Do we ever learn from the past?
Updated: Apr 21, 2021
I know this post will probably create some reaction but it's been on my mind for a while now - and even though I absolutely understand the (short-term) necessity, I am questioning the (long-term) strategy.
I am talking about putting all eggs in the China basket - as the temptation is so great, the ROI so high and the promise so exciting... well, if no sand gets thrown in the gears.
Don't get me wrong, I totally understand why the Chinese market is vital for luxury brands today and why it is also so tempting and interesting for brands to leverage that massive value pool, to learn from the super-advanced and super-demanding Chinese consumers, to challenge oneself and adapt to a totally different culture. If nothing else, luxury brands will evolve and reinvent themselves by mixing eastern & western cultures, which would be fantastic.
And any recent report will support that decision. LVMH's most recent quarter report says it all, with a record-high year-on-year growth : the company posted revenue of €14 billion in the first three months of 2021, an organic growth of 30% year-on-year... but also 8% higher than pre-pandemic first 2019 quarter. Revenue in Asia, excluding Japan, increased 86%, and sales in the U.S. 23%, while European revenue fell 9%.
However, I cannot help but think about the last 2012-2013 luxury recession, when the Chinese luxury market collapsed literally overnight, following a series of laws passed by the government to limit corruption within the Chinese society - putting an end to many brands' ambitious plans overnight. I was working in the Cognac industry at the time, leading a brand's development across the US and the overall Americas region. Let me tell you : overnight, everyone was frantically looking for business opportunities - anywhere, literally anything - that could offset the sudden crisis in China (which obviously, never happened for anyone, as everyone in the industry had put ALL their eggs in the same Chinese basket for 10-15 years and was very happy to have done so because year on year, the growth was spectacular - without doing much to be honest...). No one was really interested in investing and developing other regions. The profit was not comparable, the prices were not as high... And yet, it would have been a good idea to resist a little bit the sirens' song or just use the amazing engine that China was to actually invest in other regions, in future markets or to (really) innovate. Instead we were all a bit short-term focused and probably a little bit lazy too.
What finally decided me to write about this is an article written by Pamela N. Danzinger, one of the most renowned and respected luxury expert, for Forbes, just a few days ago. It kind of echoed what I had been thinking for a while now, and somehow gave me reassurance that I was not the only one worrying about the current situation and perspectives.
In her article, she quoted :
“If the Chinese sneeze, the luxury sector gets pneumonia,” said Luca Solca, senior research analyst for luxury goods at Bernstein, to Jing Daily, in describing luxury brands’ over-dependence on China.
She also called China the "Honey Trap" for luxury brands - which I think is quite a realistic description of that beautiful, fascinating yet complex market today for western brands :
“Brands have to make a huge effort to understand the Chinese culture and market. It takes enormous energy and investments,” she states and continues, “Once you are totally focused on one market, the result is you neglect other key markets that have a different approach to luxury, like the United States and Europe.”
In that article, she also shared the well-known examples of brands that have failed in the recent years, sometimes by missing the point with local consumers, sometimes by just being the collateral damage of something bigger than the brands themselves.
We also know that younger Chinese consumers are more and more interested in and protective of their national brands (and that national pride and pro-Chinese sentiment was only increased by 2020). Will it be at the expense of western brands one day? Is there anything to prepare for at all here?
One could choose to agree or disagree with Pamela Danziger's article (and with mine) or choose to disregard or ignore them, but the reality is that in just the past 10 years, we have already seen quite a few worrying examples. And if we look at the recent Burberry backlash over BCI (Better Cotton Initiative, a sustainability project that "suspended its links to Xinjiang over alleged human rights and labor abuses"), it will be interesting to see how much that episode will impact the company's results in the coming years (or not) and how/whether it will change their decision-making, or again, not at all...
Photo : cotton field
Not to mention that, at times when brands are constantly and more and more asked by consumers to stand for their values, to commit to what they believe in and to state their purpose and commitment loud & clear, it is going to be incredibly challenging for brands to do the splits between pleasing the Chinese market and pleasing the western consumers....
Is it going to be beneficial to "less sensitive/less controversial" topics (could climate be the big winner?) - and to the detriment to other "causes" (human rights, fair trade, women's rights, minorities...)? Maybe... unless brands are able (or decide) to develop and strengthen other regions and markets, and invest in more balanced long-term strategies.
Sources & Additional reading:
Article from 2014 : https://luxurysociety.com/en/articles/2014/10/what-is-really-happening-in-chinas-luxury-market