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A bonanza from the spread of high-end shopping malls across Asia is largely
over
Apr 1st 2017 | MILAN
IT TAKES at least a month to wash, comb, spin and otherwise prepare fine mohair
to become cloth that is stitched into suits by Ermenegildo Zegna, a
107-year-old Italian brand. In Trivero, an Alpine village west of Milan, 150
artisans in an elegant factory work at carding, dying, weaving and warping. As
looms rattle, bespectacled women stretch cloth over illuminated screens and
check for imperfections. Others use a rack crammed with dried Spanish thistles
to remove excess hair from fabric.
Zegna, run by its fourth generation of family owners, is distinctive in many
ways. Big corporate successes are rare in Italy, which tends to nurture smaller
firms. Sales from Zegna s 500-odd shops worldwide, plus earnings from selling
to other producers, amount to an annual 1.2bn ($1.3bn) or so. It controls its
entire supply chain, which is unusual even in an industry that cherishes raw
materials. Three years ago it bought a 6,300-acre farm with 10,000 sheep in
Australia. A spokeswoman brags that vertical integration at Zegna runs from
sheep to shop .
The company is also unusual because it has stayed independent of the few
swaggering giants that bestride the luxury-goods world, of which the biggest is
LVMH, Bernard Arnault s 30-year-old conglomerate; it incorporates Louis
Vuitton, Dior and many other brands. Other groups include Kering, also based in
Paris and the owner of Gucci, and Richemont, a Swiss specialist in watches and
jewellery. (The luxury sector is also replete with minnows, of course single
brands with revenues of just a few hundred million euros, such as Versace and
Missoni.)
But in other ways, Zegna is typical of the luxury business. European
manufacturers dominate this 250bn industry, accounting for around 70% of
production. And Zegna s past growth and present challenges are shared by firms
of all sizes.
Luxury firms have prospered in the past by forging into new markets: first
Japan, then America, then China, notes Armando Branchini of the European
luxury-brands association in Milan. Jean-Christophe Babin, the boss of Bulgari,
an Italian jeweller, says it was the spread of high-end, beautiful malls in
Asia that did most for growth. In particular, status-hungry Chinese consumers
propelled luxury s recent long expansion. Olivier Abtan of the Boston
Consulting Group in Paris describes ever-richer Chinese consumers, with an
utter lack of inhibition in displaying their wealth, as the best possible
boost that the luxury industry could imagine.
The boss of one of the conglomerates recalls how difficult it was to balance
rapid expansion of his brands against losing a perception of exclusivity. He
resolved the dilemma by taking the theory of the Veblen good one for which
demand soars as it becomes more expensive to an extreme, slapping ever-larger
price tags on the firm s posh handbags and other items.
This Chinese boom is over. In the past four years Xi Jinping, China s
authoritarian leader, has cracked down on political rivals suspected of
corruption, discouraged ostentatious displays of wealth and turned Chinese
tourists off shopping abroad by levying heavier duties on those who return with
armfuls of Herm s bags.
Worse, because it could be a permanent shift, firms report changing tastes
among Chinese consumers. They have been shunning big, shiny logos and like
Western shoppers are now mixing cheap fast-fashion items with fewer luxury
pieces. Last year, estimates suggest, China s huge luxury market shrank (see
chart).
Solid economic growth in America in the past few years has helped sustain
sales: stockmarkets and appetite for luxury goods reliably rise in step. Some
retailers do report a recent uptick in Chinese demand over the past six months.
Yet no one expects a return to the glory days. Terrorist attacks in Europe,
slower growth in air traffic and lower spending in the region s airports are
also hurting luxury sales. The watch business has been particularly hard hit
(see article). In Milan the chairman of a famous Italian fashion brand warns of
saturated markets. Adding new shops in China is not viable, he says, when you
already have 200 retailers selling every sort of luxury item . He expects this
year to be much like 2016 flat.
Mr Abtan foresees years of modest global growth, perhaps of around 3%. A
spokesman at Gucci says that the overall market is growing at perhaps 1-2%, so
the pie is not getting bigger . The challenge at Gucci, he adds, is to achieve
more sales density from existing shops.
Which kind of firm is best placed to deal with slower growth: giants, minnows
or medium-sized firms like Zegna? The advantages of being a conglomerate in
luxury include having more muscle to secure brands favoured spots and lower
rents inside shopping malls. Luxury groups can also multiply the effect of
their marketing and share back-office services.
A new argument for independent firms such as Herm s or Prada to join the big
groups is the imperative to go digital. Luxury firms were slow to adopt
sophisticated digital strategies so long as the going was easy. Only 8% of
total personal luxury-goods sales take place online, compared with 16% for the
rest of retail (excluding items such as petrol and groceries). But now the
industry wants that to change.
Michele Norsa, a former boss of Salvatore Ferragamo, an Italian maker of shoes,
notes that new online habits are being led by young consumers who account for a
growing share of luxury spending. Online markets have appeared for second-hand
sales; fancy frocks can be hired for a few nights from websites such as Rent
the Runway. The big firms are thinking of how to profit from such new markets
something that small firms might struggle to do.
An Italian lawyer who has been involved in several big deals in the luxury
sector expects more consolidation, and not only because the industry is
slowing. In the online world, firms especially crave fine-grained data about
the most attractive customers for example, on the super spenders , the
minority of the ultra-wealthy who account for an outsized share of total
spending.
Until now, brands within groups have jealously guarded customer information
from each other. But conglomerates may start sharing. Next month LVMH will
launch a common digital platform for its brands that will yield new sorts of
data. It will compete with rival luxury sites such as Net-a-Porter, and promote
the idea of omnichannel shopping (combining online and in-store purchases). A
decade ago established brands didn t see online platforms as even compatible
with luxury products, says Jos Neves, the founder of Farfetch, an online
seller of luxury goods. Now they see that having their own online presence is
essential, he says.
Mr Abtan of BCG says the big groups are probably best placed to go down such
digital avenues. They can invest and buy expertise to push traffic from
websites to shops. Firms of Zegna s size also need to bring in skills and
should be able to afford it. But the minnows may struggle. The next challenge
for luxury-goods firms will be about more than controlling supply chains and
colonising posh malls. They will have to understand as much as they can about
consumers and their digital habits. From sheep to screen will soon matter at
least as much as sheep to shop .
This article appeared in the Business section of the print edition under the
headline "Lux in flux"