Emerging Markets

Growth markets: China hogs the headlines, but for emerging brands, mature markets matter far more.

As if in harmony, both business and fashion press sing about China as the next big thing, the golden growth market that luxury’s Big Three soon hope to conquer. In that sense, China is something of an El Dorado. But it’s worth pointing out that a country with a population in the billions, and a rising middle class that’s (hopefully) going to splurge on Louis Vuitton luggage, is less of a story than it seems.

China’s size suggests that it has means to potentially buy a lot of LVMH, Kering, and Richemont goods. But the consumption narrative is an incomplete one. To become a truly great luxury economy, that market must produce great brands — as well as consume them.

This is not lost on today’s modern luxury set. China may hog the headlines, and existing luxury houses may push harder into the region (despite already having overextended themselves there). But for the modern luxury cohort, is the Chinese market really a growth market for them? And if not, which markets are?

Several barriers.

Yes, China boasts the most Internet users of any country on earth — making it the fastest growing e-commerce market on the planet — but there’s still plenty of uncertainty as to whether DTC modern luxury companies (MLCs) from the West can penetrate the market. Several key obstacles help to explain why:

Domestic rivals. Although unknown internationally, many of China’s homegrown darlings, from sportswear manufacturer ANTA to the apparel giant Peacebird, have already captured the hearts of Chinese consumers with their strong brand awareness and reasonable price points.

A whole different battleground. According to a recent report by McKinsey China, over 60% of domestic consumers prefer Chinese brands over international ones — provided the products are of comparable quality and price.

Taking the modern luxury temperature.

Lean Luxe surveyed several MLCs located in different international markets to test our China theory and find out what regions are truly big drivers for companies like them.

Tracksmith (running)

Zoning in on a specific shopper. “Tracksmith’s mission is to serve the Running Class — a vastly underserved portion of the running market,” said co-founder Matt Taylor. Positioning itself as a lifestyle brand, Tracksmith has found success in bigger U.S. markets where running has caught on: New York City, San Francisco, L.A., Chicago, Houston, and Boston. Yet, as the sport itself expands beyond American borders, Tracksmith intends to follow suit.

Expansion abroad. Tracksmith’s market split is currently 80% U.S., with the United Kingdom, Canada, Australia, Western Europe, and Japan making up the dominant share of the remainder, in that order. But Taylor also sees potential in markets like Australia, Hong Kong, Singapore, and Japan, where the brand has amassed a sizeable following. “It is surprising as it can be quite expensive for them with additional tariffs since we only distribute from the U.S. right now,” he said.

Lunya (sleepwear)

The language barrier. “We think about where there would be demand for our product and then how effectively we would be able to service them,” said CEO Ashley Merrill. “Since we are not just a wholesale company but a DTC brand, we need to consider things like customer service, brand localization, and operational challenges that might make shipping burdensome for the customer like customs issues, time, and cost.” For the L.A.-based sleepwear brand, markets like Canada, Australia, and the UK are the most viable international options.

Key markets. Since digitally native brands can cast a wide net domestically in the beginning, several patterns begin to emerge. For Lunya, these cities are the large metropolitan areas of the United States, including New York, Los Angeles, Chicago, San Francisco — but also D.C. and Dallas, which has garnered attention in recent years. “As those areas become saturated we will likely continue to test resonance online and let that guide our growth strategy,” said Merrill.

Matches Fashion (online retail)

Overall Growth. In March, a decade after tapping the e-commerce space, Matches released their financial results for the first time. For the year 2016, the British retailer saw 45% growth in the UK and over 80% for the rest of the world — alongside a growth in total online sales by 73%.

Brick-and-Mortar. Despite the importance of e-commerce to the business model, the company — just last week — announced an expansion in brick-and-mortar. Opening its sixth London outpost in a Mayfair townhouse, Matches plans to use the space to host trunk shows, installations, talks, and dinners, which will appeal with today’s omnichannel consumer.

Digital slowdown? Nothing lasts forever. According to a report by McKinsey, the growth of luxury e-commerce, which Matches presently specialises in, will be in the shape of an S-curve. Currently, about 7% of shoppers are buying luxury online. Though this number is expected to triple in the next decade, the space is expected to eventually slow down and gradually plateau as time goes on. Physical presence will become essential for a company like Matches to secure future growth.

Iffley Road (running)

Heritage as an organic selling point. “We’re of the view that you need to prove your concept in your home market before really spreading your wings.” explained co-founder Claire Kent. Still, she has noticed organic demand popping up in international markets, from places with a similar consumer profile — such as Australia, Europe, and the US — but also Asia. Said Kent: “Particularly, Asia and the US are large markets where there’s a history of demand for high-end British brands with a heritage style.”

Market split. Iffley Road’s current split sits at roughly 60% United Kingdom, 20% United States, and 20% for the rest of the world. Kent has also noticed an uptick in German-speaking countries. “Within Continental Europe, we can see that consumers in countries that really appreciate high quality — for example Germany and Switzerland — seem to discover Iffley Road,” she said.

Grana (modern basics)

Coming to America. American consumers overwhelmingly drive sales even for MLCs in the rest of the world, particularly in the digital space. This has made brands like Grana eager plant roots in the country as well. “It’s been really exciting to see this market growth since we don’t have an offline space there yet. However based on our data and continued market growth, we plan to open our ‘try offline, buy online’ concept in Q3 to continue changing the way people shop in New York,” founder and CEO Luke Grana told us. The decision is data-driven: according to Grana, the US market has grown 30% year-on-year.
Agents of growth. Devoid of a physical presence in America since December 2015, over the past year, GRANA has astonishingly grown 570% in the region. According to Grana, this can largely be attributed to “a lot of word-of-mouth, celebrities recently wearing our clothes, paid collaborations with influencer and bloggers as well as online targeting throughout the omnichannel.”

China, after all? Of course, being based in Hong Kong gives GRANA a unique advantage if they do choose to tap the Chinese market. Although the brand does not sell to the Mainland yet, it is accruing interest in the area through native channels, even before setting up shop. On WeChat and Weibo, GRANA has caught the attention of Chinese consumers. But, that doesn’t necessarily mean it’s finally time to set up shop there. “We don’t ship there yet, but it’s a great way to see traction here,” Grana concluded with restrained optimism.

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