The revolving door at Lanvin Group is still swinging. On the heels of the sudden departure of group chief financial officer Shang Koo last month, the Shanghai-based firm said on Feb. 24 its executive president and co-chief operating officer Grace Zhao is stepping down. Zhao will be transferred to a new role within corporate parent Fosun International effective March 1. But these recent changes at the group behind five international luxury brands suggest it is still troubleshooting the makeup of its senior management team.
Lanvin Group, led by chief executive Joann Cheng, is arguably the boldest attempt by Chinese investors to build such a portfolio but, of the major ventures, including Qiu Yafu’s Ruyi Group and early attempts made by Victor K Fung’s Fung Group, it has had the bumpiest start. The company listed on the New York Stock Exchange via a SPAC deal in December. Investors redeemed 97 percent of their shares at the merger, an abnormally high rate that often indicates dissatisfaction with a SPAC’s target. The withdrawals also forced parent Fosun International to place more funds. The stock price ended Monday at $6.41, down from its $10 debut price.
Even when China’s economy was on a tear, the thesis that Chinese ownership was an easy route to supercharging a luxury brand’s growth was optimistic. Now, with the country’s growth stalling as it encounters numerous headwinds after emerging from zero-Covid lockdowns, the path has only grown more difficult. Although the economy is on an upward trajectory, it’s looking more like a U-shaped recovery than the V-shaped rebound of 2020.
But putting aside the fact that Chinese owners now need to address significant challenges in their home market, there are other stumbling blocks that predate the pandemic. Owners’ relative inexperience in managing high-end labels which require long-term vision and brand-building prowess is apparent in firms with origins in manufacturing and sourcing like Ruyi and Fung Group. Moreover, a cultural gap appears to exist between some companies and their Western brand acquisitions.
Lanvin Group shared top-line figures this month that surged high double digits. To be sure, its namesake label and other brands like Wolford and Sergio Rossi, have improved on multiple fronts including product design, marketing, and customer experience but the results were on the back of store openings as the group plans to triple its retail footprint in the next three years. Profitability is of course another matter. As it stands, retail productivity at flagship brand Lanvin is one-third of that of peers, according to Bernstein.
Part of the challenge is that the competitive dynamics of the luxury market — which is complicated by both accelerating speed and escalating complexity — favour the scale of megabrands, according to Luca Solca, head of luxury goods at Bernstein. Lanvin “lacks even a distant resemblance to a mega-brand,” said Solca.
Bernstein research shows that while LVMH owns 75 brands it is Louis Vuitton that generates over half of the group’s profit. Kering, similarly, owns 10 brands, and yet its fortunes are dictated by the performance of Gucci, which contributes 72 percent of group profit.
“Even if Lanvin plans to overinvest in terms of marketing in the coming years [allocating] 15-20 percent of sales for the top brands, their relative power is inconsequential,” Solca said.
Lanvin Group did not immediately respond to BoF’s request for comment. The group’s namesake brand, designed by creative director Bruno Sialelli, is scheduled to show its latest womenswear collection this weekend at Paris Fashion Week.
The megabrand void is also a challenge for Ye Shouzeng’s ICCF, the group behind sustainability-minded Chinese fashion brand Icicle, which bought Carven back in 2018. Since the purchase, the French brand has been very quiet and without a creative director. Only in the last week did the group finally indicate what it plans to do with the brand, naming Louise Trotter to the position and announcing a September return to Paris Fashion Week.
On the other hand, minority stakes specifically geared towards helping overseas brands expand in the Chinese market are typically more effective: for example, Chinese investment into Self-Portrait and Alexander Wang, which has been the latter’s saving grace while it tries to redeem itself in the West after sexual assault accusations. Following the deals, each of these two labels have opened a flurry of stores in China to bolster business.
Not all investors follow this path. There has been no sign of a monobrand rollout for Mary Katrantzou since Wendy Yu’s Yu Holdings took a stake in the London brand.
Some companies are looking to categories outside of fashion, which don’t have to answer to the unrelenting pace of showing new seasonal collections. Yatsen Holdings, the Guangzhou-based parent to digital-first cosmetics brand Perfect Diary bought British skincare line Eve Lom two years ago. Its challenge is to pivot from mass makeup to prestige skincare. The jury is still out but given that prestige beauty is more affordable than luxury fashion — and that distribution is mostly done through wholesale channels instead of monobrand stores so operations can be delegated to an experienced partner — this business model could be easier than cultivating the competency to do it all in-house.
Jewellery, which tends to be more culturally specific than fashion, is another matter altogether. Gansu Gangtai acquired Buccellati in 2017 but quickly offloaded it to Richemont two years later. Chow Tai Fook Jewellery Group bought American jewellery brand Hearts on Fire in 2014 for $150 million. But the brand focuses mainly on diamonds and Chow Tai Fook, a legacy retailer heavily tilted towards offline distribution and to gold products. In 2021, it wrote off HK$614 million (US$78 million) in the brand’s value and is now in the midst of repositioning it further upmarket.
One strength some Chinese companies wield over Western counterparts is in e-commerce, with the reach and speed of partners like Alibaba, JD.com and Pinduoduo outstripping capabilities in the West.
Venture capital firm Sequoia Capital China, which counts former Vogue China editor-in-chief Angelica Cheung among its partners and is operated separately from its American parent, took a stake in the Canadian ecommerce platform Ssense.com in 2021. The platform too has not been immune to headwinds and trimmed its workforce for the first time last month. However, investments by the fund represent a different kind of acquisition as the assets are not in need of a revamp but already on a promising path.
“Sequoia is successfully taking on growth stories,” said Mario Ortelli, who runs a luxury M&A advisory firm. “On the contrary, the other Chinese companies mainly bought turnaround stories, which are quite complex and timely to execute if you do not have a strong experience in the relaunch of luxury brands.”
RTG Consulting chief executive Angelito Tan also highlighted the fund’s majority purchase of Parisian menswear brand Ami.
“This is also one of the more interesting deals in the last few years as unlike many traditional brand acquisitions, Sequoia retained the operational structure of the brands [as] Ami’s CEO and founders are still in place, while providing them with resources for growth and expansion,” Tan said.
Another move by Sequoia Capital China a year ago to acquire South Korean designer label We11done for an undisclosed sum may indicate where Chinese M&A activity is headed next. Not only is the brand more accessibly priced but its Asian sensibilities could be easier to integrate with Chinese ownership. More importantly, Sequoia’s goal to scale the brand, which is already popular with Chinese Gen Z, further in the country is a lot more modest and achievable.
What does all this signal for the future of Chinese investment in international fashion? While an uneven recovery in their home market may mean M&A activity may be slow among Chinese investors in the short-term, Ortelli believes there will be more deals on the horizon.
“There was a period that there was a run of Chinese investors buying brands and after that initial enthusiasm they are becoming more selective,” he said. “They will still be active in the market. It’s a different pace but still they will evaluate opportunities as they have done before.”
THE LATEST NEWS FROM CHINA
FASHION & BEAUTY
Slumping Gucci Sales in China, US Push Kering Sales Down 7%
Sales at star brand Gucci fell 15% in the fourth quarter, in large part due to underperformance in China, dragging down the luxury group’s results. The company was more impacted than rivals LVMH and Richemont where sales grew 9% and 8% respectively. (BoF, Reuters)
E.l.f. Makeup Exits China
The American makeup brand known for its accessible price point throws in the towel after entering the country in 2018. It plans to shut down its Tmall and Douyin official stores on March 15 and exit the market by the end of March. (WWD)
Lancome Announces He Cong as Makeup Ambassador
Top Chinese model He Cong has been tapped by Lancome as makeup ambassador. The French beauty brand also added actress Hoyeon Jung of Squid Game fame, singer Aya Nakamura, and Youtuber Emma Chamberlain to its roster. (Weibo)
John Paul Mitchell Sued For Cruelty-Free Claims Despite Selling in China
The haircare company was named in a class action lawsuit which accused the company of falsely advertising itself as animal cruelty free. The case claims 63 products were sold in China between May 1, 2015 and June 30, 2022 that were subjected to animal testing in order to comply with Chinese regulations. (Bloomberg Law)
CONSUMER & RETAIL
JD.com Takes on Pinduoduo With $1.5 Billion Subsidies Campaign
The two e-commerce giants are going to battle for the budget conscious shopper. As soon as next month, JD.com plans to offer $1.5 billion (10 billion yuan) in discounts in order to wrest market share from Pinduoduo, which is said to be more popular in lower-tier cities. (SCMP)
China Duty Free Group to Open Fuzhou Store
The state-backed travel retail operator agreed to invest $360 million (2.5 billion yuan) into a location in Fuzhou, the capital of the southeastern province of Fujian, a diversification away from the China’s largest duty free hub of Hainan. (JRJ)
South Korea Eases Covid Testing Rules for Chinese Travellers
Starting March 1, Chinese tourists will no longer have to Covid-test on arrival in South Korea, although they will still be required to test pre-departure. Seoul imposed visa restrictions and PCR testing on all visitors from China at the start of the year as coronavirus cases in China surged after its reopening. (Reuters)
Adrian Cheng Named Chairman of Meta Media
The Hong Kong tycoon is appointed co-chairman of the influential Chinese fashion media corporation formerly known as Modern Media, which publishes Chinese versions of Bloomberg Businessweek, InStyle, Numero, The Art Newspaper and more. (Forbes)
SUPPLY CHAIN & TECH
Clothing Companies Urged to Diversify Manufacturing Away From China
Top trade associations including the NRF and AAFA are urging their members to diversify their supply chains due to rising tensions between the US and China, most recently aggravated by the downing of a Chinese spy balloon. Meanwhile Chinese manufacturers are travelling overseas to try to drum up business to combat such ‘decoupling’ efforts. (CNBC, FT, FT)
China Jumps Into AI Chatbot Race to Compete With ChatGPT
A team at Fudan University debuted MOSS, a domestic AI alternative to ChatGPT tool, which was blocked on popular Chinese platforms due to censorship concerns. Baidu, China’s internet search giant, is also working on a bot of its own called ERNIE. (CNN, FT)
China’s Apparel Exports to US Grew to $36.5 Billion in 2022
China’s apparel exports to the US continued to increase last year after a sharp recovery in 2021 but the growth rate dropped off in the last quarter of the year impacted by geopolitical disputes. (Fibre2Fashion)
Kuaishou Announces Week-Long Shopping Festival in March
The leading live streaming platform is launching a new festival to be held from March 1 to 8. The company will hand out $116.3 million (800 million yuan) in discounts in the hopes of stimulating consumer spending. (Sina)
POLITICS, ECONOMY & SOCIETY
China’s Economic Recovery Outlook is Mixed
Beijing relied on heavy stimulus spending and infrastructure projects to drag its economy out of the 2008 world financial crisis, but it won’t be able to use the same tack for a revival post zero-Covid given its current high debt levels and distressed housing market. Early official data indicates that the benefits will be felt mainly domestically and strongest growth will come from service industries such as restaurants, bars and travel. (CNBC, WSJ)
Disappearance of Chinese Banker Reignites Fears of Government Crackdown
Mystery surrounds the whereabouts of Bao Fan, the star dealmaker in China known for brokering the listings of Alibaba and Tencent. His firm China Renaissance said he has been uncontactable since Feb. 16 but recently posted an announcement saying they became aware that he was assisting a government investigation. (NYT)
US Government Agencies Disagree on Covid-19 Lab Leak Theory
The White House says it can’t reach a consensus over whether the pandemic originated in a lab in Wuhan. The US Energy Department joined the FBI in concluding it came from a lab leak, albeit with “low confidence”, whereas other government arms believe it was of natural origins or remain undecided. (CNN, WSJ)
China Eases Child Limits Further in Attempt to Address Ageing Population
Chinese couples can now have as many babies as they want and are no longer limited to only three children as Beijing tries to reverse a shrinking population. Some cities are offering nearly a month of marriage leave, and Hangzhou is offering $2,900 for every third child as incentive. (Reuters, NYT)
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