Prada’s Problems in China are Deeper Than the Economic Slowdown

Gone are the days when Prada was one of the top brands for Chinese women looking for a stylish new piece to add to their wardrobe. The Italian luxury-goods maker has been undergoing a difficult time rejuvenating its brand image in order to stay relevant with Chinese Millennial and Gen-Z audiences. That pain point, coupled with the recent decrease of luxury spending from Chinese nationals, who represent one of the brand’s biggest revenue sources, has brought the company’s profit-making ability back in the spotlight. The Hong Kong-listed parent company Prada S.p.A., which owns premium labels from Prada to Miu Miu to Church, released a rather disappointing 2018 full-year earnings on March 18th, seeing its operating profit drop 10 percent to 366 million. The group’s positive retail growth in the first half of 2018 was completely wiped out by a lackluster second half, as demand from Chinese customers in the mainland and abroad both shrank. This worse-than-expected results led to an evaporation of 864 million worth of the company’s market value the same day, indicating a fresh wave of concerns on Prada’s outlook from global investors. The fashion powerhouse claimed the waning Chinese tourist spending, especially in Hong Kong and Macau, as well as the Chinese economy slowing down in recent quarters, was to blame for its financial distress. As true as their claims may be, other factors must be considered, as other major peer brands like LVMH, Kering, and Hermès continue to see growth from this most desirable market. “The Chinese consumer is our most important group of consumers,” said a Prada spokesperson. “Buying in Mainland China and abroad represent more than 30 percent of our Group sales.” The statement indicates the company’s huge reliance on this market for its financial wellbeing nowadays, justifying the company’s latest loss to a certain extent. However, Prada’s increasing problem with Chinese consumers may be deeper than that. Declining Desirability “Prada is not on my radar if I want to buy a new luxury handbag this year,” said Kiwi Zheng, a Shanghai-based Chinese luxury consumer working in the finance sector. “The brand has no ‘IT’ bag.” Tian Xu, a Ningbo-based luxury shopper, echoes Zheng’s comment. “I feel Prada is not in vogue. My budget will likely go to brands like Dior, Chanel, or Gucci. Dior’s Saddle bag is the one that I want the most at the moment.” Renee Hu, a Shanghai-based luxury-goods Daigou agent also told Jing Daily that Prada handbags were not popular among her clients, while she constantly received inquiries about Chanel, Louis Vuitton, and Hermès. However, to say Prada does not have an “IT” bag is a bit misleading. Years ago, the brand’s “Galleria” collection, or what Chinese consumers often nicknamed as the “killer” bag (杀手包), was arguably the most popular handbag for white-collar women. In the past two years, the company also unveiled the “Sidonie,” “Belle,” and “Odette” collections to cater to the worldwide fever for tiny but chic bags. The key question, therefore, is whether Prada’s current offerings boost the brand’s desirability among Chinese shoppers. Answers haven’t been positive. “I think they did a terrible job in marketing their new products compared to other luxury brands,” said Zheng. “I have not heard about Prada for a while.” Tiffany Qiu, a Chinese luxury shopper working at an investment bank in New York added, “the ‘killer’ bag is outdated for office ladies. We like Saint Laurent’s Sac de Jour or Celine Box more these days.” Quality Issues Zheng and Qiu both also noted a much more concerning problem. “Prada’s quality is questionable,” says Qiu. “If you read comments from consumers online, there are a lot of complaints. Some even say if you buy a Prada bag and its leather does not wear out in a year, you may buy a fake one.” A quick search combining keywords “Prada” and “Quality” in Chinese indeed leads to an endless list of articles on the subject. For example, on China’s social sharing and e-commerce app Xiaohongshu, a great deal of the comments was complaining about the brand’s bad quality. One writes, with a picture, “I carried the bag out at most five times and one part had become unstitched.” On the overseas Chinese e-commerce platform dealmoon.com, there was another post naming Prada as the top luxury brand that the writer will stop buying due to its low quality. And mainstream Chinese media outlets like Sohu had similar articles. Qui added, “So if I have the budget to buy Prada, I will definitely go to Louis Vuitton, as its quality is really worth my money.” In response to Jing Daily’s inquiry about Chinese consumers’ quality concerns, Prada issued a statement to emphasize its ongoing efforts in ensuring its product quality. (Prada’s full statement can be found at the end of this story.) Hope of Turnaround Can the brand make a comeback anytime soon? At the moment, it’s not looking promising. Prada’s struggle is likely to continue throughout 2019. CMB International Securities Ltd. analyst Walter Woo told Bloomberg, “We haven’t seen significant recovery in [Prada’s] China sales during the first two months this year after a weak fourth quarter in 2018.” Even Prada Group CEO Patrizio Bertelli recognized the challenges ahead during the latest conference call. “The Chinese market has become more selective than it used to be in the past.” Bertelli added, “We’ll have to work on that market more and more intensively.” Prada still has the chance to restore its prestigious past in China. It restored a 1918 historical residence in Shanghai, Rong Zhai, which has become a new cultural center in the city and a popular meeting place for China’s Millennial and Gen-Z audience, who are proud of their county’s cultural roots. The brand has also embraced e-commerce by launching a Chinese e-commerce site in December 2017 — a smart move to serve the country’s digital-savvy consumers, and to attract a new, younger and more fashion conscious consumer. Only time will tell if these initiatives, and perhaps others yet to come, will help Prada regain consumer’s confidence, and in the process, increase its market share in China’s highly competitive and desirable luxury landscape. Prada's full statement: The design of all of our products is creatively conceived in Milan, whereas Prada Group's Industrial Headquarters, based in Tuscany, centrally coordinate the production process, carried out through 22 Group-owned production sites, 19 of which are in Italy, embodying the highest expression of the manufacturing tradition of the Prada Group, as they harmonize the ability of preserving artisanal know-how with cutting-edge industrial processes, geared to achieve and respect the manufacturing quality and excellence. These production sites are accompanied by a network of external suppliers. In most cases it is a matter of long-term relationships, begun after a careful selection conducted on the basis of very strict parameters, aimed to ensure excellent quality with a special focus on working and reliability conditions. In details, in 2017 the Group purchased materials from about 530 suppliers, about 82 percent of them located in Italy, 9 percent in other European Union countries and the remaining 9 percent in other Non-UE countries. 60 percent of them have been working with the Group for more than 10 years, and 16 percent for 5 to 10 years. In the same period the Group worked with approximately 400 manufacturing suppliers; 76 percent of them are located in Italy, 12 percent in the rest of the European Union and 12 percent in non-UE countries. 42 percent of the suppliers have been collaborating with the Group for more than 10 years and 22 percent for 5 to 10 years.

Prada’s Problems in China are Deeper Than the Economic Slowdown

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Published March 21, 2019

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Prada’s Problems in China are Deeper Than the Economic Slowdown