Following five years of blistering growth,
-- one of the first high-end international fashion brands to enter China, having opened its first store there in 1991 -- is adjusting profit forecasts amid an overall slowing in the market this year. Though Chief Executive Gildo Zegna said earlier this year that rising demand in second- and third-tier inland Chinese cities would get it through a broader slowdown in its most critical market, Zegna's expectations for China this year sit at a little over 10 percent growth, far below last year's 30 percent.
Rather than blaming a "luxury crackdown" or decline in conspicuous consumption, Zegna sees this year's expected sales decline as an indication that sky-high luxury growth in China has been, and is, simply unsustainable. Said Zegna, "The growth of 20 to 30 percent we have seen in China can’t continue...That doesn’t mean the market will stop growing, but it means we have to adjust to 10 to 15 per cent growth there." Still, as Zegna admits, in the current global economic climate, double-digit growth in China is a godsend. Added Zegna, "I wish every country we are in grew like that.”
Though sales within China gave the brand a strong boost in the region, the emerging mainland Chinese outbound tourist also proved a shot in the arm in more stagnant markets. According to the FT, Chinese and other Asian tourists shopping in Europe were the main drivers for a modest sales bump in an otherwise flat European market last year. Yet the brand remains strongly focused on moving quickly to expand further in China despite the difficulties seen there this year. Considering Zegna stores in Macau out-earn their counterparts in Las Vegas, and demand remains high among the newly wealthy in smaller inland Chinese cities, it's perhaps not surprising that around 1/3 of the 50 stores Zegna will have opened in 2012 are in China.
Zegna is confident that expansion is the key to getting past the current luxury slowdown in China -- which we pointed out last month is not a uniform slowdown, by any means -- but the brand should also understand that moving quickly on the interior expansion side isn't enough on its own. Considering its massive exposure in China -- where it currently operates well over 70 stores -- and "early adopter" status, Zegna will have to move quickly in top-tier cities as well to make sure it doesn't lose out to newer entrants and risk an increasingly tarnished brand image.
To do this, Zegna should take cues from other first-movers like Burberry and Louis Vuitton and not only focus on building new stores in relatively untapped second- and third-tier cities but also refurbishing stores in top-tier cities, turning to newer social media platforms to tap a younger consumer, getting more involved in the burgeoning multi-brand high-end e-commerce market, and increasing the diversity of in-store offerings in response to the current low-key luxury trend in political power centers like Beijing. If it's able to expand its potential buyer base via physical expansion while changing along with more low-key, savvy shoppers in China, Zegna might not just get through the next two years relatively unscathed, it could just end up seeing sustainably high sales for years to come.