In an exclusive interview to CPP-LUXURY.COM, Mr Luca Solca, Managing Director / Sector Head Luxury Goods at Exane BNP Paribas spoke about the latest trends in luxury retail, based on the latest Luxury Goods – Retail Convergence Report
As emerging markets mature, an increasing number of major luxury brands switch from franchised operations (mono-brand stores) to directly operated stores. In some cases, brands need to re-locate and they incur huge costs to secure new locations whether they lease or buy. How damaging such re-location can be to a brand’s reputation, especially in the case of street locations?
I think your expectation of brands getting back franchisee stores is very correct – we indeed make the same point in our recent “Retail Convergence” report. By and large, I expect this to be a positive for the brands: typically franchisee stores are smaller and done “on the cheap”. Sometimes there are good reasons for this: the cities where these stores are would not support a full scale flagship.
But, in many cases, the reason why these stores are second class owes to capex limitations on the part of the franchisee: the franchisees, after all, are managing a business with an “expiry date” and therefore need to be careful in committing their capital for someone else. I expect, therefore, that transforming franchisee stores into DOS (Directly Operated Stores) may be advantageous for the brands, even if the price to pay is relocations and temporary disruption.
Luxury fashion and accessories brands have always regarded multi-brand distribution as a ‘test’ for the potential of a market. However, in emerging markets, many multi-brand stores have created a negative perception due to the fact that they would mix new collection items with stock / outlet items, selling them full price and not mentioning this. Tell us your view.
Emerging markets are probably the last place where you want to have multi-brand distribution, as there is a lack of good quality multi-brand retailers – at least in soft luxury.
In hard luxury, the situation is slightly different, given the Emperor and Hengdeli of this world. In general, I would not think that multi-brand distribution is a good test for the brand. Rather, I would use small DOS – like the ones you can open in hotels or airports, as the case may be.
Why do you think luxury watchmakers are opting more for mono-brand boutiques than multi-brand (wholesale) in both mature and emerging markets?
Direct retail gives you much better control over brand deployment. Display, merchandising, in-store service, range – as well as the all important price discipline. Mono-brand retail, nevertheless, can only take you up to a point in watches retail. I believe that a significant % of watches will always be sold in multi-brand stores.
The solution here is to develop group multi-brand stores – like Swatch Group is doing with Hour Passion and Tourbillon. Or, to create alliances and do the same with other partners. The M&A option is also to be considered – look at what Luxottica could achieve in eyewear.
Have you identified general criteria which can be applied for the majority of luxury brands for mono-brand store location choice? How do you explain choices such as Hermes’ flagship store in Mumbai (India) or the Patek Philippe Maison in Beijing (China)? (no neighbouring luxury retail etc )
In most cases, luxury brands tend to cluster together, to give consumers a general impression of shopping in a refined and sophisticated area. In Europe, this means creating the fortune of landlords of specific street (Avenue Montaigne, etc.). In EM, this happens most often in luxury shopping mall (in this case, major luxury brands can negotiate to retain a part of the value added created – by agreeing lower rental costs, capex from the landlord, etc.)
In a few exceptional cases, brands will branch out into isolated stand alone locations, for example when they enter a virgin market or when they have a chance to create a landmark. Think Zegna in Lagos (Nigeria)or Prada in Omotesando (Tokyo).
Gucci, Bottega Veneta, Jimmy Choo, Valentino and Louis Vuitton are presently shifting their retail expansion to fewer but larger stores. Tell us your insight.
This can be seens as an “arms race”, where brands escalate the size of their stores over time. A larger store can impress consumers, and convince them of the superiority of the brand – especially in markets where consumers are relatively inexperienced.
The advantage of mega-brands is that they can outspend rivals in advertising, and as advertising spend and sales productivity are correlated, they can therefore open larger stores. Larger stores can also better convey the brand in its entiry category development. The caveat, though, is that the larger the stores, the higher the fixed costs.
In many large emerging markets luxury brands have followed each other when opening their first stores in a certain city or country, without conducting extensive prior-entry research. Do you agree this is the main reason some of the top players are now seeing a slow-down in sales due to over-exposure or an unjustified presence in a certain country or city, where they would have been much better off with one store or being present with a shop in shop or corner in a multi-brand or department store?
Emerging markets develop very rapidly. There can be shifts in what the right malls are, and even in what the right cities are. It is to be expected that retailers have to relocate or even close a small portion of their stores each year. What most luxury goods brands do, is to rank where their clients (who shop in the existing network) come from, and then open stores in the top ranked cities of provenance, where they still have no presence.
In your recent report, Burberry had sales of 2,455 billion euros with 406 mono-brand stores worldwide, compared to Hermes and Prada which had sales of over 3 billion euros, each with a smaller number of mono-brand stores, 305 and 366 stores respectively. At the same time, Burberry’s furnishing costs per square meter are half of those of Hermes and Prada. What is the ideal balance for a successful long term, strategic approach?
In retail, the higher the sales / m2, the better. ROIC and sales / m2 correlate. Burberry is weaker than peers, in having lower sales productivity than best in class, and even lower full price sellthough. This depends on their larger mix of apparel sales – apparel is a more difficult category than most, as it demands a lot of space and has short (seasonal) shelf life.
There is no silver bullet, I am afraid, one needs to work on the retail format, and get it to work. Inditex (Zara) shows that even at materially lower price points, the right mix of price and volume, can get you excellent space productivity and excellent ROIC.
Unlike mass market fashion brands, luxury fashion brands have not established clear policies of taking over operations in a certain country, once they see higher potential or when the franchisee falters. Wat is your view?
They have to get to that, it would be very much in their interest the idea that you can use franchisees to shield you from the ups and downs of the market is a myth.
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