Chinese, Indian Companies Increasingly Acquiring Pedigreed Western Brands To “Leapfrog” Ahead
With the possible exception of the Warren Buffett-feted Trands, Shanghai Tang, and JNBY, which recently set up shop in New York’s Soho district, higher-end Chinese fashion brands are virtually unknown in the West and rarely celebrated at home. Though brands like NE-TIGER hope to change this by getting domestic shoppers to quit their foreign brand addiction and rediscover Chinese design, the odds are — at the moment — against them.
However, this week the Financial Times reports on a trend that Jing Daily has identified several times over the past year and a half, that of companies in emerging markets like China and India looking to leapfrog into the high-profit-margin luxury industry by acquiring well-known Western brands and taking advantage of lower labor costs, developed supply chains and distribution networks at home.
Much in the same manner that auto companies like Volvo and Land Rover were acquired by Chinese or Indian companies in recent years, in the wake of the global economic crisis dozens of pedigree apparel brands either went bust or put themselves up for sale at prices that many Chinese and Indian companies felt irresistible, with Mumbai-based SKNL purchasing HMX, the Chicago-based owner of suitmaker Hickey Freeman (a favorite of U.S. President Barack Obama) and Hong Kong-based Li & Fung taking over the British couturier Hardy Amies.
So is the “axis of fashion” really “tilting east”, as a CNN post suggests today? Or will formerly-Western-owned brands have trouble selling in their home countries under new management? From the FT:
From individual consumers of luxury goods, the Chinese and Indians have become consumers of luxury companies, in a shift that has far-reaching implications for the $80bn (€63bn, £52bn) a year industry. Many of the recent acquisitions have been driven by a wish to raise production standards in Asia and, in the long term, change a tenet of the luxury industry: the importance of production in “country of origin”. The notion that to merit its price tag, a luxury item must be made in the country where it is designed and where its label was born is on the wane.
Although the ready-to-wear shows, which start next week in New York and continue in London, Milan and Paris, are filled with labels that say not only Calvin Klein or Gianfranco Ferrè but also that they are “Made in Italy” or “Made in France”, the goal of many new owners is to change the second part of the equation to “Made in India” or “Made in China”.
The first stage in the transformation – transfer of ownership – has not only begun but, says Luca Solca, chief luxury analyst at Sanford Bernstein in Switzerland, “is a trend that is only going to gain momentum”.
Many Asian companies believe they have a comparative advantage in taking over apparel-centric luxury brands because they can shift production to lower-cost facilities closer to home and increase profit margins, while also using the magic of brand names and their existing distribution channels in the US or Europe to increase sales.
As the article goes on to point out, however, just acquiring a famous brand isn’t an end in itself. Chinese or Indian buyers need to have a clear understanding of where they want to steer their new prize, and need to recognize the challenges they’re likely to face both at home and overseas:
“Brands mean nothing unless you know what to do with them,” says the chief executive of one of the most successful US apparel chains. “Olds mobile used to be a prestigious brand,” he points out, referring to one of the General Motors marques that had value in the past but is no more.
While on paper many acquisitions look logical as well as emotionally compelling, execution can be hard work. Indian companies are, for example, used to surviving in an environment where capital has been expensive and interest rates high. That gives them a laser-like focus on return on their investment. But often they may not have the deep pockets to invest in the brands they acquire.
“Just as in the 1970s, [when] ‘Made in Japan’ had a negative taint,” says Mark Bandak at Blackstone Advisory Partners, part of the US private equity group, “today so does ‘Made in China’ or ‘Made in India’ – but they take great pride in their manufacturing capabilities and the question for them is how do you change that image? This is key at the moment.”
But as wealth swells in Asia, and American and European consumers tighten their belts, there is no doubt that fashion’s centre of gravity will increasingly shift east, in manufacturing as well as consumer terms. In the end, more and more companies will tackle the question posed by John Studzinski, head of Blackstone Advisory Partners: “Do you just buy the milk, or is it smarter to own the cow?”