Dialogue with Luca Solca of Bernstein : “China Can Provide Insights that Feed Into Western Markets”

Alicia Yu: What are your latest observations and outlook on the global luxury market?

Luca Solca: Quite clearly, China and the Chinese in the past 20 years have become very important for the luxury goods industry. They have become the No.1 nationality. The COVID-19 restrictions impacted the second quarter. And Chinese ban was down during the second quarter. But I expect that as these restrictions are lifted as we see, for example, monitoring in-store traffic and sales. Chinese demand should be back.

This happens in the context of very strong global luxury demand. Not only the Chinese, but the Europeans and the Americans of providing very strong contribution to luxury sales. I think that is to be connected to a number of reasons.

First, during the pandemic, high end consumers were forced to save quite a significant amount of money. They didn’t have many ways to reward themselves. They couldn’t travel. They couldn’t go out. They couldn’t see friends. So, buying luxury goods products was one of the only possible ways to find some relief.

The other thing, I believe, is that the COVID-19 pandemic has been a stark reminder that we’re all mortal. And as a consequence, there’s a higher realization that you only live once and possibly the willingness to spend as high-end consumers exercise at the moment is higher than it was prior to the pandemic. It’s like in a post-war euphoria when people are happy to be alive and they want to make the most of it, and they want to enjoy as they can. This is the context that I expect that as the Chinese get out of the lockdowns and we move into the second half of the year. Unless we have some surprising negative developments, we should have a similar behavior pattern.

It has proven to be far more resilient than anyone expected in 2020. Expectations were that there would be a very significant decline in sales, and this decline would stay for a while. Instead, what we saw is a very buoyant demand environment, so much so that many luxury brands were forced to increase prices to try and rebalance supply and capacity with demand, which as you saw, as braw, operating profit margins through unprecedented high levels during 2021 and during first half of 2022.

Alicia Yu: In your opinion, should a luxury brand be more adaptive to the local cultural environment or stick to its universal image and ways of communication? And how to balance?

Luca Solca: Clearly, I think that luxury brands are global. And some of their elements of their DNA should stay global. The root causes of their appeal, or the aspiration that they represent, speak to a global desire of people — getting ahead and improving their situation. Having said that, I think that luxury goods brands are also very meaningful, from cultural and from a social viewpoint. And they need to be respecting the local and social situation. Not only respecting, but also, I think they need to understand it in depth, so that they can dovetail with those specific elements and deploy their mission and their execution accordingly, especially in a large market like China.

Here, sometimes people talk about the Chinese consumer. There’s no such thing as the Chinese consumers. The Chinese society is incredibly complex with many different audiences, with many different groups, with many different desires and aspirations. I think that luxury goods brands need to understand, or that need to have a way to play in an ammonic way within that complex environment, especially now.

As we have multiple communication media, and we have many different ways of reaching consumers through social media, frequent communication and two-way dialogues. Doing that without an in-depth understanding of the social discourse and local consumers in each market, I think, is fraught with gigantic risks and with the high likelihood of failure.

So in order to be locally proficient, I think luxury goods brands need to have very senior local organizations that can be working in a team with the global brand leadership.

Alicia Yu: As a luxury brand tries to sell products and concepts with cultural and social implications, what kind of challenges it would normally face in foreign countries, and how to avoid pitfalls and win local people’s trust?

Luca Solca: The most important pitfalls we had in the most recent years are connected with the inadvertent management of communication or product innovation. There was no understanding that some content could potentially be seen as offensive by this or that consumer audience. You need to understand the local sensitivities, what could be seen and what would be the reverse of the coin of what you’re trying to convey.

So, I believe that the best insurance against the pitfalls of this nature is to have people that are senior enough and competent enough that can be, let’s say, the gate keepers of communication choices. They can say, Look! Here is a red flag, because this content could potentially be taken the wrong way because of A, B, C.
And this should be trusted to these local people. I believe that is probably going to be the single most important factor, getting a luxury goods brands to stay out of those potential pitfalls.

As you were talking before, about localization, it’s not just localization with a market and encounter as complex as the Chinese. I think that China can provide quite a lot of new ideas and quite a lot of insights that can instruct and shape how the brand should develop in the future in the west as well. It can be a two-way development. And I believe that there’s a huge amount of potential wisdom and potential insights that luxury goods companies can get from integrating Chinese executives in high positions in their organizations. They should not be seen at all as a way to gain PR branding points. This is not just a facade. This has to be a real integration with real teamwork and people working as a team and as one.

Alicia Yu: Under the current economic and social environment, in order to ensure continuous success in China market, how should luxury company improve their strategy and execution?

Luca Solca: I certainly think that continuing to increase the quality and the profile of what luxury goods companies do in China is essential. My view is that as Chinese luxury consumers buy a lot of products. They go down

the learning curve very fast that they end up being some of the most demanding and some of the most sophisticated consumers in the world, so executioners to be very highly similar to what happened in the 80s, for example, when Japanese consumers were also very keen on luxury goods products and demanded the best of best. So I think that this has to be the first and the most important requirement.

China is also at the front when it comes to developing a digital society. So I think that digital execution could potentially have a center of excellence in China, where new ways are developed and could be potentially exported to other markets when it comes, for example, to leveraging KOLs and social media, but also when it comes to using CRM and developing a two-way dialogue with consumers. I think this is probably an area which is going to be more and more important as luxury brands learn more and more about their consumers.

I would say that this is a second and very important pillar. And then clearly, as the Chinese consumers at one point will be able to travel again. Getting all that has been developed in China to coexist with the opportunity for Chinese consumers to buy abroad will demand more of a global approach to how you receive consumers globally. It was for a number of years that western stores, especially stores in Europe, would be flooded by visitors and by Chinese consumers. We have more stores in China. I think it could make sense to go to a different situation. Of course, Chinese travelers come to Europe, but they don’t necessarily have the same compelling price advantage buying in Europe rather than in China. So I think that the price gap would normally have to reduce in the medium term.

In fact, the best brands are already tooling up to do that and to pass that test. If you look at the new flagship store that Dior built in Paris, which is its hometown, it is quite revealing because it is of a very different and highest standard than anything we’ve seen so far. It makes sense for Chinese consumers to have marvelous stores like you say in Hainan and in the rest of China, but then they need to see and they need to experience something different when they come to the headquarters of these brands, when they see the  hometown flagship stores which need to be representative of the brand DNA and of the brand history. For sure, the bar is getting higher and Chinese consumers are contributing quite a significant amount of that.

| Editor: Nan Wang