BrandWatch by Michel Gutsatz

Shang Xia: A Chinese luxury brand

I would like to put into perspective two issues that have been of concern to the world of luxury for some time – with some information that went unnoticed and found on a Chinese website:

• For several years now (the 2005 meeting of The Walpole was devoted to it, among other subjects) the industry has been asking itself questions about the emergence of luxury brands in China (and India) - seeing in them a potential risk.  For years, we have reassured ourselves by saying that consumers identify luxury to include only a few countries (France, Italy, England ...). The Walpole therefore concluded its study by saying that a Chinese luxury brand would not see the day for long time.
• For several months the press has echoed the launch of a new Hermès brand in China and asks questions about this strategy.  The first boutique of the brand has just opened in Shanghai and the answer is clear: Hermès created from scratch - with the help of a Chinese designer with whom the company is associated - a Chinese luxury brand, conveyer of Chinese traditional skills (in cabinetmaking, porcelain, cashmere...).  "An authentic brand, with its style, materials and know-how rooted in Chinese culture" (Patrick Thomas). The photos published by Jing Daily prove it:
  
  
  
• The information stems from a study conducted by the firm, Labbrand, in December 2008, among wealthy Chinese. "If it is true that in industries like top fashion garments and accessories that foreign top brands dominate, in other industries, and specifically those having deep roots in China’s heritage and tradition, Chinese brands have good chances to gain the upper hand".  Drawing up a list of 10 of the most "luxurious" Chinese brands, they found that the criteria most often put forward are "Chinese Heritage" and "Quality Expert".

Thus the arrival of Chinese luxury brands - relying both on traditional knowledge (as I said last year on BrandWatch regarding beauty) and Chinese nationalism - is now a reality. It will gradually take root in jewelry, in the tableware, in home fixtures and fittings... a new and welcome competition for European brands!

Zara's perfume world is changing

Zara has made a 180-degree turn in its perfume strategy. I offer a quick analysis in the form of a "Before & After".
BEFORE:

• Licence entrusted to the Puig group - a traditional specialist in selective beauty (like Interparfums, L'Oreal, Coty, ...)
• Positioning of the perfumes created by Puig: the "me too" of luxury perfumes. 
 The "Rosa" collection therefore strangely resembled Chanel's Excusifs, or Dior Homme …
  
  
  
  
• Distribution: Zara stores.
• Results: quite disappointing (an estimated turnover of 80 million Euros).

AFTER

• Sucontracting agreement with Maesa, a full-service beauty specialist for supermarkets and mass-market fashion brands.
• Positioning: a collection of 13 fragrances conceived like a fashion collection, i.e., with new perfumes every year (introduction of new fragrances and withdrawal of those that do not sell). These perfumes replicate the codes of brands such as Diesel and Hugo Boss.
  
  
• Price: between 10 and 20 Euros (retail price) – i.e., much lower than selective perfumery prices.
• Distribution: through the 1200 Zara stores.

This is a major change: switching from traditional perfumery - luxury / slow-moving / selective – to perfumery that is trendy / fast-moving / inexpensive. The Zara perfume is now conceived like the Zara collection: inspired by top fashion designers, with quality ("no compromises on the composition"), and rapid rotation.  Perfume thus leaves perfumeries to become an affordable product and an impulse buy in fashion boutiques.  The reason why this business model is likely to succeed lies in the rotation/price combination.  Until now, most often, fashion brands that boasted of their own perfume positioned them in the selective price scale (even those from Victoria's Secret are in the $25 / $50 dollar range). I am willing to bet that Zara's example will be carefully analyzed ... and copied.

USA: the end of BOGOs?

WWD tells us, in an article in its September 3 issue ("Mass Market Beauty Shifts Promotional Gears") that mass-market beauty brands in the U.S. are radically changing their approach to promotional marketing: at the beginning of the year, L'Oreal Paris announced that they were withdrawing the Buy One Get One Free (BOGOs)  strategy of their "tactical arsenal".  It was followed by Revlon, among others.
At a time of economic crisis and a shift towards value, brands and retailers realize that promotional frenzy not only destroys their margins but also destroys their image: consumers eventually come to believe that the brand is systematically discounted. This leads brands to rethink their marketing strategy by playing on other devices: gift cards, gifts with purchase, special events ... or - like Target – playing up the rewards received to encourage consumers, surfeited of novelties, to buy.
Walgreen's chose to innovate by taking - in partnership with Neutrogena, RoC and Revlon - pages of advertising in Vogue, Allure and Glamour, presenting products, advice and services. Maybelline (in partnership with Marie Claire) has created a pop-up store, open during the New York Fashion Week on Broadway, offering free make-up sessions. 



In fact brands and distributors of mass-market cosmetics adopt the same marketing strategies as selective beauty brands: how will the latter react?

China likes brands (2)

I propose to continue our analysis of the relationship that China has with brands by focusing on a phenomenon that started about 5 years ago: the purchase of European brands by Chinese companies. Here is a list (not exhaustive … I would be delighted if readers of BrandWatch complete it):

• In cars, examples abound: in 2005 Nanjing Auto bought MG, and SAIC (Shanghai Automotive Industry Corporation) acquired the rights of several Rover models. These were redeveloped and marketed under the name Roewe, with great success.  Since SAIC had acquired Nanjing Auto, the new group re-launched the MG in Britain in 2009/2010, with models that were well received by critics.  The group's portfolio also comprises the rights to Austin Healy, purchased in 2007. This year, Geely bought Volvo from Ford.
• In 2008, Weichai Motors, the first Chinese manufacturer of boat engines, trucks and construction equipment, bought Motors Baudoin – recognized experts in marine engines.
• A similar phenomenon is appearing in fashion.  In 2008, the group Hembly International bought Sergio Tacchini. In 2009, Zhongfu bought the rights to Pierre Cardin in China. This year Shandong Ruyi (world leader in spinning and weaving, one of the Hugo Boss sub-contractors) acquired 41% of Renown, the Japanese fashion comppany, and Tombolini, the Italian clothing company.

Chinese companies have been building on the low-cost business model so far: the price made the difference, and some even resorted to dumping to get rid of competitors in markets. They have now clearly understood that owning a brand generates higher margins than being a manufacturer for the owner of the brand. This explains why over 20% of company heads surveyed in a recent study by The Economist ("A brave new world: The climate for Chinese M & A abroad", 2010) say they are in search of brands.
However, Chinese companies are faced with significant managerial shortcomings - especially where integration of foreign teams and marketing are concerned. The Economist's survey shows that Chinese companies have acquired 298 foreign companies in 2009 (including 13% in Europe and 13% in the U.S.), but only 39% of top managers surveyed believe they have the skills to integrate these acquisitions. The challenges ahead are therefore significant. However I am persuaded that the Chinese companies in question will acquire these skills rapidly ... not least because the European and U.S. business schools are setting up centres in the very lucrative MBA market in China with important local partners.

 

 

The future of retailing is at Carrefour Planet

Carrefour has just opened its new Planet concept in two of its stores in Lyon. I would like to take this occasion to analyze the essential elements of the concept - which will fundamentally change the very notion of a hypermarket: the increase in the number of brand shop-in-shops.
Two brands have entered with force: Apple, with a space selling the iPod and Mac, and Virgin with a cultural space. In both cases, Carrefour has drawn conclusions from its relative disappointment in essential non-food categories. I would summarize its reasoning in five points:

1. The future development of hypermarket sales will come about through non-food - the categories that are not the core business of supermarkets.
2. These are categories in which large specialty stores (Sephora in beauty / Decathlon in sporting goods / Leroy Merlin in DIY ...) have carved out very strong positions, and against which the large supermarket retailers have been impotent up to now. 
3. These are also categories where national brands could remain very strong (such as in beauty, fashion or electronics).
4. Carrefour has therefore drawn the obvious conclusion:  They must ally with the strongest national brands to re-invigorate entire shelf spaces… and attract a flow of customers.  What we are seeing is a real cultural reversal (at least in France): making the national brand a true partner, and not an adversary.
5. The cultural sector is a special case: Carrefour noticed the development of the Cultural Spaces at Leclerc and failed to duplicate them. The company was therefore obliged to join forces ... with a specialized retailer!  This is another cultural rupture: a distributor installs its brand in the midst of the shelves of another distributor!

The French supermarkets have reached a new turning point: the powerful national brands, and the specialized retailers that were until today confined to shopping malls, now enter the hypermarket.  In a certain manner the new model is a combination of the traditional supermarket and a department store.  Supermarkets will gradually become renters of commercial space in their stores, and entrust their partners with the management of their own floor space (stocks, personnel).  Consumers and brands will find this really advantageous: several of my clients, who "reclaimed" spaces previously managed by department stores, have greatly increased their sales by optimizing their replenishment, responsiveness and service levels. In this new model - which is also being implemented in the USA (Sephora at JC Penney and CVS Boots at Target and CVS...) - each partner finds its advantages, in terms of image, as well as traffic and sales. This can only spread to other categories: When will we find an H&M shop-in-shop at Carrefour Planet?

 

China likes brands (1)

The title of this first post of September IS NOT "Chinese love brands". I suggest we look beyond a banal observation about the growth potential for brands in the Chinese market, and offer a more detailed analysis of what the rules of the game seem to be in China right now with regard to brands.  To do so, I shall strive to put into perspective a number of reports that we have been receiving over the past several months - in the form of a series of posts.

• Traditional Chinese beauty brands (Beijing Today, July 2) - some of which were in vogue in the '80s - are back (they are available online at tangjinu.taobao.com). All of them have in common the use of ingredients and fragrances to which the Chinese have been accustomed for a long time, such as osmanthus, sandalwood, violet, rose ... Describing themselves as "natural", they sometimes make a reference to traditional medicinal practices. Their prices are very low - allowing many Chinese women to use beauty products that are accessible. 
• Shanghai Jahwa has re-launched a high-end beauty brand (Jing Daily, August 24) that was very popular in the Shanghai of the 30s, Shuang Mei - under the name Shanghai Vive.  With very Art Deco packaging, the brand store is located in the famous Peace Hotel, which just reopened its doors. Besides beauty products, one also finds here jewellery and accessories - creating a true "lifestyle" brand evocative of Shanghai – at the time it was called "the Paris of Asia".  This brand completes Shanghai Jahwa’s portfolio together with Herborist (which I mentioned last year, and which saw its sales rise by 60% in 2009), and a mass-market brand, Liushen, (representing a half of its sales).
• First Auto Works, a long time provider of official cars in China, today announced a re-launch of the famous Red Flag limousines - as a prestige brand in their range. In the 50s, the Red Flag cars were copies of official Russian limousines. An American entrepreneur - creator of a hotel and restaurant, Red Capital - uses one of the last original cars for "nostalgic" tours in Beijing… for foreigners.

Contrary to what some may claim, this is not purely nostalgia. I see three salient points common to these examples:

1. The desire to develop Chinese brands - and therefore draw on the history of China, so as to establish them over the long term. This is a new approach for the Chinese for whom access to the past has been denied for many years.
2. The ability to stake on real brand portfolios - from mass market to high-end or even luxury.
3. Chinese nationalism finds here a field of application - to be monitored closely: China believes that ancient brands are part of its heritage - and is providing the means for defending and reviving the most important among them.