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British Brands in China Pt 1: Who is winning and losing in the retail market?

Publication Date: 18 Sep 2019 - By Manika Premsingh By Manika Premsingh
Actionable
Differentiated

Thematic Equity UK China Consumer

From the turn of the century to 2020, the Chinese economy is expected to grow 13x over, opening up opportunities for business around the world.

The $1.2trn global luxury market is one such industry, with China accounting for about one-third of it according to consulting firm Bain & Company. With growth in the foreseeable future expected to remain robust, there are still significant gains to be made in the market despite a slowdown in Chinese growth. This is particularly true for apparel and accessories’ brands.

Luxury makes its mark

In this huge growth, it is British luxury brands that have found a place in the market and continue to see it as an important one in the future as well.

Brands like Burberry and Ted Baker are cases in point. The FTSE 100 listed Burberry - best known for its trench coat and its signature check - takes 40% of its revenues from China. While it had a presence in the market for 20 years through its franchise partner, Kwok Hang Holdings, Burberry directly entered in 2010 by buying it out. This gave the brand access to 50 stores across 30 cities in the country. A combination of being an established brand, a local strategy and a digital thrust seems to have gone in Burberry’s favour, making it more of a success story than not, in a market where other global brands have not had as much luck.

Ted Baker, another UK-based luxury brand and retail store, is making a dent in the Chinese market. The FTSE 250 brand opened its first store in the country in 2012; it now has 6 in the mainland and 3 in Hong Kong. But unlike Burberry, which went solo to build a bigger presence in the market, Ted Baker announced a joint venture with Shanghai LongShang earlier this year, a retail store operator to foray further into China. The 50:50 JV is expected to improve the brand’s bottom-line.

Fashion brand Mulberry is another to have forayed into the Chinese market, and in fact, is potentially looking at a lifeline from its Asia operations. The brand saw an overall decline in revenues for the financial year ending March 30, 2019, but its Asia revenues were up 62%. The region accounts for less than 20% of the company’s revenues, but if the lop-sided performance seen in the recent past continues, it is only a matter of time until it becomes more important to the business. Having recognised the region’s potential, the company launched Mulberry Asia in 2017 in Hong Kong, in which the Mulberry group owns 60% stake.

Hitting a wall

High end brands like Burberry, Ted Baker and Mulberry might have had it better, but establishing in the Chinese market is not easy, though, as other well-known British brands have wound up their operations in the country.

One example of a failure in the Chinese market is Marks and Spencer (M&S), which left in 2017, nine years after making its first foray into the country by opening a store in Shanghai. An inability to get the pulse of the Chinese consumer is reportedly one of the key reasons that the quintessentially British brand was unable to thrive in the country, with less than 10% of its revenues accounted for by international markets.

However, M&S’s challenges need to be seen in a larger context. It has not performed well in the UK markets in the recent past, partly due to the sweeping transition to digital formats and its retail lines failing to attract younger customers.

Like many others, M&S’s suffered from both gaps in understanding of the local market and the more structural shifts towards online shopping that are challenging the brand.

M&S is not the only mid-range brand that exited the Chinese market. Apparel brands New Look, Topshop and ASOS have also wrapped up. Much like M&S, New Look is facing challenges of its own back home, having avoided going into administration last year, and instead closed many of its UK stores. Topshop has a similar story to the others, with stagnant UK sales that had led the company to hope for a China boost.

Added to this was the steep learning curve represented by the Chinese market, which possibly called for a longer gestation time than the brand had on its hands. ASOS, the online fashion platform, too had challenges in grappling with the Chinese market and faced tough competition from China’s home-grown Alibaba.

It is worth noting though, that even the brands that are thriving are facing issues of their own. Burberry, for instance, has had a chequered ride so far. The US-China trade war and more generally, the slowing down of Chinese growth are impacting the company, whose share price yo-yos around any China related news. Besides this, its ad campaign for the Chinese New Year came under criticism for lacking in cultural sensitivity, clearly an issue the brand is still grappling with. The timing was particularly bad, as it was close to the heels of Dolce & Gabbana’s advertisement, which had just before that come in for criticism for racial insensitivity.

Where do we stand?

Burberry is now entrenched in the Chinese market despite all its problems that it faces as a global operator and those specific to China. The prospects look good for other high-end brands like Ted Baker and Mulberry suggesting that consumers are willing to pay a premium price. But mid-tier brands like M&S, ASOS and New Look did not find their footing, on account of a host of factors including market specifications and local competition, suggesting a different dynamic in play for this market segment as compared to luxury brands.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Manika Premsingh

 

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