Challenges of Retail

Retail, or the expansion of mono-brand stores, is the only route to growth for brands today, especially in Asia.
Sep 21, 2017

Yet, the growing costs of doing retail business, the advent of e-commerce, the current market turbulences and the economic uncertainties are all making life more difficult for established retail brands, let alone new entrants. Brands that are not strong in retail and, as a consequence, are not strong in Asia, face daunting challenges to penetrate now the market and catch up with their long established competitors.

European brands initiated 50 to 60 years ago a long growth path. About 30 years ago visionary brands started to develop their retail business out of revenues from traditional wholesale. Cash generated from wholesale was used to finance capex for retail, thus giving those brands a competitive advantage that now is evident. They started by opening stores in major European cities like Milan, Paris and London, followed by openings in Asia in Hong Kong first, properly pacing and structuring their retail development

Meanwhile, retail has evolved from a relatively easy activity 30 years ago to a very sophisticated business that today requires companies to be flawless if they are to succeed, especially in Asia. In fact, doing retail in Europe is less stressful than in emerging markets and Asia in particular. If in Europe a brand is somehow protected by key-money and long leases, in Asia these safeguards do not exist. Very short leases, of one to three years, very high rents ranging from an average of 250/300 (in Singapore) to 500 euros per month per square meter in Hong Kong.

Retail companies that can afford it because they embarked on the retail path long ago have been able to upgrade their organisations with skilled and talented management and designers, a perfect supply chain and strong financial control, and more recently a clear omni-channel brand positioning and brand identity, and remain competitive. They have also been able to sustain stores start-ups and continuous capex investments to compete in emerging markets and Asia particularly, sometimes by going public.

Brands that are new in the retail arena are instead at a disadvantage due to much higher entry barriers and fewer chances to become part of the retail “elite” unless they are willing to bet and invest massive resources in the game. Developing a retail culture takes time and whereas in the past it was relatively inexpensive and simple, nowadays it requires huge investments.

Asian companies do belong to the latter category.  Asian brands, in the absence of a strong Asian multibrand channel, are faced with a virtually insurmountable challenge, as they need to throw capex upfront to drive their business expansion without first testing their products on the market and get valuable but cheap feed-back from consumers and retailers. In fact, the multi-brand channel also helps brands test their products and adjust them without financial risks or jeopardising their brand equity. This is actually a reason why Asian fashion, bar a few exceptions, has generally not been able to develop internationally and has remained restricted to the local market.

Of course franchising out the retail through distributors is an option that reduces risks and requires limited capex, yet the costs of doing retail business today, and its complexities, are fast reducing the window for distributors to invest in new brands.

The slowdown in Asian economies, together with the political and financial turmoil of the last two years, have had a great impact on retail, which saw growth rates of 20-30% collapse to more physiological rates at around 10% in the medium to long term.

The new and different market conditions led consumers to reduce their spending on luxury goods in favor of lower price and high quality products. On the distribution side, it has reduced the appetite of big groups to invest in new trademarks and urged the need to restructure operations and to consolidate their existing retail network, leaving excellent and direct input spaces in malls, which are more than ever looking for fresh brands to offer customers a new exciting and less exclusive brand mix.

Brand that have developed a retail network in Europe but which are not yet present in Asia have right now some rare opportunities to take locations that in other times would be impossible to grasp. This window of opportunity will close again when the economy should start growing again. Of course a direct investment requires, besides capital, a marketing strategy, strong retail expertise and a team on the field attentive to the continuous evolution of the market.

The development of multibrand channels in Asia – that is good quality multibrand boutiques -  is the answer to the lack of growth of a local industry that would deserve to develop more than it is doing now.

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