1436 offer quality products that are derived from Chinese craftsmanship
and traditional expertise, connecting their brands to Chinese history for a modern consumer.
1436 is different in its expansion strategy, however both brands are very intentional and
knowledgeable of building a new luxury brand from scratch. Shang Xia and 1436 both aspire to
be one of the first Chinese luxury companies, leveraging Chinese historic culture and quality
products, however only time with determine which business model and value proposition will
successfully create a brand that will withstand the founder.

Traditional Western Luxury Brands

Shang Xia and 1436 are disadvantaged compared to the power of traditional western
luxury brands; western luxury brands have the advantage of strong global brand awareness and
loyalty. Shang Xia and 1436 are new brands who are trying to create brand equity and brand
loyalty from a highly competitive landscape.

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 Western markets were highly concentrated and matured. Global consumers were
educated on their value propositions, and were willing-to-pay for the luxury items. The five
pillars of luxury were clearly fulfilled by all western luxury brands, and here is no disconnect
between the brand and the consumer perceptions of the pillars. However, Shang Xia and 1436
differ from western brands; they are still developing their position in the luxury market. In doing
so, they need to strategically fulfill all the pillars of luxury which they both have successfully
done.

Rarity/Scarity

The fabric of 1436 products is extremely rare and scarce. Their cashmere fiber comes
from the northern part of China, Mongolia region, and the supply of the cashmere is carefully
curated from specific goat hair that is held to extremely high standards – only the best hair under
the best environmental conditions are chosen. Only 2 out of 1,000 grams of yarn meet their
standards.
Shang Xia products are created through extremely old, and rare traditional Chinese
methods. The artisans used to create the products are limited and the materials they use are
extremely rare to replicate

Social Status

Luckily for 1436, cashmere has historically been perceived as a fabric for wealthy
individuals.1436 contemporary designs aims to offset the challenge of overcoming the
association of oldness to cashmere.
Shang Xia creates status through its limited production and exclusivity. Their clientele
includes celebrities, and wealthy individuals which helps enhance their social status. Their
products signal superior taste and exclusivity They also offer exclusive, limited edition
collections every year that are inspired by different cultural Chinese history.

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Hedonistic and Refine Experience

1436 and Shang Xia use their store locations to create a luxury retail experience. 1436
stores are designed to be concept stores, and the open space is used to signal the wealth of the
brand experience. Similarly, Shang Xia uses their stores to create a dream for the client (Exhibit
4). Their three stores are designed by well-known architect, Kengo Kuma.
Both companies stores are artfully designed in order to create a luxury experience for
their clients. They aim to create an experience and product that offers pleasure greater than the
functional benefit of their products.

Exceptional Quality

Both companies ensure exceptional quality through extreme control. As mentioned

previously, 1436 manufacturing process and standards are one of their greatest accomplishments
as a brand. The cashmere is a superior quality even to other luxury cashmere brands, such as
Loro Piana.
Shang Xia ensures superior quality through the control of the raw materials, and use of
artisans. All decorative objects, furniture, accessories, and garments are held to high quality
standards and are created in-house.

Creative Leadership

Shang Xia is led by artistic director and CEO, Jiang Qiong Er. Under her leadership,
Jiang has successfully mixed traditional Chinese products with contemporary designs. Symbols
of past dynasties are not used in the product, replaced by symbols consumers connect with today.
Design is intentional, and exhibited amongst other art collections and museums.
1436 has been under the creative leadership of Graeme Black, born and raised in
Scotland, since 2011. His experience in the western world helps fuse the Chinese and European
aesthetics into 1436 collections. He is inspired by traditional Chinese art, but transforms his
designs in order to create contemporary products for demanding consumers.

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Competitive Advantage: 1436 & Shang Xia

The global luxury industry is highly competitive, composed of highly matured brands
with strong positioning strategies. However, 1436 and Shang Xia are unique in the competitive
landscape because of their Chinese origins. There are very few Chinese luxury brands. Both
companies aim to position themselves as international Chinese luxury brands, however their
competitive advantage amongst themselves varies.
1436 competitive advantage is primarily its manufacturing and product capabilities. The
Erdos Group has extensive knowledge and control of the cashmere production in china,
controlling over 40% market share. In the beginning, 1436 leverage the brand awareness of
Erdos, however they later dropped the name from the company in order to avoid brand dilution
and confusion because traditional Erdos products are of lesser quality than 1436. Their
competitive advantage is in the know-how of cashmere production, and financial support of the
diversified Erdos Group.
Shang Xia is supported by Hermes which is a competitive advantage for the company.
Financially this allows Shang Xia to grow organically without feeling the pressure to expand
rapidly. In addition, the association of the brand to Hermes is understated yet followers of the
company are aware of the relationship which creates a strong brand equity for Shang Xia.
Additionally, Shang Xia has a competitive advantage because it it’s rare product offerings that
are hard to imitate, and already strong customer loyalty.
Shang Xia and 1436 global competitive advantage relies heavily on their Chinese origins,
and their ability to convert historical Chinse traditions into contemporary products. Additionally,
there is very little competition in the Chinese market. Both have an advantage in the Chinese
market considering their first-mover advantage and unique differentiation and value
propositions.

Luxury Consumer Engagement

The global luxury market is highly profitable, with over $730 billion of annual sales from
over 380 million consumers, and has fairly robust growth. Chinese consumers are a large

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segment of luxury consumers, with over 30% of total luxury sales accounted by the Chinese
market. Despite global economic growth slowing down, the rise of the middle-class and
expansion of UHNW (ultra-high net worth) individuals is growing in China.
A challenge for 1436, Shang Xia, and other luxury companies present in the Chinese
market is government regulation. Recently the Chinese government started to crackdown on
luxury “gift giving” in China, which led to a 40% to 50% decline in some luxury brands sales.
Another challenge, is the presence of western luxury brands in Chinese stores and markets.
Western luxury brands have long held Chinese consumer luxury engagement and
purchasing decisions. They control prime retail locations, and are seen as superior luxury brands
by Chinese consumers. Chinese luxury consumers are influenced by Western brands, and buy
western products in order to imitate western ideals or lifestyle. However, there is a trend in
Chinese consumer preference to Chinese brands. Chinese luxury consumers are motivated by the
country of origin when purchasing luxury items. They are also motivated by other attributes such
as design, customer service, exclusivity, and craftsmanship. Shang Xia and 1436 should leverage
their Chinese roots to engage Chinese consumers. Their Chinese heritage and design can be
taken advantage of in order to engage with the new Chinese luxury consumer.

Main Challenges: Shang Xia & 1436

Shang Xia’s main challenge is in their manufacturing capabilities, and supplier

relationships. Their products use ancient Chinese craftsmanship techniques, however this
expertise is lost and training new employees is challenging. They lack the number of people with
the skill set to create their products, and they struggle to find new employees to train because of
the shift in cultural dynamics. There is an increase in demand, and if the Shang Xia aims to
expand globally they need to increase artisan workshops and be more operationally effective in
order to fulfill international demand at the same level of quality.
In order to negate their supply chain challenges, it is recommended to continue producing
limited capsule collections but at a less frequent rate. Limited collections increase their luxury
brand status and exclusivity of the products, however it decreases their production capacity since
it increases the time it takes to design and execute each product to market. Shang Xia should

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focus on creating more standardized items that can be contributed to their core brand, therefore
production time can be managed and hopefully decreased. For example, Hermes has a limited
product range, but each item is signature to their brand.
Oppositely, 1436’s strengths is its production capabilities and manufacturing
effectiveness. Rather, their main challenge is in its distribution strategy. They have struggled
since the beginning to access distribution locations that are suitable for a luxury brand. They
initially aimed to be located in first-tier cities, but modified their goal and are now located in
second- and third-tier locations and airports. Communications is limited, and must remain
limited in order to remain exclusive. Stores are the primary mode of communication for luxury
brands, and 1436 needs to build their brand equity in comparison to matured luxury brands with
already stable access to the best retail locations.
It is recommended that 1436 use their retail locations in order to create a dream about the
values offered by the luxury brand to its consumers. In order to maintain exclusivity while
reaching their aggressive distribution targets, 1436 should offer exclusive events for consumers
in order to increase customer loyalty. Even further, in order to ensure further brand dilution,
1436 should decrease its presence in third-tier markets but rather focus on their locations in first-
tier cities and expand only when first-tier locations are presented.

Personal Response

After analyzing the two brands, I strongly believe that Shang Xia has a greater chance at
long-term success. It is important to note that both companies are executing strategies that align
with luxury ideals, however the slow organic growth of Shang Xia is more convincing for future
success. Shang Xia association with Hermes, communication strategy, distribution strategy, and
product strategy, is more unique and synergistic than 1436. I also believe that the leadership
under founder, Jiang Qiong Er, is passion driven and nurtured. Rather than 1436’s belief in
Black’s artistic director leadership.

Total Word Count: 1,997