Times are hard for Italy’s fashion industry. According to a 2008 report released by the Italian National Fashion Chamber of Commerce, the rising value of the euro against the dollar, declining consumer confidence and decreasing demand are putting the squeeze on an industry that has produced some of the top names in haute couture.
Italian fashion industry association Altagamma’s chairman Leonardo Ferragamo publicly warned that 2008 would present a difficult year for the industry, as growth rates in the first quarter fell. As of 2006, over 2,400 firms employing workers in the textile and clothing industries in the industrial Varese province have closed. More than 27,000 lost their jobs. Many of those jobs ended up in China.
Today, however, Italian fashion is once again looking to China, not as a threat but as an opportunity. As markets for luxury goods shrink across Europe and North America, Italian haute couture is targeting China’s upper and growing middle classes.
According to market research by Euromonitor, 80 million Chinese had moved into the middle class bracket by January 2007; that number is expected to rise to 700 million by 2020. Urban residents earn upwards of US$12,500 a year, which means they can splurge on a Fendi bag. Chinese luxury goods consumers rank third in the world behind the Japanese and the Americans, spending an average of US$6.5 billion a year.
A big show
Italian designers have been working hard to market themselves through increasingly extravagant events in China. Last month, Beijing played host to a spate of parties and fashion shows thrown by some of Italy’s biggest luxury brand names.
The Legation Quarter, now one of the city’s hottest new venues, provided the backdrop for Versace’s first fashion show in China. Versace gave US$100,000 of the proceeds to Sichuan earthquake relief. At the event, CEO Donatella Versace expressed her intent to make these shows a regular feature of China’s fashion scene. Versace is investing over US$56 million in increasing its presence in Asia, with a specific focus on China, and is opening 11 new stores across the region this year.
Other top luxury brands are also out to impress. MaxMara invited 1,000 exclusive guests to sample champagne and sushi in a huge metal drum in the über-trendy 798 art district. And in late October, Fendi threw a four-day party on the Great Wall, fashioning part of the former defense shield into a catwalk.
A clean slate
For Italian fashion houses that are not doing so well, China represents a chance to reinvent a dying brand. Local fashion media lacks objectivity; rather than pick apart the latest trends, magazines sell fawning articles to the highest bidder. As a result, much of the Chinese public remains unaware of declining reputations of some Italian names.
"Dolce&Gabbana is a dead brand in Europe," said Paul French, chief China representative for marketing intelligence group Access Asia and a regular columnist for CHINA ECONOMIC REVIEW. "It’s a joke. It’s worn by hookers and girlfriends of the Russian mafia." But China is a clean slate where Dolce&Gabbana can re-invent its previous image.
Even so, it’s going to take more than lavish parties. Italian luxury firms need to project the right image. Versace made the news when only Chinese models strutted down the catwalk of its Beijing show, but it’s hardly the norm.
"It’s ridiculous for foreign brands to use white models," said Shaun Rein, managing director of China Market Research Group.
The majority of luxury goods companies are private enterprises that rarely produce hard numbers about their own sales. But, with the notable exception of Gucci, which ranks alongside Luis Vuitton as the most successful foreign luxury brand in China, all of the Italian brands are having problems luring in the middle class they so desire, said Rein.
A major obstacle to success is ignorance of the Chinese market and the geographical variations in consumption. Acceptable fashions on the Bund in Shanghai vary greatly from what is worn on the streets of Beijing.
Selling the dream
Another issue is retail strategy. Taxes on luxury goods on the mainland are crushing – a 17.5% value-added tax, 10% consumption tax and an average 24% luxury tax. Consequently, only one-third of all luxury goods purchased by Chinese consumers are bought on the mainland. The likes of Gucci realize that their mainland stores serve largely as advertisements and so make these outlets suitably palatial.
"Chinese consumers want to feel like they are buying the best and that the best are investing in China. They want to be wowed," said Rein.
Wowed, yes, but not frightened. Both Rein and French agree that most newly wealthy Chinese are hesitant to don the wild styles of fashion houses like Versace. Chinese consumers are looking for utilitarian goods, albeit with a foreign label. Which is why Gucci, with its emphasis on simple, durable styles, is enjoying so much success in China.
However, although luxury in China may mean "Made Elsewhere," the irony is that the image of Italian heritage marketed by luxury brands is anything but, says French. Increasingly, high fashion is made in China, a fact that luxury brands don’t advertise, and for good reason.
Luca Spaggiari, an Italian resident in Shanghai, refuses to buy Italian designer clothes here. "I find Italian clothes made in China are more expensive and lower quality," he said. "You do not find these kinds of clothes in Italy."
Italian luxury goods no longer employ little old ladies in quaint shops down a small side street in Rome to painstakingly craft that thousand-dollar clutch purse, but Chinese factory workers on a line in Zhejiang province. If brands become detached from Italian quality in Chinese consumer consciousness, Italian fashion stands to take another hit, especially given its price point.
"When does luxury lose its luster?" asked French. "When are people going to feel they are being cheated paying thousands of dollars for a bag that cost US$25 dollars to make in a factory?"