China’s Luxury Strategy: Acquisitions

on December 3 2010 | in Retail Trends | by | with No Comments

Chinese companies want a greater part of China’s $10 billion luxury market.

Rather than build home-grown luxury brands that would take years if not decades, many are looking for acquisitions to jump start their luxury business. A top strategy — buy mature luxury brands rich in heritage but have fallen on hard times or have gone out of fashion.

Analysts expect takeover activity to pick up in 2011. “For sure there are many players and new groups, banks and private equity funds from China that are interested to scout for old brands to develop or turnaround in the Asian markets,” said Bain & Co. partner Claudia Arpizio.

Some Chinese firms like YGM Trading, Mensun Ltd and Li & Fung, already own or have been in talks with troubled brands, continue to seek new deals.

YGM Trading bought French house Guy Laroche in 2004 and is the Asian licensee for British brand Aquascutum. “We are still trying to add brands to our portfolio through house brands, licensee brands, distributors and acquisitions. We’re still expanding, it’s an ongoing process,” its CEO Shirley Chan said.

Which brands are likely targets?

One that is big enough for Chinese consumers to be aware of, like Italian fashion house Cavalli, but not so big that it can’t be bought or enticed into a deal.

These heritage-rich brands, particularly the ones hurt by the financial crisis, offer the most opportunity to be rejuvenated, repackaged and rebranded for the home market.

While the Chinese may be flushed with cash, they are cautious and only want to make a reasonable investment.

“I expect Chinese and emerging market investors to be relatively cautious in terms of the absolute amounts and the multiples that they pay, so I would think they would go for a smaller, rather than a higher profile acquisition,” said Bernstein analyst Luca Solca.

Also, smaller Western brands have a harder time and bear huge risk entering the Chinese market, so selling stakes make good sense. “For some of the minor brands that’s very costly because China is a wide space,” said Bain’s Arpizio, “You may open some stores in the wrong location and then you have to move, or you may have the wrong merchandising plans.”

Everyone is trying to get into the action. Luxury sales in China is forecast to grow to $14.6 billion in the next five years, making it the world’s biggest luxury market according to a study by the World Luxury Association.

photo credit: robert cavalli

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