Luxury brands in China buy back to cash in
Anticipating the rapid development of the Chinese market, many global luxury brands are trying to regain direct control by buying back their operations from their Chinese business partners.
Just last month, UK luxury giant Burberry, in an attempt to gain control over its brand, re-purchased its Chinese stores from Hong Kong based Kwok hang Holdings for a total of $107,65 million. The company also announced plans to better manage the expansion of its China operations.
The move follows a similar buy back conducted by Coach Inc. in 2008. The same year also saw the world famous Swiss manufacturer of high end pens and watches Mont Blanc breaking away from its Shanghai based partner Shanghai Gracing Group while French leather goods maker Chloe withdrew its agency from the Hong Kong IT Group.
To avoid having to resort to partnerships with local firms, many luxury goods companies have started exploring new distribution channels such as the Internet and have set up virtual boutiques to attract Chinese customers.
For many companies, it is a standard practice to enter developing markets such as China via joint ventures and partnerships with local partners who bring the much-needed knowledge of local market conditions. However, major players have been in China for at least 10 years and now have a much better understanding of the Chinese market. What’s more, with Chinese consumers looking increasingly hungry for western luxury goods, many luxury houses want to cash in and keep all of the profits for themselves.
The numbers speak for themselves: according to research conducted by the Chinese Academy of Social Sciences, the total value of China’s luxury market will reach $14.6 billion in the next five years, making it the largest in the world ahead of the US and Japan. According to Boston Consulting Group, by 2015, Chinese consumers will account for 25% of the total consumption of luxury products worldwide.
With the market set to grow dramatically over the next few years and Chinese customers becoming more and more sophisticated, building strong brands will need to be first on luxury companies’ list of priorities. But doing so also requires control over retail operations and distribution channels. Luxury giants came in with partners but this strategy has outlived its usefulness; now it is time to cash in alone.