The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
Last month, luxury giants celebrated a strong start to the year.
LVMH reported on April 13 that sales from its fashion business grew 37 percent compared to 2019 and 52 percent compared with the first quarter of 2020, when lockdowns began to take hold across the globe. At €14 billion ($16.72 billion), the group’s revenues beat expectations by rising 32 percent compared to 2020 and 8 percent over the previous year.
Meanwhile at Kering, Gucci saw 25 percent growth year-on-year in the first quarter and helped drive a “sharp revenue rebound” in its parent company’s sales for the period, which were up 5.5 percent from 2019. Hermès’ quarterly revenues surged 44 percent year-on-year, up 33 percent from early 2019.
Though few of these firms cited the extent of China’s contribution to their quarterly results, it is impossible to consider their performance without acknowledging the role the Chinese market has played. “All these companies [are] getting a real boost from China,” said Amrita Banta, managing director and co-founder of Agility Research, during a webinar. More broadly speaking, “what is at the heart of this is that the affluent have remained very resilient in this crisis.”
Indeed, the wealth of the world’s billionaires has grown by $4 trillion during the pandemic, according to think tank The Institute for Policy Studies, but there are other forces at play. From getting personal with China’s younger shoppers to expanding brick-and-mortar networks in the mainland, luxury industry leaders are investing more in the market than ever before, setting expectations at an all-time high.
While luxury’s frontrunners are the most financially equipped to take risks, their China strategies contain valuable lessons for other brands hoping to replicate their success.
A reality check
When it comes to luxury’s highest performers, “top of mind brands with an established leather goods business, a strong digital presence and a good store network in China were the real winners,” said Mario Ortelli, managing partner of luxury advisors Ortelli & Co. Being synonymous with an in-demand category is key, he adds: leather goods for Louis Vuitton, Dior and Hermès, outerwear for Moncler.
Some of these brands may have exceeded their pre-pandemic sales levels, but Chinese luxury spending overall hasn’t fully recovered in spite of brands’ efforts to repatriate consumption after the collapse of international tourism.
“China’s [domestic] spending still hasn’t reached the levels of China’s total spending on luxury when they were traveling abroad,” said Banta.
Though Chinese shoppers are clearly driving luxury’s rebound, consumer sentiment goes some way towards explaining why the market hasn’t yet experienced a full recovery. Data from Agility Research revealed that 64 percent of respondents in a survey targeting affluent Chinese consumers believe their economic situation will improve post-pandemic; 55 percent believed their spending would increase. While their relative optimism is remarkable, the percentages are also lower than where they were pre-Covid.
It may take a while before a wider recovery is achieved, particularly as experts don’t expect intercontinental flights to resume until 2023. And as the industry enters the second quarter of 2021, the gap between luxury’s winners and everyone else is only set to widen, said Ortelli. “The gains will not be as easy to get as in [the first quarter of 2020] when there were lockdowns in mainland China [in 2020].”
The Gen-Z connection
Millennials are currently the Chinese luxury market’s core consumer, but top brands are increasingly investing in building connections with its growth-driving Gen-Z populace (those born after 1995, of which there are about 80 million in the country).
The uptick in online buying means there’s a lot more visibility about who’s actually buying.
“[For] the Millennials and those born before them, the typical path for luxury was to gradually climb the ladder and buy premium brands first before graduating into luxury. With many of the Gen-Zers they are much more likely to go directly into buying luxury,” said James Roy, a director at Agility Research in Shanghai.
Being digitally savvy, Gen-Z’s impact can be most felt in lower tier cities where brands don’t have physical stores, like Luoyang and Zhongshan, he adds. There, “the uptick in online buying means there’s a lot more visibility about who’s actually buying,” giving brands more data to harvest. Furthermore, younger shoppers are a key audience in major cities like Shanghai and Beijing, as well as travel hotspots like Hainan’s Sanya, a major duty free hub.
Roy recommends brands add a personal touch to their interactions with Gen-Z customers. “[They] really like being added on WeChat by sales assistants in luxury brand stores,” he said. “They [don’t] find it an imposition... they want more personal connections with the brands and this is a key opportunity for it.”
Exclusive, limited edition and collaborative products are another way to reach China’s Gen-Z. According to data from a report by Tmall and Bain, the cohort’s purchases of luxury collaborations and limited edition items grew 300 to 400 percent between January and October in 2020. “The recently launched Gucci-Balenciaga collaboration has promise,” Bernstein analyst Luca Solca wrote in an email. “This is exactly the kind of thing Gucci should do to reignite young Chinese consumer interest for the brand.”
Fewer flights, more brick-and-mortar
With Chinese shoppers still unable to travel to luxury retail hubs like Paris and London, brands are making the most of domestic demand and many are doing so through their physical retail networks.
Ortelli points out that while big established brands (like Louis Vuitton, Dior) are growing their China footprints at “full speed,” some smaller labels are in a position to match their momentum. Loewe is an example of a brand that is popular and for which the Chinese physical retail scene is relatively underpenetrated.
Brands do, however, need to be extremely strategic; a glut of malls means businesses have many options, but not all locations are the right fit. “If I’m Louis Vuitton, I can choose the top locations and my brand is a profit generator, so I can have preferential rents. If you are a smaller brand, you want to be able to find the right location,” said Ortelli.
Expanding their domestic retail network isn’t the only opportunity for brands, as a return to global travel stalls due to second waves of Covid-19 infections and new variants. “With people not being able to travel to see family and friends, luxury gifting has become a more important category,” said Banta. She added that the top categories for gifting were fragrances, jewellery and alcohol, while the top gifted brands were Dior, Lancôme, Hermès and Cartier.
The next virtual milestone
“Brand perception and digital presence are the two factors... that divide winners from losers,” said Ortelli. Unsurprisingly, brands that excel at the former are also at the fore in China’s distinctive and rapidly changing digital ecosystem — Hermès’ comparatively low-key digital presence is the exception, rather than the rule.
The market’s online environment, and the way brands have interacted with it, has evolved through several stages, more recently the fusion of social media and e-commerce that has manifested in marketplaces like Tmall and Taobao amping up content and discovery-focused spaces and social media platforms introducing transactional functions.
“What we can see now among the leaders is a real focus on covering the entire purchasing journey through a platform,” said Pablo Mauron, partner and managing director of Digital Luxury Group’s China business. At one point, brands worked with the expectation that platforms would serve unique functions, or at least specific audiences — think Tmall for conversions and acquiring new shoppers, or WeChat for engaging with loyal customers — but the goal has since shifted to keeping shoppers within the funnel on their preferred channel, be it Xiaohongshu or Douyin, which introduced flagship stores for brands in March.
Moreover, digitally-minded luxury brands have developed unique communication strategies for each channel that are tailored to the platform’s audiences and functions, said Mauron, raising Gucci’s campaigns for the launch of its Jackie bag — which took the form of lifestyle-focused short movies on Xiaohongshu and a retro game challenge on Douyin — as an example.
From gaming to livestreams, there are few virtual spaces luxury hasn’t ventured into. One area that has remained relatively unexplored is music, said Mauron, adding that Dior’s recent foray into QQ Music (users can download a personalised Dior skin for their player) may be a turning point.
And while luxury’s leaders have the resources to experiment with new digital formats, it’s becoming harder for smaller, more frugal players to nab screen time.
“Even though investments are increasing, expectations increase with it,” said Mauron. “That leads brands to be very performance-driven — only a few will take potential bets, such as music platforms, to see where it goes.”
FASHION & BEAUTY
Fosun Fashion Partners With Chinese E-Commerce, Marketing Agencies
The deal will see Baozun and Activation become minority shareholders in Fosun Fashion Group and guarantees that Fosun’s brands exclusively work with Baozun and Activation for their e-commerce and marketing needs. Baozun is a leading e-commerce service provider for many international brands in China, including Nike, Farfetch, Burberry, Zara, Gucci and Coach. Last year, the company, which is listed both in Hong Kong and on the Nasdaq, reported total net revenues of 8.8 billion yuan ($1.36 billion), an increase of 21.6 percent year-on-year. Fosun has been pushing its brands, particularly Lanvin, more aggressively in the China market, where e-commerce is playing an increasingly important role in sales conversions, even for luxury brands. (BoF)
I.T. Delists From Hong Kong Stock Exchange
Hong Kong-based multi-brand retailer I.T. Group last week announced the completion of its delisting from the Hong Kong stock exchange. The move follows shareholder approval of the offer to privatise I.T by company founder Sham Kar Wai’s Brooklyn Investment Limited, in partnership with private equity and investment advisory firm CVC Capital Partners, for $168 million, or the equivalent of $3 per share. On April 16, disinterested shareholders holding over 99.99 percent of scheme shares voted in favour of the proposed privatisation and final payments to shareholders is due to be completed by May 7. The newly privatised company will be split into two entities, with the BAPE business to be split off from the main I.T. business and CVC Capital Partners to take a minority shareholding in BAPE. (BoF)
China’s Dazzle Group Sees Sales Surge 61% in Q1
The Chinese apparel giant saw 2020 revenues reach 2.56 billion yuan ($385.47 million), up 7.81 percent year-on-year, while first-quarter 2021 revenue rose 61 percent to 657 million yuan ($101.34 million), according to an earnings report released today. The Shanghai-based fashion company has four major brands under its umbrella: Dazzle, a midmarket womenswear brand; d’zzit, which aims at younger female consumers with its overtly girly aesthetic; high fashion brand Diamond Dazzle and menswear label Razzle. By the end of 2020, the group’s store network included 1,154 physical stores in mainland China and online sales rose 20.08 percent to 368 million yuan ($56.76 million) over the year, compared with 2019. The company also said it was actively looking for acquisitions to help meet its strategic goals. (BoF)
TECH & INNOVATION
Tencent Leads $50 Million Investment in Fashion E-Commerce Firm ChicV
The tech giant’s holding company is among the investors betting on ChicV, a Guangzhou-based business founded in 2015 that specialises in selling fashion cross-border, also known as haitao, and operates three sub-platforms Stylewe, JustFashionNow and NoraCora. ChicV is one of many media-shy retailers that have popped up in recent years, taking advantage of China’s highly developed manufacturing infrastructure to pump out ultra-fast, very cheap fashion products to consumers across the globe through social media platforms like Instagram. This model has proven a lucrative one and China’s best-known cross-border player, Shein, was valued at $15 billion in 2020, but these retailers are also commonly the subject of consumer complaints for the subpar quality of their products and shipping delays. (DealStreetAsia)
Watchdogs Release New Rules to Regulate Livestreaming
Chinese authorities have released new guidelines to regulate the country’s booming livestreaming industry that are due to be implemented by May 25. The measures, jointly released by the Cyberspace Administration of China (CAC) and six other government bodies, including the Ministry of Commerce (MOC) and the State Administration for Market Regulation (SAMR), set standards for livestreaming e-commerce platforms, operators and hosts. They require livestreamers and operators to be at least 16 years old, or for minors under 16 to have the consent of a legal guardian, and ban fake advertising claims and data fraud (including bogus comments, likes, views and sales figures). They also put the onus on livestreaming platforms to handle complaints from consumers in a timely manner and to protect the personal information of their users. (BoF)
CONSUMER & RETAIL
Gucci, Alexander McQueen Join Voucher Schemes in Hong Kong’s Top Malls
In a bid to attract shoppers back to the city’s brick-and-mortar stores hit hard by Covid-19 and pro-democracy protests, several high-end malls have launched cash voucher programmes in which luxury brands are taking part. At Alexander McQueen, Gucci, Ralph Lauren and Giorgio Armani boutiques in the city’s Harbour City mall, customers can receive a $100 HKD (around $13) voucher for every $1,000 HKD ($129) spent in a day and two $500 HKD coupons for every $6,000 HKD spent at designated shops. Throughout the pandemic, other high-end shopping centres, including Times Square, Pacific Place, IFC Mall and K11 Musea have also introduced voucher schemes and cash coupons that included luxury fashion brands’ stores. In some of these cases it’s unclear whether tenants have to bear the costs of shoppers’ savings, but a source familiar with the matter said that brands at Harbour City and Times Square are required to absorb two-thirds of the value of every voucher used. (SCMP)
JD.com’s Logistics Arm Gets Green Light for Hong Kong IPO
Last Thursday, the Chinese e-commerce giant’s logistics unit received approval to press on with an initial public offering that could raise up to $4 billion on the Hong Kong stock exchange, said people familiar with the matter. The listing would follow that of another subsidiary, JD Health, which raised $3.5 billion in December; JD.com raised $4.5 billion in a secondary listing last June. The news comes in the wake of heightened regulatory pressure on Chinese tech giants including JD.com rival Alibaba, which was fined $18.2 billion yuan ($2.8 billion) this month for anti-monopoly violations. On Thursday, JD.com was among 13 firms summoned by the country’s top financial regulator (others included Tencent and Bytedance) and urged to put an end to anti-competitive practices. (BoF)
POLITICS, ECONOMY, SOCIETY
Washington, Beijing Make Progress on Climate Diplomacy
Last week, President Xi Jinping accepted President Biden’s invitation to attend the US-hosted Leader’s Summit on Climate and pledged that China would “strictly control coal-fired power generation products.” The news follows a productive visit by Biden’s climate envoy John Kerry to Shanghai, which ended in a joint statement reinforcing the powers’ commitment to working together on implementing the Paris Agreement. Kerry, the former US secretary of state, was the first official from the Biden administration to visit the country; the trip and result ups hopes that the countries can collaborate on the climate front in spite of their various political pain points. (SupChina)
Kissinger: Failure to Ease US-China Tensions ‘Risks Cold War’
At the McCain Institute’s Sedona Forum over the weekend, the former US national security adviser warned that conflict between Washington and Beijing could engulf the entire globe. “It’s the biggest problem for America; it’s the biggest problem for the world,” Kissinger said. “Because if we can’t solve that, then the risk is that all over the world a kind of cold war will develop between China and the United States.” He urged US foreign policy heads to unite against China and noted that advances in AI and nuclear technology have upped the stakes. (The Guardian)
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