Oriental Express: Why is Prada and the luxury industry looking to the East?

On June 24th 2011, Italian fashion house Prada will make its debut on the Hong Kong Stock Exchange (HKEx). This comes a decade after the fashion house first attempted an initial public offering (IPO), which at the time was destined to be on Bourse Italia – the stock exchange of Prada’s native Milan. The event will also mark an industry first, as Prada will become the first Italian luxury brand to be listed on the HKEx.

We have read a lot of writing and heard a lot of opinions about the Prada listing, and this topic in general. As we inch closer and closer to the date, it has been the main topic of conversation and speculation not only amongst the tight-knit fashion and luxury sphere, but also for business, economics and political nerds alike (read: people like me). There is one question, however, which has fuelled the biggest fire since the news that Prada filed for a HKEx listing became public back in April:

If the traditional luxury market is perceived to be Europe; and the current largest luxury market is calculated to be the USA – Why Asia? Why Hong Kong?

Amongst this global conversation of corporate restructures, investment bankers and cold hard (capital) cash is a small tale of romance between the luxury industry and Asia.

There has always been a large awareness of luxury brands amongst Asian consumers. During a recent trip to Florence, Italy I went on a guided tour of designer outlets, which included amongst others, the Prada SPACE outlet. On closer observation of the other tour attendees, approximately 80% of the other shoppers were of Asian descent ranging from Indonesian, Korean, Taiwanese to Chinese. These are a breed of people I call professional shoppers – I understand them personally as I have grown up around a gaggle professional shopper aunties. They travel the world, some enduring flights as long as 24 hours, to reach the various luxury shopping meccas of the world. Whether in Sydney or Paris, I have observed that it is not uncommon to see affluent Chinese or Japanese customers at a Louis Vuitton boutique who a) are very educated and knowledgeable about luxury goods, and b) are not afraid to spend big.

The Asian market, and more specifically the Chinese market, is the luxury industry’s old faithful Burberry trench. For as far as most of us can remember, ‘Made In China’ has always been a household name, almost becoming a brand in its own right. Over time however, the reason for both brands’ successes slowly became the reason for its decline in value.

Burberry’s signature plaid became known to be the social uniform of the ‘chavs‘. At the same time, China and its industries became stereotypically linked to the idea of mass produce (i.e. low quality, homogenous, ‘cheap’) and were increasingly receiving the shun from consumers around the world.

During the late 1990’s and into the new millennium, Rose Marie Bravo and the then newly acquired designer, Christopher Bailey, set out to effectively refurbish Burberry – its image and what it offered. It culled the plaid from the majority of its products and sought to re-introduce the market to a more youthful but nevertheless timeless and luxurious brand.

Halfway across the world, the hardworking nation of China was slowly but surely building an economic giant that will one day become the world’s largest. According to Rupert Hoogewerf (chief executive of the Hurun Report, which produces China’s Rich List), “the wealth in China right now is all first generation”. This population, and more importantly – their children, is rapidly turning into the one of the core constituencies for the global luxury industry.

In the six months of 2011 alone, the luxury industry’s activities in China have been impressive in terms of spread and scale.

Earlier this year in April, Burberry opened a new flagship in the Chinese capital city of Beijing. The store boasts to be Burberry’s most technologically advanced store in the world; and earlier this month, Chief Executive, Angela Ahrendts, believes that this will “accelerate growth” of the Burberry brand within the Chinese market.

Also thinking along the same line, Hérmes expanded and refurbished its boutique in Guangzhou’s La Perla mall. Florian Craean, Managing Director of Hermès North Asia, noted,that “In the seven years since Hermès entered Guangzhou, we’ve found it an increasingly good fit for us, so we’re much more confident in the Guangzhou market.” This is important as it marks sufficient confidence by the luxury industry to expand their physical presence beyond the conventional main cities of China.

The Chinese consumer market is not the only factor in the rise of China’s status as a global luxury name. Chinese model, Liu Wen, has experienced a meteoric rise within the industry in the past three years. Since her first agency contract in 2008, Wen has graced countless Vogue editorials and international catwalks. In 2009 Wen became the first East Asian model to walk the Victoria’s Secret annual showcase; and most recently, Wen was signed to be a face for Estée Lauder, becoming their first Asian spokesmodel.

Looking back to 2007, it seems Karl Lagerfeld had it all right when he first capitalized on the ‘China factor’ by staging his now infamous Great Wall of China catwalk for Fendi. The Prada IPO is definitely one of the hottest trends on the fashionable news circuit right now, however they are not the first European company to capitalize on the burgeoning Asian wealth. In May 2010 L’Occitane, a French retailer of beauty products, became the first French company listed on the HKEx and raised USD$708 million on its IPO.

Traditionally, where a company within the luxury goods industry has floated and offered shareholdings to the public, it has been within the confines of their native equity markets. From a bottom line point of view (read: how much it will cost the company) – IPOs are very expensive proceedings with very high accounting, legal and marketing fees. Experimenting with a new exchange market, like the HKEx, can be perceived as very risky.

This recent mass interest in the HKEx however, is not without its justifications. The proverbial ‘method behind the madness’ is primarily to gain access to the deep capital pockets of Asian investors, and specifically that of the Chinese nouveau riche – which is just a fancy way of referring to this ‘new generation’ of wealth in Asia.

According to a recent report by leading brokerage and investment group CLSA Asia-Pacific Markets, China is poised to surpass the US and Japan as the leading market for luxury spending within the next decade. CLSA projects that China will increase its luxury goods consumption from €9 billion (AUD12 billion & USD13 billion) in 2010 to an estimated €74 billion (AUD100 billion & USD107 billion) by 2020.

This is not difficult to conceive because the Chinese luxury goods market is currently only in its growth stage and will consequently experience a greater rate of growth than the mature luxury markets of the US, Europe and Japan.

It is in this strong context that, following four failed attempts spreading across a decade of turbulent global economic conditions, Prada has launched its most solid IPO strategy to date – by relocating to the HKEx, Asia-Pacific’s third largest equity exchange, and riding a wave of one of the oriental East’s biggest wealth booms.

Prada is not alone.

Prior to finalizing its (still crispy and fresh) GBP£500 million acquisition deal with Labelux in May of this year, rumours circulated that British shoe label Jimmy Choo had also considered a HKEx IPO. Perhaps the high costs of an IPO proved too much; or perhaps it was the persuasive argument of Creative Director Tamara Mellon, that prevented this particular IPO from eventuating.

Whatever the reason, China is not short of pursuers.

Burberry, who is already listed on the London Stock Exchange; and American accessories brand, Coach, who is already listed on the New York Stock Exchange have both expressed interest in opening secondary trading of their shares on the HKEx later this year.

At this stage, it is also worth noting the following question:

“Why bother with Hong Kong? Why not just go directly via the Shanghai Stock Exchange (SSE)?”

The SSE, after all, is ranked above the HKEx in terms of market capitalization (- this is the total combined dollar value of all the shares being traded on any particular stock exchange, read: how ‘rich’ the stock exchange is.)

The simplified answer to this question can be broken down into two parts: business efficacy and marketing potential.

Like a lot of functions governed by China, the SSE is also highly restrictive to foreign investors. An IPO on the SSE would require a lot more administrative effort (ahem, more costs) and participating investors may be very limited (ahem, potentially less cash inflow).

From a marketing point of view, Hong Kong is perceived as an international shopping destination – even more so than Shanghai. The 2011 edition of the ‘How Global is The Business of Retail’ report, published by global real estate advisory firm CBRE, has ranked Hong Kong as the world’s best city for luxury shopping. The HKEx profile is clearly a better fit for the branding of a luxury goods company.

To put this into perspective, an equivalent dilemma would be asking Chanel who they would prefer to represent their ‘Mademoiselle’ handbag advertising campaign: Blake Lively or Chelsea Clinton? Both are outstanding characters however one embodies and complements the character of the brand better than the other for that particular purpose.

As one of the global economy’s strongest emerging markets, China has not failed to make its mark as a prominent consumer market. This has been specifically evident within the luxury goods industry, where they are projected to become the global leader within the next decade. Acting as legitimate international corporate giants, luxury companies like Prada are now looking to increase their market exposure directly via the equities market – i.e. by floating shares of the company to external investors.

While all eyes are on the stocks of Prada S.p.A., interestingly enough, fellow Italian luxury fashion house Salvatore Ferragamo Italia S.p.A. has also been approved to make their debut on a stock exchange – five days following the Prada IPO. Ferragamo, however, has chosen to remain locally with Milan’s Bourse Italia.

Two Italian luxury fashion houses, full of heritage and history. Two exchange markets – one traditional and local, one experimental and foreign. Which, if any, will surpass expectations? Will Prada reinforce the peaking confidence in the Chinese market and the HKEx? If so, what could this mean for the other luxury fashion houses and corporations such as LVMH, Richemont and Burberry? Will they follow suit?

Investors, traders and general gossip can speculate what will happen however, for now, we think we will sit back and watch the action with a bowl of popcorn.

By Heidy Suwidji – a financial accounting analyst and all-round fashionholic, you can catch her keeping one keen eye on the latest fashionably corporate news, and the other on her favourite online shopping sites. Follow her on Twitter at @lolaswij.