Casey Hall
Baoji, an industrial city in northwest China with a population of three million, doesn't conform to most people's idea of a luxury goods market. Sometime soon, however, it will be home to a store for US brand Coach.
The store is one of 30 in China that Coach parent Tapestry is looking to open in the coming 12 months, says its Asia-Pacific president, Yann Bozec.
Tapestry's planned expansion in the mainland is unusual, both for its willingness to tap lower-tier cities where most Western competitors are reluctant to tread as well as for its timing, coming as it does amid a deep slump in Chinese luxury sales.
It also follows some 60 Tapestry store openings in China over the past two years.
It's a business strategy that analysts say allows Tapestry, one of the largest luxury retailers in China, to capitalize on its position as a purveyor of so-called "accessible luxury" at a time when many higher-end labels have gone further upmarket and Chinese consumers have become more cost-conscious.
Brands from Louis Vuitton to Gucci and Burberry have an established presence in China's biggest metropolises as well as second-tier cities like Wuhan and Xian.
In contrast, cities on the lower end of tier rankings - determined by metrics such as economic output, consumer behavior and population size - have been shunned, seen by many brands as lacking the malls that their cachet of exclusivity demands.
But where a Louis Vuitton bag or a Gucci dress can sell for thousands of US dollars Tapestry's price points are lower. Coach largely sells bags below US$1,000 (HK$7,800) while Kate Spade, another Tapestry brand, prices its dresses at around several hundred dollars.
Baoji will be Tapestry's second foray into a fourth-tier city after it opened a Coach store two years ago in Daqing in the northeast known as the oil capital of China.
Tapestry also plans to look at other tier-four cities as candidates for the 30 new stores this financial year.
"A lot of our existing customers are already from tier-three, tier-four cities, so we believe there is a cluster there that will get us scale," Bozec says. "We never want to be exclusive or selective. We want to be close to where our customers are."
China's pandemic border closures diverted much luxury spending that would have taken place overseas back home. The domestic market doubled in two years to be worth 471 billion yuan (HK$509 billion) in annual revenue in 2021, according to Bain data.
Research from real estate firm Savills also shows 55 percent of the world's luxury store openings last year were in China.
But luxury sales in China are now cratering, with consumer sentiment hit hard by the zero-Covid policy and frequent lockdowns, a slowing global economy as well as regulatory crackdowns on sectors that have led to spikes in youth unemployment.
Tapestry has not been immune. It saw China sales slide 32 percent for the quarter ended July 2 from a year ago. China sales generally account for around a fifth of its overall sales.
"We know Covid is making things unpredictable, but nevertheless our customer studies and our economic research is incredibly optimistic about the long-term growth potential of the China market," Bozec says.
He won't comment on investment figures for China - a main growth market as Tapestry seeks to ratchet up global revenue to US$8 billion in 2025 compared to US$6.7 billion in the past year.
Among Tapestry's closest competitors, Ralph Lauren says it is sticking with 2019 plans to have 150 stores in greater China by the end of April compared to 135 today, with a focus on tier one cities.
Compared to the past two years, however, most luxury brands have gone silent about new store openings for China.
"Generally, the lockdowns and falling consumer sentiment have [caused] retailers to pause and reassess expansion plans," says James Macdonald, head of Savills Research China.
Tapestry also intends to expand product lines in China, such as adding handbags to offerings for its third brand, Stuart Weitzman.
Another change, in a nod to Chinese tastes, will be the introduction of "livestreaming studios" at some Coach stores to allow customers to broadcast their shopping experience to social media followers.
Analysts see Tapestry's pursuit of more stores as an opportunity to cement its lead in brand penetration in China. The company has 360 stores in 80 cities.
Coach's luxury market share in China is also more than double that of Michael Kors and more than triple that of Ralph Lauren and Tory Burch, according to Euromonitor data.
Oliver Chen, a Cowen analyst, says Tapestry can benefit from price hikes of up to 60 percent among top-tier luxury brands in recent years that make Coach look more attractive in terms of value.
Coach's "footprint is still not saturated relative to the opportunity," he says.
REUTERS
