17 January 2013 | Omera Khan and Pat Brown
With China on course to be the top consumer of luxury goods, Omera Khan and Pat Brown look at what to consider before entering the fray.
In 2009, China surpassed the US as the second largest global consumer of luxury goods, and it is expected to claim the top spot from Japan by 2015. To meet this demand, niche luxury manufacturers in the West must realign their supply chain strategies to meet the shift, while tailoring their service offering to fit the buying behaviour of the Chinese consumer.
Entering this market is, however, time consuming, expensive and fraught with risks. Only one in 10 overseas consumer goods companies is profitable in the country. And yet no luxury producer can claim to be a global provider without a Chinese presence and strategy.
So how do you go about this? There is relatively little prescriptive guidance for establishing supply chain strategies in the luxury fashion marketplace. In a brief overview of a longer research paper, here we analyse some of the critical supply chain success factors that must be considered when entering the Chinese luxury fashion market place.
Numerous studies that have previously examined luxury brand management find that many factors must be taken into account when developing overall business strategies for the luxury market. These include marketing, licensing, brand creation and identity, technology and retailing, and communication, among others. When the lists offered by these studies’ authors are filtered for factors specific to logistics and supply chain management, however, common themes emerge. These are: product design, choice of distribution strategy and product exclusivity, including intellectual property (IP) protection.
According to six earlier studies analysing the luxury goods sector in China, the critical supply chain considerations are: distribution strategy; the country of origin; and protection from counterfeits.
To examine this issue further, a case study was conducted using a UK-based manufacturer of luxury cashmere and woollen accessories. The company sources raw material fibre from China, Australia and various other countries. Almost all production takes place in company-owned and operated manufacturing sites in the UK. It sells to luxury brands and also markets its own branded product, which is distributed through its own UK retail outlets, online and through sales agents around the globe.
To create a frame of reference for this study, four critical supply chain success factors in the luxury and China-specific academic literature were explored in the case study company: product design; country of origin; distribution strategy; and anti-counterfeiting.
1. Product design
The typical Chinese luxury consumer is both younger and more likely to be male than the luxury consumer in Europe or the US. Furthermore, studies have found that wealthy Chinese displayed a preference for foreign goods with designs identical and unmodified from those available in the western world.
The case study company acknowledged a need to focus on a younger customer target for Chinese sales, but said it would retain the overall UK heritage and provenance of its product offering rather than trying to localise it. By strongly marketing classic ‘heritage’-type designs and patterns, it can communicate the story of the brand and attempt to create a recognisable image.
The intention was to accompany traditional, classic designs with products developed specifically for each new season. The company would not go so far to say it would not attempt to create designs specifically targeted at the Chinese market. The core offering would, however, remain true to its British heritage, it said.
2. Distribution strategies
In 2008, Pierre Xiao Lu came up with a model to help companies determine distribution strategies to enter the Chinese luxury market. The model considers four criteria – brand recognition, capital availability, market understanding and the strength of a local partner – and recommends general distribution methodologies based on a company’s relative position within each of the four criteria.
These distribution strategies are: exclusive sales; the use of subsidiaries; local distribution; or a joint venture.
The company used for the case study has relatively low levels of brand recognition and market knowledge, and quite a small amount of funding to enter into a distribution agreement. Additionally, it would want to rely heavily on the knowledge of a Chinese partner in this agreement, yet still retain considerable control over distribution and sales approaches. The model is applied to the case study company in the table.
In this case, a combination of strategies is likely. However, the case study company does not believe creating a subsidiary or establishing a joint venture at this early stage is an appropriate entry strategy. The model points to a distributor relationship and direct sales as the two most likely strategies to enter the distribution market.
The managing director of the company said: “We should focus on finding a distributor with strong coverage in the biggest markets to begin with – Shanghai and Beijing. The distributor(s) must have strong ties to luxury stores, but have little to no competing cashmere products.”
3. Country of origin
Senior management acknowledged the potential benefits of a Chinese manufacturing capacity, whether owned or licensed. Cashmere is sourced from China, imported into the UK and finished goods are shipped to customers throughout the world.
In the case of Chinese demand, the country where the materials are sourced is also that targeted for increased consumption. Reduced freight costs, labour costs, lead times, emissions and duties are all significant attractions of a Chinese manufacturing site. However, additional factors were raised:
● Many Chinese luxury consumers are not yet prepared to buy a luxury fashion item with a ‘made in China’ label. This is particularly true for cashmere goods, where a made in the UK or Italy label is preferred.
● Start-up costs and lack of local expertise for the company’s niche product would be significant obstacles.
● The company’s corporate mission aims to provide stable employment for hundreds of UK families.
● Commodity costs are increasing.
The company’s production director said: “With cashmere commodity pricing at elevated heights and the recent reports that Chinese-end consumer demand for cashmere may be less than expected in the short term, it would not yet be prudent to establish production capacity there. More importantly, we want to offer a product that is made in the UK.”
4. Anti-counterfeiting measures
China is the world’s largest producer of counterfeit goods and is the source of 80 per cent of the world’s counterfeit luxury goods. While the case study company currently has little trouble with counterfeits of its own branded product, the goods it manufactures for some of the world’s biggest luxury brands are among the most counterfeited items in the marketplace. It must be prepared to assist its customers with counterfeit protection and to pre-emptively protect its own brand.
Anti-counterfeiting experts recommend a combined approach of legal and technological methods to combat counterfeiting. Luxury textile producers should engage in trademark registration, education of supply chain partners about the negative impact of counterfeit trade, monitoring procedures, and show a willingness to fight criminals with evidence.
Central to these recommendations is the ability to distinguish, without fail, a genuine from fake product during the process of formal investigation or prosecution.
To this end, companies can consider various technologies to help. Radio Frequency Identification (RFID), QR codes, fabric DNA and biomarkers are among those currently used to protect against counterfeiting. For example, textile producers can use fabric with DNA – a technology where the yarn or thread used can be impregnated with a re-sequenced DNA signature of an undisclosed plant. The DNA is virtually impossible to replicate and can be specific to a company or a wide range of products. Biomarkers are designed to do the same thing, but with a much faster validation time.
The case company is currently considering all of the above technologies.
☛ Dr Omera Khan is a senior lecturer in logistics and supply chain management and Pat Brown is a research associate at the University of Hull