Swimming against the tide…Chinese luxe in Europe

While the stampede of western firms to sell to the seemingly insatiable Chinese market continues, a relatively unknown (atleast in Western markets)  Chinese luxury goods manufacturer is trying to forge a market in Europe.  An interesting fact is that Bosideng is not a manufacturer of typical “Chinese luxury” products such as silk or tea but is aiming at creating a global brand that is culture agnostic and appeals to the generic consumer of luxury products. With over 7579 retail stores and a market share of 36% in China, the company now seeks to move up the value chain by selling high quality clothing (with brands like Bengen, Snow flying and Kangbo) that would appeal to all well-heeled customers irrespective of their location (similar to the demographics of consumers like Christian Dior or Hugo Boss – a broadly homogenous well-travelled, mobile and high spending category of the privileged)

Red by Bosideng

Though there are some oriental touches to their fashion line, like the use of red piping on suits for instance, it is far too subtle to be plugged as “oriental”. It would be interesting to see how such a company would plan and execute its supply chain strategy while trying to move up the value chain – would it use abundantly available low cost labour and manufacturing in China? Would procurement be local or global or glocal? What would be the inventory stocking models? Let us look at some initiatives of Bosideng in SCMluxe while it is in the process of opening of its very first store in Europe in London’s trendy South Molten Street:

v  Procurement (or source) for the high end fashion line is from suppliers in Italy, Turkey and Portugal

v  Production (or make) is entirely out of Europe with only 7% being manufactured in China

v  Designers are commissioned from leading western brands such as Nick Holland and Ash Gangotra from the label Pretty Green

v  The main collection is restricted to 50 pieces at a time, so that new products are refreshed in the store on a weekly basis. This calls for a high inventory turnover and low levels of obsolete (out of fashion?) stock. Weekly refreshment of the collection will mean tighter controls over inventory and very short lead times. With manufacturing being local, logistics will be faster and simpler but demand forecasting will need to be very robust. Bosideng will have to err on the side of lower inventories risking stock outs. However in the luxury goods industry, stock outs may be a good for the brand?

South Molten Street, London

v  An all-out splurge on the retail store. With an estimated £6 million ($9 million) spent on its new property on South Molten Street, Bosideng is using a high cost sales channel instead of the cheaper option of using department stores (store in store).  This is because getting premium space for a newcomer is difficult in department stores  along with the problem of limited branding freedom

v  Alternative E-Commerce sales channel to be launched with a dedicated website for Europe. This move is to counter the twin challenges of a standalone retail store – (i) High Cost (ii) Low accessibility. The web sales model helps customers who cannot travel to the retail store locations as well as provide a cheaper option for sales

Obviously the above model of SCMluxe calls for deep pockets and staying power since the return on investments will take time. Will this high cost contra-indicative strategy of wading into a troubled market like Europe while the rest are heading East make profits? Or is it a well thought out strategy to establish a Chinese brand in the luxury market where these high costs may well be thought of as a part of the branding budget? Another interesting thought allied to this will be how the Chinese markets will be serviced with the above SCMluxe strategy? Currently Bosideng claims that for its high end suits, tweed is procured from European suppliers and shipped to China for tailoring before it comes back to Europe for the final finishing touches. Will this work for the Chinese market and will consumers want to purchase a local product at western prices? Bosideng may well provide us with an example of how the great leap East will play out…

Quick comparison of SCMluxe Retailing formats

While we have discussed retailing of distribution (Deliver) formats in posts (SCMluxe downstream part 2 and part 3), let us look at a quick comparison of the three formats in a tabular format for ready reference

Retail Sales Channel	Stand Alone Store (Boutique)	Store in Store (Department store)	Web Store (E-Commerce)
Cost	High	Medium	Low
Brand Value	High	Medium	Low
Accessibility for customer	Low	Medium	High
Flexibility in operations	High	Low	Medium
Control over operations (manage brand and communication independently	High	Low	High
Footfalls	Low	Medium	High
Footfall to order conversion rates	High (target footfall)	Medium (both targeted and accidental footfalls)	Low (mainly used to check out and compare product)

Though above is open to interpretation and in general self explanatory, if any readers want points above to be made more explicit, please write in and I'll be happy to have a more detailed post on this

Catering to the B2B luxury market

The focus of the luxury goods industry is normally on B2C sales with all distribution and communication strategies centered around the end consumer (retail stores, brand communication, pricing etc). However there is a large market in B2B as well. These comprise of two main types:

1. The product as a component of another product (eg. automotive audio/video players or glassware for perfumes)
2. Products sold to large businesses in bulk volumes (champagne to restaurant chains, cosmetics to airline or hotels)

Does SCMluxe vary from B2C to B2B. The answer is a resounding YES!

Some of the characteristics of SCMluxe for B2B that distinguishes it from the more common B2C value chain are: 

Champagne container for shipping



1. Packaging and Retailing - Packaging is aggregated in bulk - for eg. pallets, containers so that space is saved and transport is easier. The retailing end of the chain focuses less on presentation (this will happen when B2B finally gets converted into a B2C sale
2. Quality checks are conducted by buyers and sampling plans and inspection becomes routine
3. Vendor managed inventory and JIT or contract manufacturing is more in vogue and margins are generally smaller
4. Design is mostly dictated by the buyer and hence controlled minutely. R&D plays a smaller role except in initiatives to control cost 

   

   Champagne container at a Michelin restaurant

   
5. Procurement is demand driven and inventories can be better controlled since demand is known and predictable (forecasting and minimum offtake contracts with buyer can be negotiated)
6. Less focus on branding and retailing

However SCMluxe for B2B has the same pros and cons as the generic SCM - a trade off between assured markets/demand and higher volumes against lower margins vis a vis the more unpredictable but more profitable B2C supply chain. Strategies for B2B hence focus more on controlling costs and enabling the handling of large volumes (with minimum costs) so as to maintain razor thin margins. The ability to do so will provide competitive advantages for the leaders to stand out and succeed in an increasingly challenging business environment.

Kimberly, Marange and the diamond chain

The diamond chain starts off with mining diamond roughs in Africa/Russia/Australia, processing, cutting, polishing in India to finally being shipped to markets in USA and Europe.

Will the value chain partners support a block on Zimbabwe?

Zimbabwe poses a particular problem in this value chain as discussed in post "Marange and blood diamonds". Though Zimbabwe does not exactly fit the criteria for blood diamonds (it does not have a rebel army for instance) as defined by the Kimberly process to identify blood diamonds, western nations, especially the US have introduced sanctions against the sale of diamonds from Zimbabwe. Generally the response to the ban of sale of blood diamonds on humanitarian grounds has had good results with the sale of blood diamonds dropping from 5% of all sales in 2002 to less than 1% in 2012. However the sanctions on Zimbabwe will prove to be a strain on achieving further results. Let us see why:

Supply chain intermediaries such as cutters, polishers in India and China are not particularly happy and tend to push back on sanctions against Zimbabwe due to 3 main reasons:

1. Diamonds from Marange, Zimbabwe are 20% cheaper than those from Russia, Australia or by De Beers
2. Mines in Russia and Australia are nearing end of life whereas Zimbabwe is just taking off
3. Indian processors have already built a competitive edge in cutting and polishing Zimbabwe roughs which take approximately 3 months of effort compared to 1 month for other roughs. This acts as a high entry barrier to other processors and they would not want to loose this advantage to newer players in the market
4. Costs of processing is much cheaper in India and China. For e.g its costs $10 per carat in India and $15-$20 per carat in China (though of much lower quality) whereas it costs over $100 per carat in the US for processing a rough stone

Thus we see that the $23 billion Indian diamond processing industry with currently over 6% ($900million) of its sales originating from Zimbabwe roughs is not going favour these sanctions. But do they have a choice when the customers demand it? Already most processors publicly claim that only Russian, Australian or De Beers stones are offered to US customers. But are they compliant or are both suppliers and customers turning a blind eye to the issue? What is the cost/price that the customer is willing to pay/buy for humanitarian purposes on a different continent? there will a trade off between profits and compliance....how much? .....that is the million dollar question

Disposing Overstocks….are e-flash sales an answer?

Overstocking is an enigmatic problem in SCMluxe. With rapidly changing trends and fashions, luxe companies will always end up with over stocks irrespective of how carefully they plan their inventories. Though this problem is symptomatic of the retail industry as a whole, the luxury goods sector faces certain challenges in dealing with obsolete or overstocks since it cannot use the traditional channels of in-store sales/discounts or unloading the overstocks through discount chains or selling in non-core geographies/regions. Using any of these channels would adversely impact brand value and image. The disposal of overstock has to be discrete and tastefully handled. Typically luxury goods companies use a variety of methods to go about disposing overstocks:

·         Destroy Overstocks: True luxury companies would follow a strategy of simply using the landfill as a method of disposing overstock. It’s expensive but safeguards the brands positioning as the ultimate luxury

·         Recycle: Products where the components can be effectively dismembered and re-used would follow this strategy – a prime example being haute jewelry where precious stones can be re-set and metals melted and re-fashioned

·         Outlet Stores – these stores owned by the firm and normally situated in brand factory outlet malls outside suburban city limits carefully control the price and quality of overstocks being disposed off in an appropriate setting to the product and brand policies

·         Flash sales on speciality e-commerce sites – These internet based sites are not run of the mill discounting sites but are specialised to the luxury goods industry and sell products under strict guidelines which reflect their luxe ethos and excess inventory is sold only for a limited period of time with deep discounts. Some examples are Rue La La, Gilt Group, Ideeli in the US and Brand Retail and Vente-privee in Europe.

In this post, let’s look at some of the features of these speciality flash sales channels. Some of their distinguishing features from traditional discounting sites are:

·         Carefully controlled product list to incorporate and maintain itself as a purveyor of luxury products

·         Membership based sales with membership controlled to ensure the right audience (membership is regulated using online databases like Amex members for their platinum service etc)

·         Focus is not just on fast delivery and service quality but also on perfect packaging, creativity and marketing flair. Most of these channels will have in-house video, photo and recording studios to provide the most cutting edge online catalogues

·         Close association with the manufacturer and owner of the brand of the product being sold. In most cases an agreement is made out strictly covering all aspects of how the product will be marketed and sold on the online channel between the owner of the brand and the online site

·         Typically online sites such as Vente-privee will buy merchandise from manufacturers only after a customer has placed an order (and paid for it) on their site. This means a positive cash flow with absolutely no requirement for working capital

The obvious advantages of the online flash sale model have some draw backs:

·         Upstream issues of getting buy ins from manufacturers – brands typically require just two or three partners for liquidating overstock and competition from online partners is fierce. Also brands have their own outlet stores to liquidate stock making online sales only the last resort for un-sold stock

·         Low margins – since very little value is added by the online retailer, the margins are wafer thin in the US with Europe being slightly better at 6%-7% net profits. Also in the US competition forces online sites to buy merchandise in advance from manufacturers and stock them before a online sale is made – this means high working capital requirements, restricted cash flow and higher overheads in maintaining stocks

However the current economic climate is proving a boon for online flash sale business with the US market itself expected to grow from the current $1.75 billion to $ 7 billion in 2017. That’s a whole lot of luxury goods being sold online and at discounted prices….something manufacturers and luxe brands will need to watch out for.

Keeping sourcing local.....the Zara way

One of the biggest challenges in SCMluxe is to keep production or "make" local to retain quality and brand value (refer post country of origin). In the fashion industry lead time is crucial...hemlines can change by the time it takes for a shipment to arrive from China. Hence to avoid overstocking (besides brand considerations)companies try to keep sourcing local but this has a huge impact on costs. Inditex (Zara's holding company) sources almost all its stocks from the local region in Spain, Portugal and Morocco. This means Zara's costs (and prices) are higher compared with competitors like H&M, Gap etc which source from China. But it also means that Zara follows a pull rather than push model of stocking. Instead of depending on forecasts (notoriously unreliable in the fashion industry) to decide on stocks, Zara actually analyses the actual orders or material flying off the shelves and adjusts its inbound stocks accordingly. This means lead times have to be very short to manage stock outs at stores - which again is possible through local sourcing. Competitors on the other hand need to predict demand (fickle at the very least in fashion) and place orders with suppliers in China to make up for the long lead times. Prices are naturally lower than at Zara but customers needing the latest fashion seem to prefer paying these prices rather than buying something that they don't want at that point of time (or not in fashion at the moment). Does Zara also benefit from lower costs due to overstocking to compensate for higher costs of sourcing?


 However going local is not all rosy....it throws up a very important limitation. What do brands do when they need to cater to emerging markets far away from the country of origin? Zara sees a huge potential in Chinese customers willing to spend on its clothes which is deemed as a luxury purchase...but are they willing to wait for it to be shipped across from Europe? Thus lead times and local sourcing can become an impediment to growth. Inditex is now focusing on scaling up its designers in Shanghai (currently 12 as compared to 250 in Europe). Thus the creative process of the supply chain is being moved closer to the market....but will this impact the brand value for the Chinese customer?....will they see Zara as a luxury product or simply another local company with mid level prices? We'll have to wait and watch...

Insourcing “Make” – British brands show the way

SCMluxe has always insisted that production or the “make” strategy is always retained in the country of origin (Refer posts location, SCM Make ) to ensure brand recognition, quality, lead times and most of all the mindshare of the customer as a luxury product. Let us look at 3 British luxury brands which have demonstrated this in differing ways:

Mulberry factory - Shepton Mallet, Somerset

1.       The Flag bearer

The British fashion house Mulberry has always explored and built upon le style anglais starting from tweeds and country jackets to its more contemporary bags and leather goods (the iconic Chiltern bag being an example). This remains so even after the takeover by Singapore based Ong Beng Seng from founder Roger Saul in a $12Mn buyout – in fact the new owners have not only retained its national heritage but expanded its appeal by bringing in contemporary British design.  They quickly realized that the leather goods and bags market was independent of culture and body type. For instance no matter if you were a size 0 or 10 or were from a culture that dressed conservatively, if you had the money, you could always show it off with an expensive handbag. So Mulberry invested heavily in the design and launch of its bags collection but also poured money ($8 million and counting) into its production facilities in Shepton Mallet, Somerset.  The factory now produces almost 30% of all Mulberry bags and employs more than 300 in the area. Each of the 300 will be specialized artisans skilled in cutting and processing leather. With over 140,000 bags being supplied to the world market from British shores, the brand retains its value and quality in the customers mind

2.       The Status Quo



Jaguar assembly plant - Castle Bromwich, Solihull



When India based Tata Motors took over an ailing Jaguar from Ford in 2008, the easiest way to cut costs and bring the company back to black would be to shift or outsource production to Tata’s expansive factories in India. However assembly of a Jaguar continues to remain in Castle Bromwich, England. Instead the company focused on bringing in new processes, improving efficiencies in sourcing and assembly as well as broadening the Landrover’s appeal in the market. Retaining the Landrover’s British heritage paid off this year with the division registering a profit of $1.7 billion after years of being in the red or barely breaking even

Burberry HQ - Horseferry Square, London

3.       The Prodigal returns

The success of Burberry’s iconic check pattern spurred the company into luxe status and as a symbol of British design and quality. However the pressures of being a public limited company and quarterly forecasts the company started selling licenses to manufacturers across Asia to produce and sell the plaid pattern on perfumes to purses to underwear. A resulting drop in quality, excessive volumes flooding the market and lack of control of display and distribution meant the brand lost its luxe appeal in the mind of the customers. It was now a mass market brand (very much like Pierre Cardin today) with large volumes, low prices and low margins. A price war meant customers were not willing to pay a premium for the product but expected it to compete with price and quality with other generic products. Shareholders finally saw sense in 2006 when the company started buying back the licenses under the stewardship of CEO, Angela Ahrendts. The cost of these buybacks were high but the company has managed to stay afloat by retaining its British tag – it now needs to build and restore customer confidence in its luxe status….all over again

Emphasizing national heritage helps established Western brands to retain existing markets and grow in the emerging markets of Asia and the Middle East. However what will their response be when Asian customers mature and demand their own heritage brands – will this be a competition to existing Western brands or will they simply open up an altogether new market?