Thursday, September 25, 2008
adora in the international herald tribune
Conquering the frontiers for luxury
By Robb Young
Sunday, September 21, 2008
MANILA: There is a longstanding joke here about a naïve fashion brand executive from Europe who was invited to visit back in the 1990s to discuss opening a boutique in the Philippines.
"He landed in the airport and met his hosts wearing Bermuda shorts - thinking that Manila was a beach resort," chuckled Eman Pineda from inside his vast new concept store, Adora, where discreet luxury goods from Jil Sander, Givenchy, Lanvin and Hermès occupy three floors and customers freshen up in lavish bathrooms to the sound of Maria Callas.
What a difference a decade makes. Today, chief executives from fashion's biggest companies are vying for space in the city's premium shopping malls, where Prada, Louis Vuitton, Bulgari, Gucci and even niche players like Balenciaga do brisk trade from their Filipino flagship stores.
A seismic shift has begun in how fashion marketers view the world's mature, emerging and frontier markets.
Major brands have been putting a lot of focus recently on the emerging category - the BRIC nations of Brazil, Russia, India and China - as well as the Middle East, in contrast with the more mature markets of Western Europe, North America and the Asia-Pacific economies like Japan, Singapore, South Korea, Hong Kong, Taiwan and Australia.
But for brands to sustain growth beyond the short term, markets that once were considered on the periphery of fashion are now hot destinations. And despite market data and statistics that might suggest otherwise, brands are expanding laterally into three new frontier fashion blocs: Southeast Asia, Latin America and Eastern Europe.
The need to establish brand recognition even more quickly than in emerging markets like the BRIC or Middle East is one thing that sets these frontier markets apart.
"Since the overall pie in these countries will not grow as much as in huge markets like China or India, it is important to be one of the first or to be among the top-rated five or seven brands in these markets in order to gain market share," said Michele Norsa, chief executive of Salvatore Ferragamo. "People get familiar with a brand and you inherit their experience and custom. This is a fundamental."
Burberry, which has been bullish in both the BRIC countries and the Middle East, is one brand whose growth illustrates how quickly emerging markets today might approach an initial saturation point, forcing labels to turn to new territories for growth.
"We already have 35 stores in China and we are on track to have over 100 in three years," said Angela Ahrendts, the chief executive of Burberry. "So over the last two years, we have realigned and reinforced our Asian regional structure in order to identify and maximize new opportunities."
One very promising statistic that frontier fashion markets have in common is a rapid increase in the number of households with moderate wealth. The upper-middle-income bracket has often been downplayed by luxury analysts, who favor tallying the number of high net-worth individuals (millionaires or better), but it is a major driver of retail growth in the newest fashion markets.
In Manila's sprawling business district, local movers and shakers like Pineda are careful not to sound overly assured to outsiders about the booming luxury fashion market here. They would rather that visitors draw their own conclusions from the evidence.
"There was - and maybe still is - a perception that this is a country with a landscape filled with just coconut trees, but the reality is that there is a substantial volume in the market here," Pineda said of his hometown, which has a sizable wealthy elite among its 11 million inhabitants. "Although it's not as big as elsewhere in Asia, it's becoming quite sophisticated and intelligent."
There are five principal countries that make up the Southeast Asian frontier fashion bloc: Malaysia, the Philippines, Indonesia, Thailand and Vietnam. And, according to Euromonitor International, the number of households in these countries with disposable annual income of more than $75,000 nearly doubled to 555,100 from 282,800 between 2007 and 2002.
Sheer size is another factor. Together, these five countries and their approximately half a billion residents represent more than 85 percent of the population in the region. And as the middle classes grow and their purchasing power increases, luxury companies are betting that loyal consumers now buying entry-level items like small accessories will trade up to the more profitable jewelry and ready-to-wear collections, while new consumers will multiply exponentially.
It comes as little surprise that brands like Chanel and Prada have multiple boutiques in Bangkok and at least one each in Jakarta and Kuala Lumpur, and that other giants like Gucci, Louis Vuitton, Hermés and Burberry have boutiques in all five of these Asian tiger economies. But smaller brands also have been quick to make inroads.
Of the three frontier regions, "for the time being, Southeast Asian countries are the most developed for us. We have two franchised monobrand stores in each of these countries, except Vietnam," said Bertrand Stalla-Bourdillon, chief executive of Marc Jacobs, whose strategy has been to open a main line and a Marc by Marc Jacobs shop simultaneously to reach a wide spectrum of consumers.
Vietnam may be virgin territory for some brands but, according to a May report by the Economist Intelligence Unit, a research division of The Economist magazine, early arrivals like Louis Vuitton posted Vietnamese revenue growth of 300 percent last year, although no base number was included to put the increase in perspective. And Mark Lee, the departing chief executive at Gucci, says Vietnam has "the most attractive growth index of luxurious consumer goods in Asia."
Susie Murray, global sales director for Aquascutum, has set her sights on the region, too. "Southeast Asia is an important strategy in our short term," she said. "We are already selling in Malaysia and Singapore and next year we will be launching a boutique in Vietnam and we are also targeting Indonesia."
Demographically, the story is similar in Latin America. The main markets - Mexico, Argentina and Chile - have experienced a surge in interest from luxury industry leaders in recent years. The number of moderately wealthy households in these three countries has increased to almost 1.3 million from 740,400 in the same five-year period.
"Latin America is already very important for us," said Norsa, of Ferragamo. "Mexico is one of our 10 biggest markets - even bigger than Germany or Spain." The label also has flagship stores in Santiago de Chile and Buenos Aires.
Moschino's entry into Mexico is typical of many midsize luxury companies: a concession at Saks Fifth Avenue in Mexico City and two concessions for its diffusion line at a local department store, Palacio de Hierro, in the second-tier cities of Guadalajara and Santa Fé.
Mexico leads the bloc with twice as many people as Argentina and Chile combined. But Argentina and Chile have very sophisticated elites with a high propensity to consume, so no big brand can afford to be complacent about them.
"Even though these are not priority markets right now, we will be watching the development of these areas over the next few years," said Massimo Ferretti, president of Moschino's parent company, the Aeffe Group.
But others, like Ahrendts, of Burberry, are already poised to establish a footprint and reap the rewards. "Once the South American business is fully integrated with our strong U.S. regional operation, we know it will be one of the strongest growth markets for Burberry in the future," she said.
Among the most promising countries in the Eastern Europe frontier bloc for the fashion industry are Ukraine, the Czech Republic, Turkey, Poland and Romania. With those countries recently joining the European Union or expecting membership, growth in the number of moderately wealthy households has skyrocketed - nearly tripling to 986,900 from 357,800 in these five countries alone, according to Euromonitor.
All these markets are on the agenda for Marc Jacobs, according to Stalla-Bourdillon, but Turkey is considered a higher priority than the rest. Ferretti agreed, citing Moschino's partnership with the Beymen Group in Istanbul, and added that Ukraine already was a substantial market for the company, which has boutiques in both Kiev and Dnepropetrovsk. Chanel, too, has outlets in both countries, as do most other major brands.
Burberry opened a store in Baku, the capital of Azerbaijan, this year, has stores in Warsaw and Poznan in Poland, opened a store in Prague 18 months ago and has rolled out three flagships in metropolitan Istanbul.
Strategies vary by country in Eastern Europe. While joint ventures or franchised monobrand boutiques are the preferred method of expansion for many luxury brands in large countries outside the European Union, like Turkey and Ukraine, selling wholesale to multibrand retailers remains a popular alternative in smaller countries that would involve greater investment for a directly owned, monobrand shop.
"At the moment, in addition to Ukraine and Turkey, we see even more opportunities further east in places like Azerbaijan, Armenia and Kazakhstan," said Norsa of Ferragamo.
(photo credit: marcel lam for the new york times)