Younger Buyers Challenge Luxury Retailers in Asia

November 18, 2009

Younger Buyers Challenge Luxury Retailers in Asia

By BETTINA WASSENER

HONG KONG — When Ermenegildo Zegna opened a 7,300 square-foot shop in Hong Kong last month, it did so with the elegant fanfare and glamour that befits the 99-year-old Italian luxury men’s wear company.

But the canapés and wine, the woollen suits and male mannequins were framed in a setting different from the more traditional, sedate, salon-like Zegna establishments in Milan, Paris or New York: The new 678-square-meter store boasts spacious rooms; a huge, shiny facade that is brilliantly lit at night; a sleek, modern design; and a highly visible location in Tsim Sha Tsui, one of Hong Kong’s main shopping districts.

It is, after all, pitched toward a luxury shopping crowd whose tastes and expectations, and even average age, are different from those in Europe or America.

“Asia has an incredible thirst for fashion and quality; the region is very important for us,” Gildo Zegna, the company’s chief executive and the grandson of its founder, said during an interview at what is one of a handful of the “global stores” that house all of Zegna’s brands — formal, casual and sportswear. “Greater China has been our fastest-growing market for the past three years.”

But the trick to succeeding here, Mr. Zegna said, is to know your local customers — and adapt to them.

A study published by the consulting firm Bain & Co. last month highlighted the importance of emerging Asian nations, with their fast growth and increasingly affluent populations, for luxury retailers who face falling revenue in other parts of the world.

The global luxury market is expected to shrink 8 percent this year, to €153 billion, or $229 billion, as sales in the Americas plummet 16 percent, in Europe 8 percent and in Japan 10 percent, according to the Bain report.

In China, by contrast, luxury sales are forecast to grow 12 percent, to €6.6 billion, this year, lifting the pace of growth in Asia over all to 10 percent.

But starting up or expanding in Asia is not merely a matter of replicating the tried-and-tested models used back home — not least because the sort of shopper who can afford top-of-the-market Zegna suits — or other luxury items — tends to be younger than elsewhere.

This is especially noticeable in mainland China.

The ranks of the wealthy there are mostly composed of first-generation entrepreneurs, said Rupert Hoogewerf of Hurun Report, a publishing house in Shanghai that compiles information on China’s millionaires and billionaires.

Typically, a Chinese individual worth $150 million or more is about 50 years old — about 15 years younger than someone in that category in Britain or the United States, Mr. Hoogewerf said.

The average age of someone with 100 million yuan, or about $15 million, is 43. The approximately 825,000 Chinese with personal wealth of 10 million yuan are on average as young as 39, according to Hurun’s data — again, about 15 years younger than their counterparts in America or Europe.

“Much of this wealth has only been created since the 1980s — in other words, a solid generation later than in Hong Kong or Taiwan. You’d have to look back to the late nineteenth century in the United States or to the industrial revolution in Britain, to find anything comparable to the wave of entrepreneurs who are now starting up in China,” Mr. Hoogewerf said.

“Many luxury brands are having quite a bit of trouble with that,” he added. “A lot of Western brands are trying to apply the same model in China as they have back home, and are thus potentially targeting too old a group, when really they need to be more youthful and dynamic to attract these sorts of people.”

In addition to the age issue, luxury retailers have to deal with regional cultural complexities, Claudia D’Arpizio, the author of the Bain study, said by telephone from Milan.

Even within China, for instance, there are differences between the cities on the coast and towns in the sprawling interior.

Those who shop for luxury apparel in coastal cities like Shanghai, for instance, prefer Western-style formal wear for business occasions. Those in the country’s interior tend to dress down and wear more casual clothes, according to Ms. D’Arpizio.

“Companies need to have a completely different merchandising plan for different parts of the country,” she said.

For Ermenegildo Zegna, China, or indeed the rest of Asia, is not uncharted waters. The company was among the first luxury retailers to open a shop in mainland China, in 1991 in Beijing.

Of the €870.6 million in revenue Zegna generated last year, 88 percent came from abroad and 36 percent of total revenue came from the Asia-Pacific region.

The company now has 73 outlets in the China region, including 10 in Hong Kong, and one in Macao, the former Portuguese colony that is now China’s gambling hub. (A second Macao outlet is to open in December.) Zegna has more than 550 outlets in 86 countries.

Last month also saw Zegna’s debut in Mongolia and two store openings in Singapore. Zegna has three shops in India and aims to open more in the next few years.

“You have to constantly fine-tune,” Mr. Zegna said. “We’ve become much more scientific and analytical. We seek constant feedback from the customer, and monitor how particular items are doing — we take that into account in our store planning, we adjust our marketing efforts accordingly, the look of each store, the product mix.”

In China, for instance, Mr. Zegna and his team learned that shoppers like stores to be “more glamorous, with bigger facades,” he said, with more space and very high service levels.

Taking account of the lower age of its customers, much of the space in the new Hong Kong store is devoted to the sports apparel and “upper casual” ranges that appeal to younger shoppers.

Introduced only three years ago, the upper casual range accounts for about 30 percent of revenue in Greater China — two to three times as much as in Zegna’s traditional markets.

Mr. Zegna’s appraisal: “Thank God we had that!”

Zegna’s marketing in Asia is less geared toward magazine advertising and more toward in-store educational events for customers.

Zegna realized that Asian shoppers like in-depth information about the craftsmanship that goes into its suits and top-quality textiles.

And so it arranges for its craftsmen to tour the region, giving talks about the processes of making ties or shoes. Store staff members also have to be more versed in such information and are trained accordingly.

The global economic turmoil has caused double-digit percentage drops in Ermenegildo Zegna’s sales in countries like Japan, Russia and the United States, leading it to reduce capital and media spending this year in all areas except Asia, which now has a larger portion of such expenditures than before. Sales in Greater China are booming — up about 30 percent this year.

“China can’t quite compensate for the double-digit drop-offs we’ve seen elsewhere,” Mr. Zegna said. “But at least it means that, over all, our revenue decline will be in the single digits, and not in double digits.”

Copyright 2009