Hermès’ Chinese Brand Slow to Gain Traction
Hermès’ Chinese Brand Shang Xia Not Expected to Break Even Until 2016.
Hermès International SCA has spent the last seven years trying to build demand for the Chinese brand, called Shang Xia, betting that Chinese luxury shoppers are increasingly willing to buy $4,600 bamboo leather handbags and $100,000 Ming dynasty-inspired furniture.
By 2016, “for the first time profit and loss will be balanced,” said Patrick Thomas, chairman of Shang Xia, in an interview. Mr. Thomas declined to disclose total sales figures for the Chinese brand.
In its latest effort, Hermès last week opened the doors of a Shanghai-based retail and VIP entertainment outlet for Shang Xia. The French company invested around 2 million euros ($2.6 million) in the retail project, Mr. Thomas said. He declined to disclose how much Hermès has invested overall in the Chinese brand. In a period of three years, Hermès hopes Shang Xia’s new Shanghai store, its largest of three globally, will surpass €10 million in sales, Mr. Thomas said. The other stores are in Beijing and Paris.
Shang Xia’s revenue is only a fraction of Hermès’ nearly €4 billion in sales last year, Mr. Thomas said. But it represents a new approach by a European luxury company to breathe life into the once heady Chinese luxury-goods market hit by the crackdown on official corruption and brand fatigue after luxury names invested heavily in China. Luxury-sales growth in the country is expected to reach 2% this year, compared with 20% growth three years ago, according to projections from U.S. consulting firm Bain & Co.
Shang Xia has also been slow to gain traction in China, said Matthew Crabbe, director of research, Asia-Pacific, at consulting firm Mintel Group.
Still, some say that China’s own high-end brands may be reaching a turning point. Entrepreneur and designer Wang Yiyang is expanding his Zuczug store, a premium outlet selling $185 trousers and $350 dresses. The Council of Fashion Designers of America sponsored Chinese designer Masha Ma on a trip to New York to meet with heads of luxury retailers, like Bergdorf Goodman.
“Chinese consumers’ interest in luxury is becoming more succinct and discriminating, shifting from acquiring big, famous brands only to discovering smaller, more individualistic labels, including those from China,” said Torsten Stocker, a partner at consulting firm A.T. Kearney.
Mr. Thomas said “the investment in Shang Xia has been a drop in the bucket of profit for Hermès,” adding that Hermès lost money in its 25-year China investment until three or four years ago. The company has always prized building a quality brand for the long term, rather than focusing on the investment for short-term gains, he said, adding that Hermès has still achieved 20% to 25% sales growth in the midst of the crackdown on luxury gifting. The company doesn’t break out detailed sales results by country.
Chinese citizens are ready to appreciate more of their own cultural roots, said Jiang Qiong Er, Shang Xia founder and artistic director. Shang Xia soon plans to auction off 20 handmade pieces—tea cups and ornamental boxes— at auction house Christie’s Shanghai sale later this month.
The first floor of Shang Xia’s new retail store, attached to the four-story Hermès outlet in a historical government building in Shanghai’s former French concession, is open to the public, while private tea rooms are available only for special guests, said Ms. Jiang.
Hermès hopes the brand, which runs an outlet also in Beijing, will take off even beyond China, said Mr. Thomas. The company opened a small Paris-based outlet last year to test demand, he said.
Other high-end companies have invested in Chinese brands in recent years. In 2012, Kering SA acquired Chinese jeweler Qeelin Ltd. French luxury giant LVMH Moët Hennessy Louis Vuitton SA invested about $200 million in 2012 for a roughly 10% stake in closely-held Chinese casual-wear company Trendy International Group.
Ms. Jiang said she expects Shang Xia to have more competitors in only a few years. “China does everything faster,” she said.