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Jun
2015

Its time for brands to take the reins

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Every observer of the Chinese luxury sector knows one thing at least about it; spending has slowed and so has the market growth in the last 24 months, and for many they worry that the doom and gloom presented in the media, that paints a picture of a total disaster for the industry. The boom years have gone and we are now in a period of stabilisation and slow maturity, at least in the tier one cities.

This picture will no doubt put fear into the minds of those executives for whom China has always looked attractive, but as yet they have not addressed it, and it will also cause those who lead brands that have entered the country with a partner, to consider whether they made the right decision or not at that time. Either way, there may be some confusion as to what to do for the best.

In the following article, we discuss the reasons why we believe that luxury brands must take control of their own destiny in China and not leave it to others and although the differences in consumer behaviour between tier 1 and tier 3 and 4 cities is still significant, it will not take too long for this gap to diminish, and while it is, valuable time is being lost during which brand and consumer engagement must be solidified.

The first step: take back the reins

There are many well documented cases of luxury brands that initially entered the Chinese markets by collaborating with a local distribution partner reaching a point in their market development when they acknowledged the need to own the brands activities and expansion strategy themselves and not to leave this in the hands of others who were motivated by different factors. Many of the most well known cases happened about four or five years ago when market growth was 25% or more and their partners were unable to open stores quickly enough, or to keep the expansion trajectory constant.
The logic behind taking over ownership of all the brand activities included consistency of message, greater involvement in terms of location, speed of openings, streamlining of the internal processes and reduction of internal costs, and the benefit of overall scale. The groundwork had been done, the market was growing rapidly; the perceived risk was lower and the financial benefits greater. This worked very well for many brands such as Coach and Dunhill, and they didn’t look back.

In the last two years, we haven’t seen as much of the ‘buy back’ approach, perhaps because many of those who could buy back have already done so, and possibly because many senior brand executives who have thought about it and not acted some years ago, have seen the market slow down and are now concerned that they might overexpose themselves at a time where its not clear how the market will behave in the coming years.

They need to face one key fact; that this is China and by its nature, it is not very predictable and neither are its people. However, what is in our view predictable is the fact that the market conditions in China will become more competitive and consumers far more knowledgable and less easy to please. A brand needs to control all aspects of its operation in China where this is possible because it will need to react quickly as and when the market changes and it cannot do that from a distance.

What is driving this need for control?

Why taking control of your brand in China is necessary

  • As the market has slowed, the profits your partner can make naturally decrease and they are less interested in developing the brand and as a result they may want to sell back to you
  • Now that the market has changed and had time to stabilise, buying back may represent a good time to reposition the brand better to fit the new market conditions
  • With the general slowing of market conditions, all brands need to work much harder to compete and avoid loosing their market position to existing and new entrants
  • The demand from consumers for more from luxury brands requires a clear demonstration of commitment to this and greater hands on leadership
  • As the market has, and will continue to develop, senior management of the brand must personally understand consumer sentiment and needs, and not rely on third parties to tell them
  • Brands need to consider the global value of the Chinese consumer, the brand in China may not make the actual sale but drive purchase elsewhere in the world
  • China is a huge country, and specific city or regional localisation of the retail experience may be necessary

Those reading this who work for brands with very few stores in China or none at all may be thinking that what is being suggested does not apply to them and its only for the ‘big boys’. The fact is that the same engagement rules and challenges face luxury brands no matter their size or location, and they should all understand this. The Chinese consumer doesn’t discriminate or make exceptions; they expect the same treatment from smaller brands as they do from bigger ones, and from those without a presence in China and those with many tens or hundreds of stores. What is important for these less active brands is to understand how they deliver what is required.

Make it love at first sight

Those brands that have been in China for many years and have many stores in many cities are already well known to the Chinese consumer, which can be considered as a positive or a negative. From the positive standpoint, one could argue that they have a place in the people’s hearts and minds that limits access to newcomers. Looking at the fact from the negative angle, one might argue that these brands have become to common, to boring or matter of fact. The Chinese consumer with their naturally short attention span may become bored of them.

The positive for brands new to China or those wanting to reach the travelling Chinese is that these people are enthusiastic for something new, more personal and that says something about them personally. Following the masses, at least in the tier one and tier two cities is now not the name of the game, the market is still very open and the chance exists for those with vision and passion to take advantage of it.

The Chinese love dating TV programmes, there are many of them, and the reason is that they are romantic; not in the Western manner but they are looking for a match to their ideal partner. As a new brand recently arrived, or arriving, or even as a brand waiting at the airport for them to get off the plane, make it love at first sight. Understand the attributes they are looking for in a brand so that they drop to one knee and ask you to marry them. You can only do this if you control your brand, how it is seen and how it speaks to your potential lover, no distribution partner will do it for you.

The how’s and the why’s of it

It is important to consider the opportunity of entering China as a positive and not late arrival and a slowing of the market as a negative, and here are some of the reasons. All are opportunities that require the management of the brand to control all aspects of it arrival or expansion in the country.

  • New arrivals or those recently arrived can ride on the wave created by the early luxury entrants i.e. consumer experience, acknowledgement and interest in luxury. These brands may have missed the big growth period, but they also didn’t have to invest huge sums of money before or during this time
  • Consider that more experienced Chinese consumers will now buy online or overseas. Your physical presence may not need to be large provided you offer consumers anywhere in the country a vehicle through which to make purchases
  • Mobile use is massive in China, and offer a very direct and measurable means to engage with consumers and to learn about them. The guys before you didn’t have this channel, and many that have been here for a long time are still very weak in this area
  • Mobile and web based platforms may be preferable to bricks and mortar to both you because of cost and adaptability and to the consumer for cultural reasons, match the two
  • Smaller brands tend to be more flexible and creative than their big counterparts, this plays to the new culture and expectation of Chinese luxury consumers; be the David to their Goliath

Modern China is no longer the ‘wild east’!

So our opinion is that all brands entering China and/or operating here should control their own destiny, and those who probably will never have a physical presence in the country still need to understand why that control gives them the flexibility to handle the modern Chinese luxury consumer.

Ten years ago, China was the wild east, and some parts are still many years behind the developed cities and provinces, but most of the people you want to sell to now, are knowledgeable, but they are still Chinese and do not behave in a manner that you will be familiar with. We are not saying that the Chinese luxury market or the luxury consumers are mature, but they learn fast and things have moved on dramatically in the past few years. The opportunity of owning and controlling all aspects of the interaction between your brand and these very valuable consumers is just the same as any brand that has been here for ten years.

Yes, they will know much more about the backend operational challenges than you, but the front end is as much an issue for them as it is for you. You are all on a fairly even playing field, or as even as is possible in China. Don’t shy away from it because a new round of the dating game has begun and you can look just attractive as the guy next to you.


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