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TMCNet:  Challenges galore at the high end [China Daily: Hong Kong Edition]

[June 08, 2014]

Challenges galore at the high end [China Daily: Hong Kong Edition]

(China Daily: Hong Kong Edition Via Acquire Media NewsEdge) Europe's fashion brands need to do plenty of homework if they are to succeed in China Tighter restrictions on public spending crimped luxury brand sales in China last year, and going by current trends are not likely to provide much comfort this year also.


Compared with the relatively high retail price of luxury brands, premium brand prices in Europe are more in line with the current market demand in China. It suggests a huge market opportunity for some retailers.

Currently, retail prices for premium brands that have entered China are much higher than in Europe. A few businesses added tariff and transport costs incurred into their retail prices. On this basis, they learned from luxury brands' tactic of marketing, skimming and pricing, and further increased their retail prices.

These tactics led to European premium brands being priced 30 percent higher in China than in Europe, with some brands even having an 80 percent mark-up, including marketing, skimming and pricing. Coupled with the fact that the average income of Chinese consumers is lower than that in Europe, this pricing strategy has pushed premium brands to the tip of the consumer pyramid in China.

Near the tip of that pyramid, their sales to niche consumers were squeezed by luxury brands. At the same time they found it difficult to attract consumers from the lower part of the pyramid. Some premium brands have a market even smaller than they have in Europe. They have not been able to transfer their advantages in Europe to the Chinese market, and their experience and resources have lost market value correspondingly.

I do not know how the owners of Europe's premium brands make their decisions. Perhaps some of them will take advantage of opportunities in the Chinese market to rank with first-line brands. Some may just not want to increase their operating costs and invest more on resources, or perhaps marketing, skimming and pricing can satisfy them. But these premium brands seem to have forgotten that in this huge market that has unprecedented spending power, increasing sales create value far beyond those of single product sales.

Starting to make adjustments according to the needs of the Chinese market would be a wise choice. Changes may not be easy, but passively waiting for the market to prove the error of pre-market positioning may bring about a cruel result.

In December 2012, I published in China Daily a commentary on how premium brands should be positioned to win over the Chinese market, but 18 months later they have done little toward this. On the contrary, they all started to set their prices in China higher than those in Europe, but at the same time the lack of support in design and product services continued. Only by imitating the practices of the luxury brands, will they put themselves in a dangerous position. Chinese consumers have a greater need for reasonably priced quality high-end products.

In China there is huge demand for high-end apparel products that cost between 200 euros ($275) and 600 euros. As almost all the luxury brands have adopted the marketing, skimming and pricing strategy, their retail prices in China are much higher than those in Europe and the United States. This has left the Chinese clothing market a huge block of medium-to-high consumers. A luxury men's woollen suit, for example, generally costs 1,500 euros, while Chinese local consumers will accept a price between 300 euros and 600 euros. However, in that price range, there are few international premium brands.

In the past 20 years, hundreds of Chinese domestic brands have prospered in this price range and formed a very competitive Chinese domestic brand cluster. In February, Marisfrolg Women announced the acquisition of Italian fashion brand Krizia. It was founded in 1993 and its products have retail prices ranging from 300 euros to 1,000 euros. Through two decades of painstaking efforts, Marisfrolg has become China's leading brand of high-end women's wear. It has more than 400 stores in the country with annual sales of nearly 300 million euros. Its subordinate brands Masfer.Su, Aum along with Marisfrolg all enjoy robust sales.

Compared with local Chinese brands, high-end European premium brands have a significant advantage in product designs. As Chinese consumers prefer European brands, especially Italian and French, they are willing to pay a slightly higher price than they would for similar Chinese brands. If these European premium brands can properly adjust prices, domestic processing, design, production and customer service to the needs of local Chinese consumers, they will soon achieve excellent sales results in the Chinese market.

I propose the following suggestions on how premium consumers can win over Chinese consumers.

First, they should learn from local high-end brands about their management, operation strategy, pricing, channel distribution, product design and development, terminal management and customer services.

In terms of management, Chinese companies are not as weak as European companies think they are. They are skilled in the use of advanced management methods and tools, familiar with the rules of the marketplace, respect talent, focus on product development and customer services, and thrive on fierce competition. If some European premium brands are strong in product design, but weak in market competition, cooperation with local Chinese clothing enterprises would be a wise move. Local Chinese business owners are smart, and most of them are farsighted. They consider the integrity of company operations as their primary goal.

Second, these companies have to find and use local talent. European brands tend to prefer hiring those who speak better English or who understand the European management model, but these managers often lack experience in the Chinese market, especially in-depth understanding of the market in second- and third-tier cities.

Due to the success of local enterprises in the high-end market, local Chinese managers earn a good income. European premium brands should acknowledge that hiring them may not be cheaper than hiring similar people in Europe.

Third, in order to better adapt to the high-end apparel pricing system in China and to ensure product margins, European premium brands should take advantage of China's strong production capacity, and buy local raw materials and set up local production. This will reduce costs, and improve market responsiveness and customer experiences. To better understand customer demand, product design and development teams should also transfer to the Chinese market.

There is nothing wrong with sticking to the concept of Made in Europe, but China's strong domestic production and processing advantages are obvious.

The author is director of Beijing VOGUEAD Branding & Marketing Consulting. The views do not necessarily reflect those of China Daily.

(China Daily 06/09/2014 page20) (c) 2014 China Daily Information Company. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).

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