BrandWatch by Michel Gutsatz

Li & Fung - From brokerage to brands

We have just learned of two successive acquisitions of European luxury brands by Fung Brands Limited - an investment fund (attached to Fung Capital Europe) owned by Victor and William Fung:

• The acquisition of a 80% share in Delvaux, the Belgian leather goods manufacturer, through DLX Holdings, an ad-hoc subsidiary. Founded in 1829 in Brussels, since 1883 Delvaux has been an appointed supplier to the Court of Belgium. The brand has three production facilities in Brussels, in Bourg-Argental (France) and Ho Chi Minh City (Vietnam). The company operates 10 stores of it own, and has 220 employees with an annual sales turnover of 17 million Euros.
• The acquisition of 90% of Robert Clergerie through a subsidiary, RC Holdings. The brand has around 200 employees, independently manages a network of 20 stores all over the world and has a manufacturing workshop and a development centre in Romans. Its annual turnover represents over 20 million Euros.

It seems to me that this is the right moment to decipher the strategy of the Li & Fung group. I suggest we take a closer look at 6 key factors:

• The arrival of Victor and William Fung at the head of a Chinese brokerage family group in 1989. Realizing that the role of broker was doomed to disappear, they completely transformed the company by making it a key player in international sourcing. In the words of Victor Fung: "Through a network of 80 sourcing offices around the world, Li & Fung sources high-volume, time-sensitive consumer goods – such as garments, fashion accessories, furnishings, gifts, handicrafts, home products, promotional merchandises, toys, sporting goods, and travel goods – on behalf of customers worldwide. Li & Fung provides its customers with the convenience of a one-stop shop with a value-added package starting from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation, to shipping consolidation. And, instead of owning production facilities, Li & Fung manages over 10,000 quality-conscious, cost-effective producers who deliver on short deadlines for its customers". He adds, "We call ourselves an “information company”, relying on a far-flung network of suppliers to do the work".  (Competing in the flat world: the Li & Fung Experience, July 2008). They thus subcontract for Tommy Hilfiger, KarstadtQuelle, Liz Claiborne, Walmart, Helly Hansen, Timberland, Mexx, Toys "R" Us, and others.
• This strategy, initially applied to fashion and toys, was developed from 2009 onwards to include Beauty: the acquisition of the Jackel Group in 2010 allowed them to become full-service providers for brands wishing to develop their own brands or private beauty labels.
• In a second phase Li & Fung created a distribution company - mainly for the U.S. market. They were thus able to offer the distribution of their products to their clients (for whom they design and manufacture products), banking on their logistical expertise. Distribution is essentially in the form of licenses. They established a foothold in the retail market by acquiring distribution rights for Toys "R" Us in Southeast Asia - and setting up the brand's boutiques.
• Li & Fung took the third step by acquiring brand licences - this allowed them to develop comprehensive know-how, from creation / development to distribution.
• With their expertise in distribution they created an independent structure - Trinity - specializing in men's fashion, that obtained distribution licences for several high-end and luxury brands. For each of them, Trinity developed networks of boutiques: they now have 409in China. They then set up a joint venture with Salvatore Ferragamo, which they distribute in Korea, Singapore, Malaysia and Thailand. They thus acquired a real expertise in retail.
• The final step was the acquisition of luxury brands - either through Trinity (Cerrutti 1881) or the Fung Brands Limited fund. The know-how that they lacked - brand management - is within their reach, especially since they are surrounded by leaders from the luxury sector.

Li & Fung has therefore become a global Chinese group in a few years, having all the expertise needed to develop brands - from mass market to luxury, from fashion to beauty. They are now incontestably a major player that one should watch closely!

Lierac: modern or private label?

Lierac just introduced its new corporate identity at the recent Pharmagora exhibition. This is a revolution for a brand whose graphic identity was, so far, quite "reserved".  Nevertheless, one fact has become evident:  with the systematic use of gold and pink, the brand is positioning itself in the high-end women's category.  This is far from the pedigree of the brand - which is rooted in plants and research.   We therefore have a brand - sold in pharmacies - whose graphic codes are the opposite of its position. Inconsistent.




This new identity creates at least as many problems as the old one did - but for different reasons:

We have fallen into a combination of two very different trends heads first:

• A copy of Shu Uemura - a brand that originated in makeup, and which therefore adopts the codes that relate to fashion and style ... where the colours of its universe are instantly recognizable.
  
  
• A copy of the Sephora private label (which was also copied by Lierac for some of its products):
  
  

We immediately understand the instructions given by the brand: "Give us back some modernity!"  Alas, this comes at the expense of the identity of the brand, which, again, forgets its roots and does not highlight what makes it strong.  Anyhow, at least they will not go unnoticed on the white shelves of the pharmacies.

At last, brands interact with their clients!

Last week I praised the interactive website that Lancôme created in China (rosebeauty.com.cn), while deploring the fact that too few brands were willing to engage in a real dialogue with their customers through social media.  Now here are three examples to reflect on - one that would earn a "Could do Better!", and two that call for a "Bravo!":

• Could do Better:  Three years ago, Clarins launched a "participatory" site called OrSérie - managed by an external service provider and intended to "federate amateurs of everything that's beautiful".  To quote the Web Journal, "OrSérie is for Internet users and bloggers between the ages of 35 to 50, eager to share their discovery of a new boutique spa, an exceptional beauty product, their opinion on the latest haute couture collection, or talk about a recent sojourn in a dream of a hotel".  The visibility of the brand is projected by the "credits" at the bottom of the home page and through the announcement of a big competition. This website is merely a "Beauty and Well-being Journal" – i.e., a space featuring articles from bloggers.  It is therefore an interface that is not interactive in any way – unless you consider that writing articles is interaction. The brand does not intervene, it is not called into question, there is no exchange of ideas... It is just another Web magazine on beauty.
• A (small) Bravo:  At the end of 2010, Migros launched a website that is fully interactive – Migipedia - where consumers are invited to discuss products, ask the brand questions and, recently, to "invent their favourite jam".  A real innovation - but with few takers: the home page displays the last 10 contributions, received over the 5 preceding days.  Migros offers opportunities but does not really maintain a dialogue. The brand is satisfied with just responding to some of the posts.  It takes two to maintain a dialogue.
  
• A (big) Bravo: The MyStarbucksIdea.com - Share Vote Discuss See website:  Here Starbucks customers share their ideas (on products, experiences in coffee shops, collective commitments, discuss among themselves, and with the brand, which commits itself to implementing their ideas. The Starbucks contacts are identifiable and a counter displaying the ideas that were shared and those that were implemented is shown to prove its authenticity. The brand assumes, discusses, listens, commits.
  

The Starbucks website is undoubtedly a model that is exemplary. But it requires a considerable investment in human resources for monitoring, and tangible commitments. At the same time, Disney announced the acquisition of Togetherville - a new social network for children under 10 (and their parents).  Brands such as retail chains will have to follow suit, their customers are expecting it.

Beauty: more Exclusive Private Brands

In the report drawn up in 2010 for Eurostaf ("Private Label Beauty Brands": see details in the left column of BrandWatch), I identified four strategies among beauty private labels - one of which seemed to me the most promising: creating exclusive brands. Two recent launches in the U.S. show that this strategy is forging ahead.

1. Walmart launched geoGirl in February - a makeup brand designed for the 9 to 12-year age group (!!): this exclusive brand (69 references) has two major characteristics:
   • It presents itself like a "Green Living" brand: packaging that is recyclable, natural ingredients, free of parabens, phthalates, artificial colours and synthetic perfumes (is this really possible??!!).
   • GeoGirl is owned by Pacific World Corp. - a company that manufactures beauty products (mostly artificial nails) for the mass-market, either under its own brand name (Nailene) or for international brands (Revlon).  Walmart will distribute this brand exclusively for at least a year.
     
2. Walgreens has launched Borba (which was distributed exclusively by Sephora for a while) - a brand of cosmeceuticals and food supplements ("Inside-Out Beauty Solutions"), created by Scott Vincent Borba in 2004 and built around "superfruits".  Banking on the acquisition of Duane Reade in 2010 (that referenced Borba), Walgreens seeks to penetrate the premium beauty segment:  one may wonder if it is not Borba too that is repositioning itself as more "mass-market": Crystalline (a 'beauty' drink) was sold at $100 for 60 (or $ 1.67 each) by Sephora, and $ 7.19 for 7 (or $ 1.03 each) at Walgreens – a whopping 38% less! (the packaging has also changed – definitely less premium).
   

Tesco: new design for its private label Beauty products

Tesco - whose three-level private label strategy is emulated by many retailers – had been paying scant attention to the graphic identity of Tesco, its core range brand.  Although its premium private label, Tesco Finest, was the subject of much attention – and was widely copied by specialized department stores in France and in Switzerland, the private label, Tesco, particularly in Beauty products, stayed very basic (as is the case among a large number of distributors):

The situation has changed. Tesco has completely revised the graphic identity of this range. The outcome is even likely to reawaken a desire around this private label - a true stylistic harmony has been introduced, endowing the brand with a real personality, using modern colours, white, transparency - and the impression that it has been upgraded.

At the same time, Tesco introduced a range of hair-styling products called "ProFlex"- where we actually witness the building of a brand - modelled on what Boots has been doing for a long time. One can only regret that Tesco did not pursue this approach to the end – using Tesco simply as a brand "guarantee".

Tesco therefore still has to completely redesign its entry-price private label range that now has graphics so reminiscent of the Soviet era.  We can wager that this development will be widely emulated:  someone should decide to take the risk!

Responsible packaging grows in strength

One after the other, Whole Foods, Procter & Gamble and Unilever (among others ... I could add Stonyfield Farm, KFC, Odwalla in food, to the list...) have announced major initiatives in terms of sustainable development - all of which relate to product packaging.

• In early September, Whole Foods Market released its new "Sustainable Packaging Guidelines", applicable to all cosmetic products and food supplements. "The guidelines mandate that suppliers reduce the use of plastic in product packaging, encourage the switch to glass when possible, limit acceptable packaging materials to those that are easily reused or recycled, and/or feature the highest percentage of PCR content.  Suppliers were given one year to transition to more eco-friendly packaging".  These guidelines were drawn up in collaboration with 25 Whole Foods'  suppliers and are currently applied to the private label of the brand: the volumes of food supplements of 365° are entirely of recyclable PET ... and the brand has adopted a pictograph that guarantees it.
• Procter & Gamble will increase the volume of plastic made from sugarcane (100% recyclable - supplied by Braskem, a Brazilian company) for its brands - Pantene, Max Factor and Cover Girl. Natura Brasil will also be using the same material.
• Unilever finally announced its "Sustainable Living Plan" - which aims to halve the environmental impact of the group by 2020.

Two different approaches should be distinguished:

1. The PCR approach (post consumer recycled) implemented by Whole Foods for its private labels: it consists of using recycled materials.
2. The "cradle to cradle" approach, much more sophisticated – adopted, for example, by Kiehl's - and accorded a certification (C2C) which measures the toxicity of ingredients used, the extent of recycling, the energy and water used, the social accountability of the company.

All these initiatives are particularly interesting: although they are dispersed, with very different approaches from one company to another, they illustrate the growing importance of sustainable development strategies in beauty.

 

 

 

 

Sophyto, an organic beauty brand, at Sam's Club

Sam's Club – Walmart's "warehouse store" chain (customers pay $40 a year for access to storehouses where the products are displayed on pallets, at "discount" prices) – has just announced that they were introducing a new range of beauty products, SoPhyto. The launch made headlines at WWD recently and deserves reflection.

SoPhyto is a British brand of organic beauty products, certified by the Soil Association.  It claims a professional positioning, ethical, emphasizing the use of natural ingredients: until now it was sold in Medispas, medical offices and through e-commerce.

Presented on branded pallets, the SoPhyto products will find themselves next to L'Oreal, Olay, Neutrogena... This initiative raises some interesting questions:

• Sam’s Club has exclusive distribution rights for the U.S.:  we see here once again a distributor that has acquired a proprietary beauty offer - not with its own private label - but with a brand with its own authenticity. The products offered have been specially created for Sam's Club.
• The choice of an organic brand certified by an European organism is interesting - in a country that has not been able to dispose of a procedure for real organic certification so far.
• The highlighting of the brand - unusual for Sam's Club - shows the growing importance that the beauty category has for these distributors.
• We may finally ask the question, from the perspective of the brand, how will it manage this positioning, ranging from Medispas and medical offices to discounters...?

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.

Belorigine: Danone goes "local"

In April, Danone launched a new brand of fresh products, but only in the Belgian market: Belorigine. It is, in my view, an important innovation that is worth analyzing. Belorigine is a range of yoghurts and milk-based desserts that have adopted local flavours (speculoos, Belgian chocolate, Liege syrup, cherry) and manufactured in Belgium (www.belorigine.be).
Belorigine is a real anti-private-label weapon, based on two strong consumer trends that we have already discussed on BrandWatch (particularly in my analysis of Eataly):

• The desire to find local or regional brands – specializing in specialties and particular tastes ... with a strong sentimental dimension;
• The appeal of locally manufactured products (the "locavore" trend).

More than this, Belorigine has been given prominence in supermarkets with stands carrying the signature of the brand that present the entire range: one wonders whether this initiative concerns only the launch (as was the case with Essensis) or a true innovation accepted by distributors. Will we soon see brands taking floor space in supermarkets?

 

 

 

 

Health Allegations: Kellogg and Others

April 2009: The FTC (Federal Trade Commission) pulled up Kellogg (see decision here), which had proclaimed, on its packaging and in its advertisements, that its "Frosted Mini Wheats" cereal was "clinically shown to Improve kids' attentiveness by Nearly 20%".  Although only 11% of the children involved in the study in question showed a 20% improvement in concentration as claimed...

May 2009: FDA bans General Mills from claiming that their Cheerios lowers the rate of cholesterol (see the article in the WSJ blog).
November 2009: Kellogg is obliged to delete the claim that cereals build the immune defence system of children from its Cocoa Krispies packaging (see my post of November 7, 2009).
June 2010: FTC prohibits Kellogg from claiming that its Rice Crispies has health benefits...
 ... and the company decides, in order to settle this dispute, to avoid asserting the benefits relating to, "cognitive health, process or function provided by any cereal or any morning food or snack food", except if these claims were scientifically validated.

Actimel UK: Of course, this might lead us to think that all these examples only concern the U.S. - and that the new European regulations regarding health claims and nutrition claims will protect us from these marketing excesses. However, one of the major consequences of these issues was the withdrawal of Danone's Actimel and Activia files last April. Danone had also been targeted last October by the Advertising Standards Authority (UK) that banned an Actimel advertisement, stating that the health benefits claimed for the product had not been proven.

However, the most serious indirect consequences lie elsewhere: consumers lose confidence in brands, in advertisements and in their "green", "health" or "nutrition" claims (see the paper presented at the Sustainable Brands Conference 2010). By resorting to greenwashing and claims that are misleading, brands are merely feathering the nests of private brands.