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Expansion to Asia Pacific

Asia Pacific excluding Japan remains the key region for expansion for luxury retailers
Luxury houses continue to expand aggressively in Asia Pacific, especially in China
Luxury retailers regard China as the number one destination for international expansion, with many now expanding their operations after gaining a foothold in the market previously. In July 2011 French design house Longchamp which is known for its handbags that have recently been endorsed by British model Kate Moss said that it planned to open six to 12 stores annually in China over the next two to three years, to make the country one of its top three markets. In July 2011 Longchamp had 13 boutiques across eight cities in China and said that it had seen its sales increase by 67% year-on-year during the first six months of 2011. Similarly, US-based luxury handbags and accessories company Coach has been expanding aggressively in China, following the acquisition of direct control of its business in the market. In the three months to the end of June 2011 Coach launched 11 new retail locations in China, bringing the total number of Coach China locations to 66, up from 41 at the end of June 2010. The company said that same store sales in the country rose at a double-digit percentage rate in fiscal 2011, and that it still perceives the Chinese market to be its biggest opportunity. Italian luxury house Prada is set to open 30 new stores in China by the end of 2012 to add to its 15 stores there, and plans to launch a design studio in Hong Kong later in 2011. Along with Greater China, smaller countries like Taiwan, Hong Kong, Macau, and South Korea are also delivering strong growth in luxury goods consumption. A free trade agreement between the EU and South Korea which took effect on July 1, 2011 has benefited European luxury retailers, with Louis Vuitton registering sales of $82.6m in South Korea between July 1, 2011 and September 14, 2011 according to CPP Luxury, up 16.9% on the previous year. Similarly, sales at Chanel rose by 14.6% to $42m and Herms saw its Korean sales jump by 11.4% to $14m in the same period. Consumers' increasing spending power and passion for luxury has attracted luxury retailers and fueled their rapid expansion plans, not only in terms of stores, but in terms of operations through the expansion of distribution centers and warehouses.

Luxury houses are now seeking direct control in the growth markets of Asia Pacific
Initially, the majority of luxury houses operated in the lucrative markets of Asia Pacific through local partners. Now, however, luxury companies are keen to take full control of their operations in the region, having accumulated sufficient market knowledge since many of them have had some presence in the region for about 10 years. Direct control allows retailers to accelerate store rollout and obtain a full share of revenues from the market. Companies can also have a tighter grip on the label's marketing, while an ability to engage with local customers can help them to better adapt their product proposition to domestic needs. Luxury houses are particularly keen to obtain direct control of their Chinese operations due to the size and future potential of the market. Buying back their operations that were previously run by a local partner also highlights retailers' commitment to the region. In September 2011 luxury footwear label Jimmy Choo, which earlier in the same year was acquired by Labelux Group, took direct control of its Hong Kong operations by buying back the remaining 50% of the joint venture it had with domestic company Bluebell Hong Kong. The move gave Jimmy Choo direct control of its five stores in the city and its wholesale

Expansion to Asia Pacific

operations. The company also opened a regional office in Hong Kong to manage its retail network of 27 stores in Asia Pacific, including Singapore, China, and Australia. Earlier in the year, Jimmy Choo bought back its Japanese operations. In June 2011 Sergio Rossi, a design house controlled by PPR, announced plans to buy back its five franchised stores in China from its local partner Kutu Trading Company, in order to accelerate its expansion in the market. The label plans to double its store network in mainland China "within the next several years." Sergio Rossi said that it would, however, maintain its partnership with department store retailer Sichuan Lessin in order to push the label's expansion to second- and third-tier cities. Similarly, at the FT Business for Luxury summit in June 2011, Lanvin's chief executive officer Thierry Andretta said that the company had licenses in South Korea and Japan that it was planning to buy back "in the next coming years." In September 2010, British luxury house Burberry bought back its Chinese operations, which were previously operated by Kwok Hang Holdings, its Hong Kong-based franchisee. Burberry had been present in the Chinese market for almost 20 years and at the time of the acquisition had 50 stores across 30 cities. Following the acquisition Burberry is making use of digital marketing initiatives to further strengthen its brand's awareness and appeal in China. In Q1 FY2012 the company announced that the acquired Chinese stores delivered comparable sales growth of around 30% in the quarter, in comparison to 15% comparable growth in other retail operations. Similarly, in fiscal 2009 to the end of June 2009, American company Coach acquired its retail business in Mainland China, Macau, and Hong Kong from its former distributor ImagineX Group. In fiscal 2011, the company announced that it had also transferred its operations in Singapore to its direct control, while Malaysia will follow suit at the end of fiscal 2012. At the end of 2009, Polo Ralph Lauren acquired its franchised and licensed operations from Hong Kong-based partner Dickson Concepts, which previously represented the American brand in China, Hong Kong, Malaysia, Indonesia, the Philippines, Singapore, Taiwan, and Thailand. According to the official statement, the partnership was terminated due to Polo Ralph Lauren's decision to assume its retail and wholesale operations as part of its worldwide strategy, following earlier similar acquisitions. However, piracy and its conservative image caused Polo Ralph Lauren to lose market share in China to rivals such as Louis Vuitton and Ermenegildo Zegna. In January 2011, Polo Ralph Lauren continued to focus on its retail operations in Asia Pacific as it acquired its licensed operations of the Polo-branded clothing and accessories lines in South Korea, which were previously carried out by local company Doosan Corporation.

Customers in China are becoming increasingly demanding and knowledgeable about brands Men remain the key luxury shoppers in China due to a strong gift-giving culture in business
The Chinese luxury market has been particularly male-driven, with men spending the most on luxury goods in the country. This differs from the majority of other markets where women take the lead. In 2010, American luxury accessories company Coach said that men accounted for 45% of spending on handbags and luxury accessories in Mainland China, in contrast to about 25% of spending across other parts of Asia and just 15% worldwide. Over 50% of Burberry shoppers in China are men.

Expansion to Asia Pacific

Luxury goods consumers in China are also much younger than in other markets, generally between 25 and 40, as younger people are more willing to spend their disposable income on luxury goods. Young people have potentially become the first generation to be able to spend money on discretionary designer items. There is a strong desire among wealthy Chinese men to flaunt their status, and luxury labels are deemed instrumental in expressing their masculinity. The concept of the "alpha male" a man of high social status and confidence is still very common in marketing efforts. This is a result of the family planning policy of allowing only one child per family; these men have grown up accustomed to getting what they want and have a sense of great competition, unleashed by the country's rapid economic growth and the fact that there are more men than women in China. China has a strong gift-giving culture: about 50% of luxury products bought by Chinese shoppers are gifts, while up to 75% of luxury watches are purchased as presents. Chinese businessmen often try to build relationships (or guanxi) and rapport with clients or partners through gift-giving, to enhance the business process. These gifts can sometimes come in the form of clothing but are most often small accessories such as watches or belts. As a result many luxury houses with a growing presence in China have expanded their men's accessories proposition in recent years.

A new segment of female professionals is emerging


This does not mean that all of the luxury goods bought in China are targeted at men Chinese men also buy luxury goods for their wives, girlfriends, and female friends. Also, a shift towards more female luxury goods consumers is taking place in China: more women are successful professionally and now have money to spend on such goods due to growing independence, and the desire to exert their increased spending power. Several luxury houses, such as Bulgari and Giorgio Armani, have revamped their marketing tactics to increase their appeal to self-made female entrepreneurs and other successful female professionals. For instance, Giorgio Armani Group has been hosting private cocktail parties together with sports car maker Maserati to specifically appeal to this emerging segment. Additionally, several luxury houses such as Richemont and Polo Ralph Lauren could not say that their customer base in China was much different to other markets regarding gender distribution, highlighting that some luxury brands are currently more attractive to female customers than others. We are likely to see more companies increasing their effort to further encourage the rising female interest in luxury through dedicated marketing, and revenue from women's apparel and clothing is expected to rise steeply in the future. Luxury shoppers in China are increasingly researching brands and products online, making luxury labels' digital marketing and online communications very important in encouraging purchases. Italian, French, and Hong Kong luxury labels are the most sought after by Chinese luxury shoppers. Italian luxury houses are especially well known for their leather goods, including shoes and handbags. French labels are particularly popular with their fashion and beauty products, while Hong Kong labels, especially Queelin, are sought after for their jewelry.

Luxury customers in China exercise different behaviors than those in Europe and North America
Chinese customers still prefer to pay in cash, even when acquiring a luxury item. This is due to the fact that electronic payment security remains a key concern in the market. This practice of carrying cash around further fuels the demand for men's handbags. Male consumers especially tend to make a purchase decision relatively quickly, without showing much doubt and consideration when instore.

Expansion to Asia Pacific

Similarly to wealthy shoppers in other emerging markets, Chinese customers are attracted to internationally recognized labels, especially giants such as Louis Vuitton, Gucci, and Chanel. This is because they are very much interested in the labels' heritage and want their luxury items to be recognized by their peers. For this reason, they are not yet keen on experimenting with younger and less recognizable labels in search for uniqueness, a trend which can be observed in mature markets.

Chinese customers are increasingly demanding quality and unique products


Chinese customers are becoming more knowledgeable about luxury goods, and along with being drawn to well-known brands, they are increasingly demanding higher quality. Additionally, they are growing increasingly proud of being Chinese. Several luxury brands originating from Asia Pacific, such as Hong Kong-based premium jeweler Queelin, are benefiting from this trend and growing in popularity in China. In recent years many luxury houses have embarked on dedicated marketing campaigns with local celebrities. However, the future will see more experimentation with their product offer. Verdict Research believes that the trend will be also boosted by heightened competition in the Chinese luxury goods market, resulting from international labels' rapid store rollout and aggressive marketing. This will lead to luxury houses taking steps to improve their proposition by better adapting products to local consumer tastes.

Luxury retailers are putting extra effort into standing out from the crowd in China Luxury retailers seek to improve their brand image in Asia Pacific through runway shows, grand openings, and destination stores
Consumers in Asia Pacific, and especially China, are becoming increasingly interested in and knowledgeable about global luxury labels. Meanwhile the competitive environment in the sector is heating up, with global labels aggressively expanding their retail networks and luxury houses putting an extra effort into boosting their brand image through dedicated fashion events and the opening of destination shops. In April 2011, Burberry staged its biggest runway show to date at Beijing's Television Centre. The show, which featured lifelike holograms along with real models and a concert by British rock band Keane, was attended by many domestic celebrities. Through embracing technology, the British company aimed to highlight its image as an edgy and modern luxury brand and thus to generate greater appeal to young urban luxury consumers in China. In February 2011, Chlo hosted its largest every runway show in Shanghai's Expo Centre to celebrate the brand's fifth anniversary in China. The show featured several famous local models, including Bonnie Chen. The event was also broadcast live online. Prior to the show the French label launched an interactive Chinese language blog, "Je suis Chlo," where visitors could see behind-the-scenes footage and vote for their favorite models. In January 2011, Prada held its first runway show outside of Europe in Beijing. Local celebrities such as Gong Li and Maggie Cheung were invited to attend the event, which featured a performance by music band Pet Shop Boys. The luxury house included some new items designed specifically for the event.

Expansion to Asia Pacific

Figure 1:

Prada's runway show in China in January 2011

Source: www. red-luxury.com

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In September 2011 Louis Vuitton launched a destination store in Singapore. Designed by architect Peter Marino, who is also behind the design of other Louis Vuitton maisons globally such as the one in London, the store is based in Marina Bay, where it sits on water and its floor-to-ceiling windows overlook the bay. The store has four floors, a private lounge, and outdoor space, as well as an art gallery tunnel leading directly to the Marina Bay Sands Mall. The store is Louis Vuitton's 12th maison globally, and the first one in Southeast Asia.

Herms is the leader in terms of adapting its product portfolio to the Chinese market
Herms already has a first-mover advantage in adapting its proposition to the Chinese market. In 2008, Herms launched a brand dedicated for the Chinese market under the name Shang Xia, which means "up down" in Mandarin. It is set up as a Chinese company and is run by Chinese management. The business designs, produces, and sells a range of premium products, including clothing, shoes, homewares, and tableware, targeted at the rapidly growing market. Shang Xia designs aim to obtain inspiration from the heritage of China and the Asian continent. It is designed by Chinese designer Jiang Qiong'er, who was trained in France. Most products are produced from materials which are typical to the region, such as bamboo, porcelain, and cashmere, and are priced slightly lower than the Herms collection. In September 2010, Herms opened the first dedicated store for the Shang Xia range in Shanghai. Herms does not specify its stake in the business, but it is thought to exceed 75%.

Expansion to Asia Pacific

Acquiring behind a Chinese luxury label is a very smart and forward-looking move by Herms to win over Chinese consumers, as a dedicated brand can be stretched further to appeal to domestic consumers. Meanwhile, the Chinese management behind it is likely to provide different insights into how to establish the brand in the market. Nevertheless, in order to be successful Herms will need to convince Chinese shoppers that Shang Xia is more than a discounted version of Herms. Another global luxury player which is well placed to offer unique products for the Chinese market is Richemont, which owns a controlling stake in Chinese company Shanghai Tang. China is not the only growth country in which luxury retailers are aiming to appeal to customers through locally adapted merchandise: in India, Herms launched a range of saris in October 2011. Similarly, Bottega Veneta recently launched a limited edition "Knot India" clutch, the design of which combines conventional embroidery with a signature Bottega Veneta weave. The clutch features "India" embossed on a sterling plate inside. Luxury menswear label Canali retails a closed neck jacket specifically designed for Indian consumers, inspired by the jackets worn by the country's first prime minister. Products specifically designed for a target market appeal to customers because of their cultural relevance and the opportunity to own something of a recognized brand that is not available in other markets.

Success is not always easy to achieve, even in the Chinese luxury goods market
In May 2011 Polo Ralph Lauren initiated a restructuring plan in Greater China, which comprises Mainland China, Hong Kong, Taiwan, and Macau. The plan involved a reduction in workforce and the closure of some retail stores and concession shops, suggesting that the American company has struggled in China and did not manage to make all of its stores profitable even in this high growth market. Polo Ralph Lauren expects this restructuring plan to result in pretax charges of approximately $1020m in fiscal 2012. Additionally, finding qualified staff has proved especially difficult, with several important domestic positions not being filled for months and luxury houses aggressively poaching experienced staff from their rivals and local partners. The issue is becoming more serious as luxury houses acquire direct control of their operations in the region and seek to expand to second-, third-, and even fourth-tier cities. In August 2011 Helen Willerton, managing director of Chlo's Asia Pacific operations, said that it was particularly hard to find staff in China and that it was on everyone's agenda at the moment. Staff retention is also a problem, as qualified staff quickly move jobs in favor of a higher salary. Those Chinese that have obtained education overseas are particularly sought after, as international companies feel that the Chinese education system does not help students to develop the necessary sales skills.

Department stores in China

Table 1:

Department stores in China

Beijing Cuiwei Plaza Co Beijing New Yansha Group Beijing ShunYi Guotai Plaza Beijing Wangfujing Department Store Co Ltd Beijing Xidan Youyi Market Company Changchun Eurasia Group Co Ltd Chongqing General New Century Department Store Dalian Dashang Group Co Ltd Golden Eagle Retail Group Ltd GuangZhou Friendship Group Co Ltd Guangzhou Grandbuy Co Ltd Hefei Department Store Group Co Ltd Hualian GMS Shopping Center Co Ltd Intime Department Store Group Co Ltd Jiangsu Wenfeng Great World Chain Development Corp Lane Crawford HK Limited Maoye International Holdings Ltd Nanjing Central Emporium.Co,Ltd New World Department Store China Ltd Parkson Retail Group Ltd PCD Stores (Group) Ltd Rainbow Department Store Co.,Ltd Shenzhen Shirble Department Store Shijiazhuang Beiguo Renbai Group Corp Zhengzhou Dennis Department Store Co Ltd

Source: Verdict Research

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Chinese luxury e-retailers

Table 2:

Chinese luxury e-retailers

Sina Luxury Vipku Xiu.com Taobao I Have You Shangpin Kela Zouxiu ihush Vipstore Toplife

http://l.sina.com.cn/ http://www.vipku.com/ http://www.xiu.com/ http://www.taobao.com http://www.ihaveu.com/ http://www.shangpin.com/ http://www.kela.cn/ http://www.zouxiu.org.cn/ http://www.ihush.com http://www.vipstore.com/ http://www.toplife.com (to be launched in November 2011)

Source: Verdict Research

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