Monday May 23 2016

GolfFT SPECIAL REPORT

The Business of Luxury

A t the centre of Milan’s pre-mier luxury shopping dis-trict — the QuadrilateroD’Oro, or Golden Grid — is anew opening that high-

lights how the luxury goods industry isrespondingtoeconomicpressures.

MonteNapoleone VIP Lounge, in apalazzo between the Céline and Valen-tino stores, draws on nearly 150 luxurybrands to tackle the problem of declin-ing footfall. It offers private fitting serv-ices and a concierge able to obtain hard-to-find tickets. “If you want to see everyred dress in a size 38 in the Quadrilaterowe can bring it to the lounge for you,”says Guglielmo Miani, chief executive offashion brand Larusmiani and boss oftheQuadrilatero industryassociation.

Five years ago such perks were nice tohave. But today, as luxury goods compa-nies face another difficult year, theyhave become must-haves as brands,stores and luxury centres like Milan,

London, New York and Paris fight forshoppers,MrMianisays.

These are testing times for the luxurygoods industry, worth €250bn in 2015,according to a Bain & Company study.Companies’ expectations of solidgrowth from emerging markets arebeing undermined and are embarrass-ing their current strategies for expan-sion, while developed markets look pal-lidandhesitant.

The LVMH conglomerate has blamedterror attacks in Paris and Brussels forweighing on sales in Europe, while thestrong dollar and weakening consumersentiment are hurting luxury sales gen-erally in the US. Falling demand inChina and Hong Kong is causing brandstorethinktheir tactics there.

Sales growth of personal luxury goods— from handbags and shoes to prêt-à-porter— slowed to 1-2 per cent in 2015from 7 per cent in 2013 at constant cur-rencyrates,accordingtoBain.

Thomas Chauvet, luxury analyst atCiti, argues that for a few years compa-nies were “in denial” about the “reset”of the luxury goods industry triggeredby the collapse of demand in China from2013 onwards. Prada was among thebrandswhosesalesbegantoslowthen.

“In 2015 and at the start of 2016, theyhave realised it is a different story,” saysMr Chauvet. In response, the industry is

adjusting to lower expectations with avarietyof tactics.

Cost cutting — from ending productlines and closing stores to removing wellpaid designers — is significant. Thoughnot all moves were solely driven byreducing cost, several top designershave left their brands in the past year:Hedi Slimane from Yves Saint Laurent,RafSimonsfromChristianDior,Alexan-der Wang from Balenciaga and AlberElbazfromLanvin.

Instead, brands are introducing fea-tures such as concierge services, pop-up

Brands innovate to combat global slowdownIn the luxuryworld,hard times call forchic solutions, saysRachel Sanderson

‘Our sectoris in aperiod ofacceleratedevolution’

Evolving tastesSophisticatedChinesetourists demandmoreASIA Page 3

Say cheese!Luxurybrandsmustlearn from InstagramSOCIAL MEDIA Page 2

Seenow,buynowJo Ellison says fashionis getting fasterBAROMETER Page 4

www.ft.com/reports | @ftreportsMonday May 23 2016

shops and art installations in stores asthe lines between shopping and enter-tainment blur and brands compete withconsumergroups.

One of the few remaining areas ofbullish growth in luxury is ecommerce,which Bain estimates grew to 7 per centof market share in 2015, from 1 per centin 2005, with Chinese etailers makinginroads.

“Our sector is in a period of acceler-ated evolution,” says Armando Branch-ini, vice-chairman of Italian industrylobby Fondazione Altagamma. He sees

three main drivers of that change: “Mil-lennials, digitalisation and the behav-iourofChineseconsumers.”

Crucially, while this upheaval wrong-foots the industry, a recent survey fromconsultants BCG found consumers felt aquarter of luxury brands were losingtheir exclusivity or were at risk of losingit. Furthermore, around a third of con-sumers said they were saturated withpersonal luxuryproducts.

Complicating the outlook are millen-nials, the sought-after 18-to-34-yearolds. BCG defines these as global con-sumers, highly digital, optimistic, sensi-tive to sustainability — and sceptical.They are not attracted by the simplefaçade of the brand, says AntonioAchille,managingdirectoratBCG.

These tensions are pushing the indus-try to be evermore innovative to keepshoppers interested, says Desirée Bol-lier, chief executive of Value Retail,which runs 11 outlet villages in EuropeandChina.

Ms Bollier this month presided over aspecial event at Value Retail’s FidenzaVillage in Italy, a pop-up store called theCreative Spot that will showcase prod-ucts by Milan’s hottest young designers— at cut prices. “You are adding thatlayer of experience to what has nowbecome a very banal thing: shopping,”saysMsBollier.

Clothes show:artist AiWeiweiposes next to hisart installationat the BonMarchédepartmentstore in ParisPatrick Kovarik/AFP/Getty Images

2 ★ FINANCIAL TIMES Monday 23 May 2016

The Business of Luxury

“Why can’t capitalism be contemporarytoo?” asks Brunello Cucinelli, founder ofthe cashmere fashion brand whichbears his name, as he sits in Solomeo,the Italian hilltop village where his fac-tory is located.

It is not an empty question: MrCucinelli, 62, grew up watching hisfather work in a factory, abandoning thefamily farm to earn a better wage. “Ihave seen my father humiliated,offended, and with little money,” hesays.Henowtries torestoretothework-ers in his factory the dignity strippedfromhis family.

Mr Cucinelli runs his company, whichis worth €1.2bn and whose jumpers cansell for upwards of €1,000, according tohis philosophy of “humane capitalism”,and it has borne results. Founded in1978, its shares rose 124 per cent to apeak after listing on Milan’s stockexchangefiveyearsago; theyarenowup50 per cent. It trades at multiples simi-lar to those of Hermès, the €34bnFrench luxury leather goods housefoundedin1837.

Mr Cucinelli, in blue blazer and whiteshirt, seated in his sleek white offices,applies his principle beyond his dona-tions for the restoration of ancientbuildings in Solomeo. “For me, it is notsustainable to give €5m to a charity andhaveyourproductsmadebychildren.”

His workers certainly benefit fromthis outlook. They come in at 8am andleave by 5.30pm. He does not allowemails tobesentoutsidethosehours.

There is a 90-minute break at 1pmand in a subsidised canteen, workerspay €3 for their lunch. On this Tuesday,that is abundant helpings of rice saladfrom white porcelain bowls set out onwooden tables, followed by peppersstuffed with meat and courgettes. Applecake and fruit are available for thosewho want dessert. Wine accompaniesthemeals,withcoffeeto finish.

On the light-filled factory floor, whereworkers dress in neutral coloursstraight out of a Cucinelli lookbook,every room has large windows lookingoutacross theUmbrianhills.

Mr Cucinelli’s vision has translatedinto profit — but not everyone is a truebeliever. He is an outlier in the luxuryindustry for rejecting the pursuit ofgrowth at all costs, insisting that thefirm intends to achieve only “elegantgrowth”, which equals around 10 percentayear.

Analysts are more sceptical. Theshare price reached its height in January2014 and Mr Cucinelli admits consult-ants have urged him to ramp up produc-tion — perhaps shifting some outside ofItaly — to drive up the company’s profitmargins.Heisadamanthewillnotdo it.

“I would like a situation where all thepeoplewhoworkwithme, the investors,the banks, the suppliers, all earn a justamount. Otherwise the annual reportcomes out and when people read it, theysay: ‘Youarethieves.’”

He rejects the idea he should pursuean aggressive policy of opening stores,the number of which now stands at 120:“You eat the earth,” he says flatly of this

style of expansion. “Very shortly youfindthere isnowhereelse togo.”

Mr Cucinelli and his family own 60per cent of his company’s shares. Fidel-ity, the global fund manager, is the sec-ond-largest investor with 6 per cent, fol-lowed by the Zegna family, who arebehind luxury menswear groupErmenegildo Zegna, with 3 per cent.Analysts think ultimately he may sell asignificant stake to LVMH, although MrCucinelli says he intends to keep thecompanyinfamilyhands.

As with Armani, where the founderremains in command in his 80s, inves-tors pose questions about governance atCucinelli. Recently he appointed co-chiefexecutives,whoare intheir40s.

For his success, Mr Cucinelli hasbecome an admired figure in Italy, anew entrepreneur in a country keen forsuccess stories as it returns to economicgrowthafteradecadeofstagnation.

On the day of our interview, Techno-gym, which was founded within fiveyears of Cucinelli and makes fitnessequipment, launched on Milan’s stockexchange; its sharesrose11percent.

For Mr Cucinelli, such “manufactur-ing start-ups” are Italy’s future. “I amsuper-positive on Italy. There is arebirth. The country is different fromtwoyearsago.There isnewair.”

Brunello Cucinelli, philosopherand cashmere capitalistEnterpriseHis delicatejumpers come from afactory that reflects ahumaneworldview,findsRachel Sanderson

Reel deal: cashmere wool on display in Cucinelli’s office—Alessia Pierdomenico/Bloomberg

Ralph Moullet, 22,assistant cutter atSavile Row tailorsHuntsman

I triedtodoavocationalcourseinfashionandclothinganddidn’t thinkIwas learningenough.OnthedaysIwasn’tatcollege, IusedtoworkforChristopherRaeburn,thedesigner,andhesaid,“Maybeinsteadofgoingtocollege, learnacraft.”That’showIfoundmywaytoHuntsman,andI’vebeenworkingwithCampbell [Carey], theheadcutterandcreativedirector, sinceIwas17.

Yousee jacketscomeback, fromthe1960sand1970s, thatgrandsonshavebrought intohavealtered. I’d love, inthefuture, toseea jacketcomebackwithmynameon,because insidethejacketwehavetheordernumberandcutter’s initials.

Yee Hui Chim, 29,prototypist atFrench accessoriesbrand Moynat, partof GroupeArnault

If thedesignergivesmeadrawingofa[new]bag, I’mtheonewhocreates thepatterns,cuts the leather,assembles thebag, sewsthebag—eitherbyhandorsometimesbymachine—andthenwealsodosomefinishingontheedges.

Beforethis Iwasasoftwareengineer. Iworkedinthesemiconductor industryfor threeyearsandIstarted leathercraftasahobby.

It’sverydifferent[frommakingsemiconductors],butdevelopingthepatterns involvesmathematics toobecause ithas tobereallyprecise. It isascomplicatedasengineeringbutwithanartistic touch.Forthis industry, theexperiencematters.

Andre Wilson, 19,apprentice claymodeller at Britishcar manufacturerAston Martin

AstonMartincametomyschooltwoyearsagototalkaboutthecarsandwhattheyweredoing;afterwardsIsawtheclaysculptingapprenticeshipadvertisedonthewebsite.

Ifacar’s justaconceptdrawing,we’llstartwithascalemodelandexperimentwiththedesignertogetvolumesandshapes.Whenwedoourfinalmodel,which isaccuratetoaboutquarterofamillimetre,wescanitwith lasers.That’ssent throughtotheengineersandthecar ismadebasedoff thatclaymodel.It’snot justavisual thing.

Youhavedirect influenceonthingsthatyouseeonTVandinmovies,whichisverycool.

Cameron Weiss, 28,head watchmaker andfounder of LosAngeles-based WeissWatch Company

Iwasalways interested instartingmyownbrandbut itwasn’tuntilworkingforacoupleof thebestSwisswatchmakingcompanies intheworld[AudemarsPiguetandVacheronConstantin] that I felt Ihadreally learntenoughaboutthebusinessofmanufacturing. Idoallof thedesign,prototypingandassembly.

Tostart,wemakeeverythingbyhand.Fromtherewethenfigureouthowtomanufacture inmorecontemporarywayswithcomputer-controlledmillingmachinesandlathesandthings likethat.

Thegoal is toproducecompletetimepieces intheUSandreallyworkonbringingbackwatchmakingasanindustrytotheUS.

Tomorrow’s mastercraftsmen, todaySkillsKate Youdemeets the next generation of artisanskeeping the luxury industry’s heritage trades alive

T he twist and twirl, the shim-mer and swirl of her tas-selled skirt were capturedin a slow-motion videoposted on Instagram by Eva

Chen as she prepared for her first MetGala this month. The gala, which raisesfunds for the Metropolitan Museum ofArt’s Costume Institute, is one of fash-ion’s highest-profile showcases andcelebrity attendees wear unique crea-tions fromdesigners.

“Not going to lie, I chose this custom@christopherkane dress for theslow-mo twirl opportunities!” Ms Chen,who is Instagram’s fashion ambassador,wrote in the caption. The videoattracted 12,000 likes from Ms Chen’s574,000followerswithinthreedays.

While luxury goods marketers mayreminisce about the days when adver-tising meant only expansive, glossy

photographs sprawled across doublepages in fashion magazines, Instagrambelieves its smartphone-sized squaresare better at showing off the detailinvolvedin luxurycraftsmanship.

James Quarles, global head of busi-ness and brand development at Insta-gram, says luxury goods makers do bestwhen they zoom in to show the cus-tomer every careful decision they havemadeinmanufacturingtheproduct.

“Luxury businesses are the best atmanaging brands of any marketer in theworld. They understand the story his-tory, the importance of the heritage, theimportance of craft, but also the impor-tance of being relevant, and modernityaspartof theirproposition,”hesays.

Luxury businesses can show each ele-ment of the process using different toolssuch as stills, videos and loops — one-second clips that play endlessly. Ratherthan worrying about whether goingbehind the scenes could ruin theirbrand’s mystery, they can show off theirdesignandmanufacturingcapabilities.

Mr Quarles — sitting in a large confer-ence room in Instagram’s Silicon Valleyheadquarters — joined the companyfrom its parent Facebook, where hemanaged relationships with advertisersfrom London. While living in London

and travelling to Milan and Paris, he sawhow fashion houses started adoptingsocial media to reach customers alreadyusingappstodiscovernewbrands.

“I had the benefit, living in London, ofsitting in the front rows, looking downthe line and everyone was on Instagramtrying to capture and edit those runwaylooks and show them instantaneously,”he says. The luxury industry followedbloggers inusingInstagram.

Now, 60 per cent of Instagram’s 400mmonthly active users say they learnabout products and services on the appand 75 per cent say they are inspired toact — by searching for a brand’s website,goingtoaboutiqueortellingafriend.

Several brands have embraced Insta-gram at fashion shows. Tommy Hilfiger,for example, recently created an“InstaPit”, with special seats for socialmedia influencers, some with millionsof followers, to snap the runway from.Luxury conglomerate LVMH opened upmore than 50 ateliers and maisons to

Snap happy:Instagram rollsout carpet forfashion brands

Socialmedia The app’sbusiness developmenthead has unfilteredadvice formaisons,saysHannah Kuchler

Instagram influencers and the public inlate May to show the behind-the-scenesstory of how everything from handbagstospiritsaremade.

Luxury brands use social media toshow they are “not my father’s or mygrandfather’s brand”, Mr Quarles says.Marketers can deploy Facebook’s seg-mentation tools on Instagram to reachdifferent kinds of luxury audiences,such as Asian consumers or “Henrys”,which stands for “high-earning not richyet”,whomaybenewcustomers.

While luxury brands may have beendrawn to Instagram organically, thecompany has put substantial effort intoshowing the creative possibilities of theapp in the hope of luring more advertis-ing dollars. Analysts at Credit Suisseestimate that Instagram’s revenue wasabout$570minthepastquarteralone.

At the Met Gala, Instagram collabo-rated with Vogue magazine to create abooth filled with flashing fluorescentlights where celebrities like Madonnawerevideoedintheirdesigneroutfits.

The results, posted on Instagram@gvsgvs, resembled glossy photo-shoots, seductive TV adverts and musicvideos. The app and the magazine hadworked together to create a new kind ofredcarpet.

‘Looking down the line,everyonewas on Instagramtrying to capture and editthose runway looks’

Brunello Cucinelliwould like a worldwhere all thosewho work with hisluxury label earn‘a just amount’

Strike a pose: Instagram’s James Quarles—Damien Maloney

Monday 23 May 2016 ★ FINANCIAL TIMES 3

The Business of Luxury

W ander around HongKong’s Harbour City onany given weekend, andamong the crowdsthronging the shopping

mall, talk of a downturn might appearoverdone. But it is quieter than in 2014,when queues of mainland Chineseformedjust toget into luxuryboutiques,driving sales that made the mall respon-sible for almost a tenth of the city’sentireretail spend.

Recent retail news in Hong Kong hasbeen disappointing. Year-on-year saleswere down 21 per cent in February,accordingtogovernment figures,asChi-nese tourists sought new experiences incities such as Seoul, Tokyo and Paris.After stripping out price changes, thiswas the biggest fall in Hong Kong retailsales since September 1998. Chow TaiFook, the largest Chinese jewellerychain, said this month that it expectsprofits to be down 40-50 per cent on“weaker consumer sentiment in [the]GreaterChinaregion”.

While Hong Kong’s swift change offortune — as recently as 2014 HarbourCity boasted the world’s highest salesper square foot — is unlikely to beexactly replicated elsewhere, it containslessons for luxury watchers on howquickly China’s appetite for upscalegoodsandexperiencescanshift.

Analysts attribute China’s changinghabits to several factors, includingexchange rate moves, but more impor-tantly toevolvinghabitsandtastes.

“The luxury experience is not justabout shopping. In Hong Kong, all theluxury brands are here and some of thefast fashionbrandstoo—butthere isnotmuch diversity at mid-price points andthere are a limited number of museumsor cultural activities,” says Aaron

Fischer, head of consumer and gamingresearch at brokerage CLSA. “But go toTokyo, Seoul, Paris or Milan and youhaveamuchwidernumberofoptions.”

Japan and South Korea have becomeparticularly hot, helped by favourableexchange rates. According to CLSA’sluxury price checks, goods in Tokyo 12months ago were about 20 per centcheaper than in Hong Kong — far fromtheir long-run average of being about 20per cent more expensive. But morerecently, the yen’s rise against the USdollar — to which Hong Kong’s dollar ispegged — means that Japanese priceshave again become more expensive,withapremiumofroughly10percent.

More important for the luxury sectoris the fact that last year marked a sea-change in habits: for the first time sinceit began its research in 2013, FT Confi-dential Research found Chinese touristsspent more on accommodation, foodand entertainment combined abroad

than on shopping. Year on year, shop-ping fell on average 6.9 per cent, and 10percentamongwealthier travellers.

Analysts put this down to well-trav-elled Chinese becoming more discern-ing. “The first time I went to Paris Ibought a Hugo Boss suit because I couldand it was my first trip. Now I buy cof-fees, I don’t buy more suits,” says Spen-cer Leung, a consumer industry special-istatUBS.

Mr Leung attributes the impressiverecentrise inoverseastripsandthesalesgrowth for favoured brands to thepent-up demand within China where,for years, rising personal wealth washeldbackbytravelrestrictions.

“We haven’t had this situation any-where else — where so much demandwas held back. For Chinese, the worldopened up much more quickly onlyafter 2012 when countries started fight-ing for the Chinese tourist dollar andeasedvisarestrictions,”saysMrLeung.

Changing habits among westernshoppers are repeated with their Chi-nese counterparts, particularly in fash-ion. Younger consumers are increas-ingly interested in niche brands theydiscover online — and which may notevenneedanyphysicalpresencesuchasaflagshipstoretodrivesales.

Global luxury brands have had mixedfortunes among Chinese consumers inthe past year. According to FT Confiden-tial Research’s Annual Chinese Out-bound Tourism report, Chanelincreased its popularity, with 26 percent of respondents buying the brand,up from 20 per cent. Other winnersinclude Coach, Hermès and Gucci, whileDiorandArmani lostshare.

Fornewerentrants,“toreachthe levelof brand awareness in China of a ChaneloraLouisVuitton isgoing to takeyears,”says Aude Bousser, founder of LBB Asia,a luxurybrandconsultancy.

The survey puts much of Chanel’s

Hong Kong confronted by changing tastesTourists frommainland China arebecomingmoresophisticated anddemanding, writesJennifer Hughes

The performance of the luxuryindustry depends on the vigour of theglobal economy and the success ofpeople who want to buy upmarketproducts. Aspirational consumers ofluxury goods have done relatively wellalmost everywhere. But the growth ofthe world economy is disappointing.The performance of the global luxurysector — worth €250bn a year,according to a Bain study — willdepend on how the balance betweenthese two elements works out.

Yet again, the InternationalMonetary Fund has downgraded itseconomic forecasts in its latest worldeconomic outlook, released last month.The baseline projection for this year isfor 3.2 per cent growth of the worldeconomy, measured at purchasingpower parity. This is much the same aslast year, 0.2 percentage points lowerthan was forecast as recently asJanuary and 0.4 percentage pointslower than was forecast last October.

This level is surely no disaster, butthe consistent downgrading of growthrates is a worry.

At least as important, the worldeconomy is confronting a swath ofpolitical and economic risks. Most willcome to nothing. But the cumulativedanger of something going badly wronglooks high.

For high-income countries, theforecast growth this year is a modest

1.9 per cent, as it was in 2015. ChristineLagarde, managing director of the IMF,has rightly described this as a “newmediocre”.

But the attractive feature of theforecast is the expectation of at leastsome growth in all significant high-income economies: 2.4 per cent in theUS, 1.9 per cent in the UK, 1.5 per centin the eurozone, and a modest, but stillpositive, 0.5 per cent in Japan.

The performance and prospects ofemerging economies are also mediocre,at least by their relatively dynamic paststandards. In 2015, these economiesgrew 4 per cent. This year, their growthis forecast to reach 4.1 per cent, with arise to 4.6 per cent for 2017. China andIndia are forecast to grow by 6.5 percent and 7.5 per cent, respectively, in2016. But falling prices have hitcommodity exporters hard, withprolonged and deep recessions underway in Brazil and Russia.

The emerging economies survived

the financial crisis of 2007-09 relativelyunscathed, the leading exceptionsbeing in central and eastern Europe.Emerging economies’ past dynamism,especially China’s, had a dramaticeffect on the global market for luxuryproducts. According to Bain, China’sdemand grew from a mere 1 per cent ofthe luxury market in 2000 to morethan 30 per cent in 2015. Meanwhile,the shares of Japan, America andEurope all dropped. Moreover, theChinese buy 80 per cent of their luxury

goods abroad, so their demand has hada huge effect on the global industry.

Now, however, the Chinese economyhas slowed towards what President XiJinping has labelled “the new normal”.This is an important negative factor forthe luxury industry. But China’sslowdown is affecting other economies.One effect is the end of the boom incommodity prices.

Key for many emerging economieshas been a slowdown in net capitalflows. This, argues the IMF, is largelydue to “the narrowing differential ingrowth prospects between emergingmarket and advanced economies”. Yeteven more important has been thefailure to maintain the pace ofstructural reforms in too manyemerging countries.

The new mediocrity may bedisappointing — but it means sustainedgrowth. Unfortunately, one can also seesignificant downside risks. Some reflecteconomics, such as divergent monetarypolicies; the impact of negative interestrates on confidence; low commodityprices; instability in capital flows; andthe possibility of renewed turbulencein financial markets.

Others are political. These includeinstability in the Middle East; massmigration; populism in high-incomecountries; the possibility of Britainleaving the EU; and friction amonggreat powers.

The growth in prosperity of theworld’s aspiring and achieving classesis good for the business of luxury. Butpopulism is growing too, as the manywho are outside the charmed circle ofthe relatively successful becomedisillusioned, even despairing. Howwill this end? The answer is likely toplay a big part in the global economicstory over the next decade.

Even retail therapy will not saveChina from its growth ailment

gains down to its bold strategy of cuttingprices for some products by as much as20 per cent in the mainland and in pop-ular overseas destinations, includingHong Kong. This move is attributed inpart to making up for the weakness ofthe euro against the renminbi and alsoto combating the grey market, wheregoods are sold through unauthorisedretailers. Chanel increased prices inEurope at the same time so they wouldbe“harmonised”, thecompanysaid.

Among the challenges of working outprices and retaining Chinese shoppers,one of the most remarkable features istheunmatchedpaceofchange.

Businesses catering to China’s luxuryappetite are catching on. Despite thelack of queueing these days in HongKong’s Harbour City, last year the mall’sshift in strategy towards focusing on theoverall experience helped pull in highergrossrevenues thanintheboomyears—andbiggerprofits, too.

FT graphic Sources: HSBC; FT Confidential Research

Outbound travel from China

How the downturn is affecting tourist spending

Thailand JapanS. Korea SingaporeMacau TaiwanHong Kong

0

10

20

30

40

Millions of passengers,2015 v 2016 projection

Change: -2.0%41.7%25.3%46.2%-1.0%-6.9% 13.7%

2015 2016

Total passengers to the ‘Magnificent 7’

91.3m2015

95.4m2016

projection

0

5

10

15

% of luxury fashion consumers

20

2520162015

Calvin KleinVersace

ArmaniLouis Vuitton

BurberryGucci

HermèsCoach

DiorChanel

Most popular luxury brands purchased

Shopping spend per tripBy product type, 2015 v 2016 (Rmb )

Clothes, shoes and hats 1,618

Make-up and cosmetics 1,810Luxury handbags 1,912

Jewellery and watches 2,424

1,349

2,085

1,866

1,645

HONG KONG

MACAU

C H I N A

HONG KONONNGGGN

MACAUAUUAC

C H I N A

The region’sswift changeof fortunecontainslessons forluxurywatchers

ContributorsJo EllisonFashion editor

Jennifer HughesAsia capital markets editor

Hannah KuchlerSan Francisco correspondent

Rachel SandersonMilan correspondent

Martin WolfChief economics commentator

Kate YoudeFreelance journalist

Josh Spero, Owen WalkerCommissioning editors

Alan KnoxPicture editor

For advertising details, contact:Victoria Roberts, +44 (0)20 7873 3226,victoria.roberts@ft.com, or your usual FTrepresentative.

All editorial content in this report isproduced by the FT. Our advertisers haveno influence over or prior sight of thearticles.

ECONOMIC OUTLOOK

MartinWolf

Themanywho are outsidethe charmed circle of therelatively successful havebecome disillusioned

4 ★ FINANCIAL TIMES Monday 23 May 2016

The Business of Luxury

Barometer The fashion industry is in tumult as some brands cut the delay between the catwalk and thewardrobe, writes Jo Ellison

Catwalk tosidewalk:models at showsin New York andLondon, withaccessories ondisplay in aCoach store inManhattanJP Yim/John Phillips/GettyImages/MichaelNagle/Bloomberg

Laurent among those experimenting. Gucci has made theshift permanent.

This gender blending is profound. First, it makes for aneditorial nightmare, as fashion editors work out what shouldbe covered, in which month, and where. For business, itmakes some sense: by showing women’s clothes onmenswear catwalks, brands can use the earlier calendardates to increase their in-store shelf life.

The women’s season is a source of frustration for designerswho want to keep their product in store for longer beforesales begin. “Sales are the terror of our industry where apiece of fashion has a lifetime of four months,” says AlbertKriemler of fashion house Akris, which has no plans tochange its practice. “The menswear dates would be muchmore reasonable to the industry in terms of delivery.”

Discounting remains the scourge of the industry. Gucci hasa plan: last December the Kering-owned companyrenounced the sale season, saying its products will simplyhang alongside new season stock with no reduction. Likewiseat Saint Laurent, which claimed the creation of the“permanent collection” that is never discounted hascontributed to the company breaking the $1bn revenuebarrier last year.

Ironically, for his last show in Paris in March, outgoingSaint Laurent designer Hedi Slimane employed an oldcouture sensibility. It was the very opposite of ready-to-buy,yet it was equally as subversive.

‘It’s a fallacyto think ofshowweekas the focusof thebuyingcalendar.We’re waypast that’

I s the fashion industry in crisis? It certainly seems tobe in a state of flux. The collapse of the Asianmarket, an exodus of designer talent from thebig houses and the sluggish performance ofready-to-wear has precipitated several radical

announcements.The slowdown has been profound. According to

Philip Gajzer, managing director of Move NowCommercial Brokers, which advises luxury brands onproperty, footfall has dropped by around 20 per cent inrecent months, and as much as 50 per cent in certain areas.An increase in first-quarter sales at luxury conglomerateKering came in below expectations at 2.6 per cent, whileearlier this month retailer Hugo Boss said it would cut costsby €50m this year after a 4 per cent fall in sales over thesame period.

This began with the global economic downturn in 2008and sharpened in the wake of the Paris and Brussels attacks,according to some fashion houses. A new system of Chineseimport taxes introduced in April has contributed further toluxury’s woes. The Chinese, who account for one-third of allluxury purchases globally, are being more frugal.

Meanwhile, disruption is happening within the industryitself as brands try to engage the new consumer — and lureback the old. In February, British fashion house Burberryannounced it would start selling collections directly from thecatwalk from September — a “see now, buy now” strategy.Commentators heralded the decision for subverting foreverthe traditional show format, where clothes are normallydelivered in store six months after their catwalk appearance,and upsetting the sanctity of a twice-yearly show schedulethat has existed for 50 years.

“It’s doing what feels right for our audience,” Burberrychief executive and creative director Christopher Baileyexplained. “It wasn’t supposed to be a ground shift within theindustry. Or even that radical. But we’re in an industry whichis supposed to embrace change and so this format felt likepart of that journey.”

Others followed suit: Tom Ford will shift his show to a seenow, buy now model in September, while Prada, MichaelKors, Coach and Diane von Furstenberg all offered a smallnumber of accessories and apparel for sale immediately aftertheir autumn/winter presentations this spring.

Many applaud the decision to challenge the status quo. “Icall it power to the brand,” explained Paolo Riva, chiefexecutive of DVF, in February. “We can control our futureand not be dictated to by a broken system. The first prêt-à-porterwas in the 1960s. Brands have fallen behind, especiallythose with a legacy. And that’s not good.”

Others have been less enthusiastic. “It’s a mess,” said KarlLagerfeld, also in February, of the decision by some brands tore-tailor the business of fashion. The creative head of Chanel,

Fendi and his own brand acknowledged the capabilities somecompanies might have to deliver high volumes in shortertimeframes through direct distribution. But Mr Lagerfeldsaid the system would be disastrous for smaller designersstill dependent on wholesale to achieve sales. He echoed thesentiments of many when he said: “This way is chaos.”

In fact, ready-to-buy may be less disruptive than it seems.“Our model of business is already ready-to-buy in that mostof our sales are in the pre-collections,” Michael Burke, chiefexecutive of Louis Vuitton, has said. “Only 5-10 per cent ofstore merchandise is presented on the runway. For us, theshow is not about commercial product. It’s about beingtransgressive and remaining interesting, so that we havesomething to talk about.”

“A brand like Coach isn’t waiting for the wholesale buyersand department stores to make their orders during fashionweek any more,” said Victor Luis, chief executive of Coach,in February. “To be able to deliver in August, which is whenthe stores now want their product, we have had to makemajor manufacturing decisions well before the show. We’veordered the materials and product that we expect willperform well and spoken to our factories. It’s a fallacy tothink of show week as the focus of the buying calendar.”

More disruptive are the plans to merge the men’s andwomen’s shows. Again, Burberry was among the first toannounce such an approach. But the mixed catwalk wasalready well established, with Gucci, Prada and Saint

See now, buy now: trouble now?