Rising Labor Costs Lead Coach To Shift Production Capabilities: Could This Help The Brand In China?#
While kate spade already has a presence in China, its new JV will greatly speed up its expansion there
The battle for China's "affordable luxury" market will soon heat up even further, as last week the Liz Claiborne-owned kate spade announced a new venture with Korea's E.Land Group that will see the brand reach upwards of 300 points of distribution by 2020 and launch a new traditional- and digital media campaign in mainland China. Additionally, following the lead of luxury brands like Burberry and Armani, as part of its new China strategy, by the end of this year kate spade will reacquire its "kate spade new york" imprint from long-time partner Globalluxe in order to consolidate its brand image and global messaging campaign.
As Craig Leavitt, CEO of kate spade new york, said in a company statement, “China will be the largest luxury market in the world and this joint venture [with E.Land] will give us the ability not only to market to our Chinese consumer in her own market, but also to ensure a consistent global brand message and to round out our Asia strategy."
As Luxury Daily notes, the new "kate spade china" joint venture is seen by the company as an opportunity to "bolster its global marketing strategy" while gaining a stronger foothold in one of the world's largest luxury markets:
The brand plans to use a multifaceted approach using traditional media, social media and events.
The marketing will be tailored to fit the local market, which is an important part of going global.
“We will focus on educating the Chinese consumer about the unique aspects of our brand and we will work hard to develop dialogue and an on-going relationship with her,” Mr. Leavitt said.
Currently, kate spade has two freestanding stores and three shop-in-shops in China.
While reacquiring control from Globalluxe and working with a company like E.Land, which has built a strong presence in mainland China, is an important step, we'll have to wait and see what kind of marketing rollout emerges from kate spade's new joint venture before we can get a sense of the company's prospects in China. It is certainly increasing its engagement in China at a time when other brands at its "affordable luxury" price point, such as Coach and Tory Burch, are either aggressively expanding, in the case of the former, or just getting started in the mainland, in the case of the latter. With the market becoming more crowded, kate spade will need a marketing campaign that positions it as distinctly different from other brands at its price-point, whether in terms of brand history, value, or lifestyle. At the moment, kate spade's positioning seems to hinge primarily on its New York heritage. We'll see if that's enough to make the brand stick with Chinese consumers.
What makes the kate spade expansion story even more interesting is that it comes just as its competitor Coach plans to shift nearly half of its production capacity outside of China due to rising labor costs there. The resulting increase in expenditure might not translate to higher prices for Chinese consumers, but will definitely bite into Coach's China profits. From Nasdaq:
Even as Coach expands sales in China, it can no longer afford the high labor costs in a highly competitive world. With Coach planning to cut production in China to 40-50% from 85% at present and open new factories in countries where wages are lower like Vietnam, Philippines and India, it could lead to significant increase in the firm's capital expenditure.
This brings up interesting questions for brands in the "affordable luxury" segment, most of whom do at least some of their manufacturing in China -- a point that hasn't been lost on some of China's more discerning consumers -- in an attempt to keep prices down. Will the great expense incurred through rapid expansion and consumer education pay off when manufacturing costs continue to rise? Could shifting production largely outside of China actually prove a popular move among Chinese consumers, some of whom find the "made in China" tag on a foreign brand a turn-off?