Hawk-i - 05 October 2018

Luxury retail: an ever-evolving landscape

Hawksford's Managing Director in Asia, Dario Acconci, has worked with the luxury retail sector for 15 years. In his latest blog, he discusses what lies ahead for retail brands investing in Asia.

Dario Acconci

Managing Director - Business Development, Asia

Fashion and luxury retail in Asia: Sunset industry or a new dawn?

It was the year 2003, when I was working at an international law firm in Hong Kong, that I first started assisting a big Italian fashion brand in drafting contracts, renewing trademark registrations and many more tedious chores. I did not like dressing up in anything but my suit, and did not have much understanding about styles, the cycles of this industry, creativity and vanity. Fashion and luxury retail in general, was not (yet) a significant western world industry, investing in the booming Asia market. It did not catch my attention as much as the delocalisation of other industries did, like cars, white goods, toys, electronics and semiconductors, etc.

I would have never thought that several years later, I would genuinely understand the dynamics of retail and the mysteries of fashion, that such a moment was simply the beginning of a journey of an industry to become one of the most relevant sectors in the most important region in the world.

One telling statistic: the Asia-Pacific region currently accounts for around 38% of the world’s apparel and footwear sales, the largest share of any region. Europe is now in second place at around 27%.

Truth be told, my surprise is just the result of my limited history skills, and not because the elements to think otherwise were not available: “For more than 1,800 of the last 2,000 years, China and India were always the two largest economies in the world,” Kishore Mahbubani said in 2016. The former diplomat and dean of the Lee Kuan Yew School of Public Policy in Singapore is a great proponent of this being rightfully an Asian-led century. “The past 200 years have been a major historical aberration, so it’s perfectly natural for China, India and in general, Asia, to resume their place… all aberrations come to a natural end”.

Approach of fashion and luxury in Asia: from Distributors to Direct Retail

The gravity force that Asia has exercised has been relentless and has strongly influenced the dynamics of entry into the Asian market. At the outset, most brands were adopting a Principal – Distributor approach, whereby the Principal would not invest nor engage in direct operations, they would simply sell products on a wholesale basis to local distributors that would invest in the opening and managing of stores. The Principal would have to approve the opening of locations, provide directions on shop layout, brand image, etc., but overall it was a loose leash, non-comparable to the strict guidelines and operating handbook typical of a franchising arrangement. 

Two main factors led to the next stage of the sector development: 

  1. Successful distributors were growing the business in Asia exponentially, ensuring good profits for the brands, but even more for themselves as they benefit from the significant multiplier applied from wholesale to retail price 
  2. The difficulty was the ability of the Principal to influence strategic decisions by the Distributor, who could not otherwise be terminated or pressured, unless it missed minimum quantities purchased or made serious trademark breaches. In a nutshell the strategy of Distributors would seldom align with the brand owners'. Typically the former’s strategy was in maximising profits, while for the latter, the strategy did encompass a wider range that included activity such as global brand building, etc.

Subsequently, many Principals decided to bring home all retail margins and regain control of their brand’s expansion. Retail activities were bought back and Distributors have been left stranded, with some money, but without scope to continue such a business model. Notwithstanding all the issues in corporate, governance, tax, customs, etc. that can be encountered when operating in Asian jurisdictions, Direct Retail had become, and is currently, the main approach for brands that have already spent several years in Asia. 

Fashion and luxury: a shifting landscape

What are the options for fashion, lifestyle and luxury brands that are wanting to venture into Asia?

Significant headwinds did affect the overall performance of the industry in Asia as a direct consequence of three main factors, namely the slowdown that emerging economies have experienced since 2010/2011, the upward spiral of rental costs imposed by landlords, and the Asian mobile/E-Commerce positive “obsession”. Such headwinds and the rise of new channels to the market, represent a significant challenge for incoming brands and have changed the overall landscape.

Big ticket brands that have built a critical mass in Asia had to buckle up their seat belts, but managed to withstand the bumpy ride and thrived. These are concentrated in the worldwide famous fashion mall clusters in Shanghai, Beijing, Chengdu, Hong Kong, Singapore and Kuala Lumpur. Within such clusters, it is still very difficult to spot vacancies, as brands are constantly attracted to have presence, and despite the steady turnover rate, shop vacancies are often filled immediately with brands queuing for their chance to conquer Asia.

What has also compounded the difficulties for new brands entering and/or surviving such a market landscape, is the changing appetite of local distributors who, having been left stranded by foreign Principals, are no longer keen to include new brands in their portfolio. On the contrary, many are offloading existing brands that are not delivering optimal performance. 

On the other hand, the most prominent shopping malls are constantly searching for new brands that will set them apart from competitors. In a very much standardised and dull 'colour palette' of retail offerings, new and smart additions are very much one of the keys to making a mall more attractive than another, or at least for a mall to be the “talk of the town”.

So, where do we go from here?

Not many options are left, brands (big or small) who rightfully feel that Asia is their future market. As well as a crucial gateway to attract Asian buyers into their stores, back in Europe or the US, they have the sole option of investing directly by setting up their own company, renting the store, hiring and managing the shop staff, etc. 

Typical distributors, however, are not completely out of the picture. When they see an opportunity for an interesting brand to come to the market, they will offer their assistance (for a monthly fixed fee plus a success based bonus) in the form of management services, whereby they will manage the people, communicate with the landlord, provide visual merchandise advisory and other services. All very nice and also useful but, not to be forgotten, all the risks, capex and pain stay with the brand. 

More comprehensively, the most effective medium term strategy would be a 'cocktail' encompassing limited but focused Direct Retail, Asian E-Commerce platforms and local Distributors that will help to achieve geographic coverage. 

How can Hawksford help retail investors into Asia?

We are ready to share with you our extensive expertise in this sector. It spans from day to day practical tips on successfully implementing direct retail activities, to providing advice on the shopping malls’ landscape, their positioning, strategies, strengths and much more. 

We work with an unrivalled number of fashion and luxury brands from all over the world who rely completely on us to take away the burden of back-office activities such as company incorporation and corporate compliance, management reporting/accounting, tax, payroll and immigration. Our mission is to ensure that brands can concentrate most of their financial and human resources to success and expansion in Asia.

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