Luxury Giants "Burning Bridges" With Chinese Partners

    Last month, Burberry became the latest fashion house to buy out its Chinese franchises in an effort to unify its brand identity, and in recent years top brands like Dunhill have ended partnerships with local retail partners to assume direct control over company direction in China.
    Jing DailyAuthor
      Published   in Fashion

    Burberry, Dunhill Among Western Luxury Brands That Bought Back Control Of China Retail Operations#

    A developing trend we've been watching over the past several months is that of major global luxury brands buying back direct control of their China operations from their local business partners. Last month, Burberry became the latest fashion house to buy out its Chinese franchises in an effort to unify its brand identity and marketing strategy, and in recent years other top brands like Dunhill have bought back franchises or ended partnerships with local retail partners to assume direct control over company direction in China.

    This week, Beijing Business Today (北京商报) looks at the trend of foreign luxury brands "burning bridges" with their Chinese retail partners, pointing out that many companies see this as a critical move to ensure expansion in China is done in a more controlled manner that won't damage the brand's exclusive image.

    From the article (translation by Jing Daily team):

    Behind the luxury re-engineering strategy lies the urgency and ambition of luxury brands to control the Chinese market.

    Yesterday, the overseas press reported that Hugo Boss plans to set up a joint venture in China in the second half of the year, signing an agreement in which Hugo boss will hold 60% of the equity. Analysts believe that China may become the luxury brand's third largest market. However, this information has not been confirmed by Hugo Boss China.

    On July 17, one of the earliest top British brands to enter the China market, Burberry, announced it would spend 70 million pounds to acquire its franchises from former partner Kwok Hang Holdings. It has been reported that the transaction will be completed this fall, and Burberry's Asia-Pacific team will assume responsibility for the direct operation of the company's China locations.

    Meanwhile, the brand will intensify the monitoring of its distribution chain, sourcing and market development.

    The article notes that Burberry's decision to "burn bridges" with Kwok Hang mainly came down to the company's new strategy of strictly controlling China expansion and keeping a tight lid on operations to cut down on counterfeits. Later, the article looks into some of the other motivations that have led major brands to cut ties with their Chinese retail agents, pointing out that many local franchisees have diluted brands through hasty expansion into immature markets:

    In some shopping malls, a number of luxury brand locations run by agents showed a sub-par level of customer service.

    This reporter once observed, at Bvlgari and Armani stores at a mall in Beijing, staff still arranging products even as customers entered the store, not displaying the slightest understanding of "customer service."

    Thus, industry experts feel that luxury brands taking control of and supervising daily store operations will improve the level of service of staff in retail locations, which will mean consumers will finally be able to enjoy the high level of service fitting of a luxury brand.

    From an insider's point of view, if a brand's most coveted goal is brand image, if agents simply undertake store expansion in the pursuit of greater profits, brand image will be hurt. Agents may not match the brand's standards of operations management or HR, which too will tarnish the brand image. Direct management of brands doesn't only ensure a steady rate of expansion, but also balances the relationship between rapid expansion and store management.

    The article goes on to say that many observers see brands buying back franchises as a means to keep a bigger piece of the profits in the world's fastest-growing luxury market. Pointing out that China is expected to become the world's largest luxury market within five years, and that mainland China is home to 140 individuals worth more than 10 billion yuan (US$1.47 billion), the author writes that with the Chinese luxury market growing so quickly and becoming so important, "not only will retail agents look to control more profits, they'll also have even more right for their voice to be heard."

    Presumably, part of the reason more luxury brands want to gain direct control is to nip this development in the bud and ensure their retail agents don't start demanding more say in the company's China strategy. However, this seems a bit hyberbolic.

    Concluding, the article looks at the trend of major brands taking the initiative to localize for the Chinese market, calling out recent examples like Hermès' soon-to-be-launched sub-brand Shang Xia and the China-only brand announced late last year by Levi's. Initiating active localization strategies, rather than relying on passive marketing, is another reason many brands want full control of their direction in the China market.

    Currently, many luxury brands have already begun to treat China the same as the American, European or Japanese markets, introducing high-end goods localized for the local culture and arts and contracting local designers for collections. Recently, Hermès -- which has 18 stores in the Chinese market -- announced that it will launch a new brand in China, Shang Xia. According to reports, "Shang Xia" is a "Chinese brand," and will be made based on Chinese traditional handicrafts and culture, using Chinese designers, R&D and production facilities.

    Hermès' North Asia managing director said in an interview that the first Shang Xia boutique will be located in Shanghai, and will mainly sell home products like tableware and furniture with traditional Chinese cultural themes.

    As China's luxury market advances by leaps and bounds, the relationship between luxury brands and the Chinese market connection has intensified. It's understood that Burberry's Black Label and Blue Label will only be available in Hong Kong and Japan. In addition, the jeans giant Levi Strauss & Co. plans to launch a [localized] Chinese brand this year.
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