China Consumer

Failing in Berlin, try Beijing

Huge store opening drive as Esprit shifts focus from Europe to China

Failing in Berlin, try Beijing

Can Gisele revive the brand?

Once a high street brand to be reckoned with, clothing retailer Esprit has “lost its soul in the past few years,” company chief executive Ronald Van der Vis admitted in mid-September. He did so after announcing that Esprit’s full-year profits dropped 98% on declining sales in Europe, as well as costs related to a series of store closures.

Perhaps all that bad news may have contributed to the clothing retailer also losing count of the number of stores it has in China.

Last week Hong Kong’s Next Magazine accused Esprit of overstating its store numbers on the Chinese mainland. Out of 37 directly operated stores and 35 department-store counters listed in Shanghai by the retailer on its website, seven didn’t exist and 13 couldn’t be reached, Next Magazine claimed.

Similarly in Shenzhen, where the company declared a total of 37 outlets. Seven didn’t exist and a further three couldn’t be contacted.

After the news came out, Esprit’s shares dropped 14% on the Hong Kong Stock Exchange. Management then denied the accusations, saying that the magazine may have used outdated figures. Esprit stock rebounded 16% the next day.

Still, the recovery did little to bolster the apparently precarious state of Esprit’s commercial health. The company’s stock has fallen more than 40% since it announced the drastic decline in full year profits.

In fact, the company is counting on its China strategy to reverse its slump in fortunes. The retailer recently announced that it would up its store presence to 1,900 locations in China over the next four years to meet a sales target of $770 million.

In the year ended June, it reported $344 million in China revenue.

That would be a major transformation. Currently Esprit derives 80% of its sales from Europe but says it now plans to close 80 outlets there. It will also divest its North American operations completely, a symbolic retreat for a company founded in San Francisco in 1968.

“It’s a pity, but we have to be realistic – China is our future,” Van der Vis told Bloomberg in an interview. “The return on our investment is so much higher there.”

Esprit is certainly no stranger to the Chinese market. It opened its first store in the country in 1992, at a time when most of the locals wore clothes that might generously be described as utilitarian, as opposed to fashionable.

But as China opened up to international influences, Esprit looked well-positioned to benefit from the curiosity of consumers. Instead it choose to invest more in Europe and in 2003 Esprit set up its global headquarters in Germany, its biggest market.

So now Esprit has to play China catch-up. Analysts say it has failed to gain sales traction previously because it charges relatively high prices for products not perceived to be fashionable enough.

“Esprit’s merchandise is monotonous, untrendy and undesirable… the same paisley print that was popular 10 years ago are still for sale today. It’s almost feels like its designers are living in a world that’s a decade behind,” is the dismissive verdict of the Economic Observer.

The company will also have to compete with Sweden’s H&M and Spain’s Zara, which have both made headway as trendy retailers offering clothing at competitive prices. A cotton jacket in Esprit costs Rmb800. Zara sells similar products for Rmb500.

“Esprit’s jacket may seem higher quality since it’s lined with silk but it still doesn’t justify the price difference,” an industry veteran told EO. “And besides, Zara releases new styles almost every week.”

The plan is to open a design hub in China, to cater to local tastes. But Esprit will also rely on some star power to retake the initiative, recently launching a major global rebranding campaign featuring Gisele Bündchen, the world’s most recognisable supermodel (and presumably one of the most expensive).

If she can’t make the stuff look desirable, surely no one can?

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.