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Monday, Mar 30, 2020

Do fashion brands breaking into mainland China still need Hong Kong?

Months of violent protests in Hong Kong have scared away many high-end mainland shoppers, and now border crossings are closing thanks to the coronavirus. Labels such as Self-Portrait are going straight to local partners to navigate mainland China’s social media and e-commerce and open online and physical shops

Make it in Hong Kong and you might just break into China. This unofficial business plan has served international fashion brands well for the last decade, as well as Hong Kong’s retail and real estate businesses.

But in a shift that could prove seismic for the city’s fashion industry, brands with little to no presence in Greater China are increasingly bypassing Hong Kong and making Shanghai or Beijing their first port of call.

As a city that European and American brands identify with easily in terms of culture, language and shopping habits, Hong Kong has long benefited from its reputation as a China-light launch pad.

Causeway Bay and the malls of Central and Tsim Sha Tsui are packed with smaller labels that have little to no presence on the mainland but are hoping Hong Kong might be their gateway to China’s shopping classes.

Lane Crawford, which is headquartered in Hong Kong, has long been the first stop for foreign designers hoping the crack the China code. The cachet of the name helps, but brands largely flock to Lane Crawford because it has stores across China, and can ease some of the barriers to entry and import complications that foreign companies struggle with.

“Lane Crawford has eight stores across Hong Kong and the mainland and they will sort out everything for you,” says Kim Ing, a strategy consultant based in New York and Hong Kong. “So it’s a huge deal if a brand can get into Lane Crawford, although Lane Crawford is very demanding about how well a brand must perform.”

However, Hong Kong retailers have seen a sharp drop in revenue after months of violent ant-government protests, which have scared away many high-end shoppers. Tourist visits plunged by around 50 per cent by late last year, according to Hong Kong chief executive Carrie Lam Cheng Yuet-ngor.

The recent coronavirus epidemic has only compounded the problem, leading to the closure of a number of rail and sea links between Hong Kong and the mainland and further curtailing the mass flood of Chinese tourists who previously took advantage of lower apparel prices.

“Retail tends to be hit hard in Asian tourist destinations when there is a political crisis that deters mainland Chinese tourists,” says Elizabeth Flora, the Asia editor for intelligence firm L2. “Japan and South Korea have both faced this in recent years. K-beauty brands’ average Baidu Index [China’s main search engine] decreased by 3 per cent in the second half of 2018 after Chinese visitors to South Korea dropped to 4.8 million from 8 million in 2016 because of the THAAD [an anti-ballistic missile defence system] dispute.”

Proving that the problem exists across the industry is LVMH chief financial officer Jean-Jacques Guiony, who said that revenue in Hong Kong was down by 40 per cent in the fourth quarter of last year and added that LVMH managed to offset disappointing results through a strong performance in China.

It’s not alone: Prada announced last year that it would be closing its flagship in Causeway Bay in June because of the effect of Hong Kong’s anti-government protests on business (in fact the shop closed for good last week, long before originally intended, because of the coronavirus outbreak). Tiffany CEO Alessandro Bogliolo, meanwhile, spoke recently about the toll the protests were taking on its business and how its focus was now on increasing market share in the mainland.

That being said, the protests are not the only reason designers are taking Hong Kong out of their business plans.

“If brands want to reach Chinese consumers, they need to go there directly,” says Ing. “Notoriety and sales in Hong Kong is not going to impact Chinese sales as much as brands seem to think it will. Brands see it as an easy route in, but what they really need to do to enter China is invest in locally relevant marketing initiatives.”

The international industry is finally waking up to this and, instead of using Hong Kong as a stepping stone, smaller brands are partnering with Chinese investors on the ground who can help them clear hurdles that once tripped up foreign designers. These include mastering Chinese social media and e-commerce and getting around import issues and government red tape.

For example, US shoe brand Allbirds and London-based label Self-Portrait have opened or are planning to open stand-alone boutiques in Shanghai, Beijing and Chengdu, without testing the Hong Kong waters first.

“In China, the response to the collection has been fantastic,” says Han Chong, the designer behind Self-Portrait, a contemporary luxury label, which has experienced a rapid rise to commercial success. “We did a special shop-in-shop with Lane Crawford last year in Chengdu and had an incredible reaction. I think the customers appreciate the detail and craftsmanship.

“Mainland China was always an important market for us from the beginning, but I knew that I would need a local partner that understood the territory and didn’t want to rush into it until we did,” he continues. “Now that we have partnered with Ellassay, I'm excited that our brand will be more accessible in the market where we produce our collections.”

Shenzhen Ellassay Fashion is a Chinese company that owns a controlling stake in Vivienne Tam. In 2017 it acquired French brand Iro’s entire operations and the brand rights to American apparel brand Ed Hardy in China, among others. By partnering with a business with such impressive infrastructure and resources, Self-Portrait’s market share should expand rapidly.

Interestingly, it appears that outside its Lane Crawford concession, Self-Portrait has no immediate plans to open in Hong Kong.
“I would have to see what the need is for that market and if it makes sense business-wise,” says Chong. “We have exciting things planned with this year with mainland China, so that’s the focus for right now.” The label has also recently opened a store in Bangkok, Thailand.

China’s e-tailers have also been positioning themselves as platforms on which smaller brands can enter the mainland market. Alibaba-owned Tmall and its 670 million consumers has become an important incubator for emerging designers hoping to break into China. (Alibaba owns the Post.)

“Tmall is attractive for brands at a time when Hong Kong’s retail market is struggling,” says Flora. “Everlane, for example, chose Tmall Global as its first China sales channel that was not its own site, and Allbirds launched a Tmall shop as its first non-site online sales channel in China. Tmall offers brands that are new to the market support in multiple areas including promotions to build awareness, CRM [customer relationship management], data, and product development through the Tmall Innovation Centre.”

Allbirds international president Eric Haskell has credited Tmall with helping increase brand awareness in China and increase online ordering. This has allowed the newish player to move aggressively into the Chinese market, launching four physical stores in China last year – in Beijing, Shanghai, Guangzhou and Chengdu.

Allbirds, which is yet to open in Hong Kong, is set to launch more bricks-and-mortar outlets in China in 2020, where its focus will be on provincial capitals, as well as other first- and second-tier cities.

Of course, all is not necessarily rosy on the China front, either. Luxury goods remain significantly cheaper in Hong Kong and the ongoing US-China trade war has made certain American brands unpopular with the Chinese public – and means many American-made goods face high import duties. Similarly in Hong Kong, an increasingly nationalistic youth is also more likely to choose domestically designed pieces over those made abroad.

Nonetheless, Hong Kong retailers will have to face facts: even if the coronavirus virus is contained quickly and the protests subdue, the city’s role in the Asian fashion industry is changing.

As international brands find Chinese partners to ease their entry into the China market, Hong Kong will lose the cachet it once had as the gateway to the country’s awe-inspiring spending power. That could mean that one day soon, Hongkongers may find themselves crossing the water with an empty suitcase for a weekend of retail therapy.

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