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Esprit saviour moves to improve sales further

Heinz Krogner made a brutal decision when he was invited by Esprit Holdings chairman Michael Ying Lee-yuen to revive the casual wear retailer's loss-making European business in 1995.

Appointed Esprit's chief executive of Europe and North America by that time, he promptly fired 100 staff and six directors, replacing them with a young, energetic management team. He then set about rescuing the European operation.

His philosophy was to build the Esprit brand by offering high-quality products at affordable prices for youthful people.

The move paid off and within six months, the European operation had returned to profitability, particularly Germany, which now contributes half the group's earnings.

On Wednesday, Esprit announced a bumper profit of $885.9 million, up 53 per cent for the six months to December from a year ago.

'We went into Europe with very high-quality products at reasonable prices and the market grew. Our brands were included on most girls' shopping lists,' said Mr Krogner.

In recognition of this success, Mr Krogner, who had been a consultant with Kurt Salmon Associates, was appointed deputy chairman and group chief executive of Esprit in 2002 with an even bigger task: to stop the bleeding of four loss-making retail markets - Hong Kong, Taiwan, Canada and Britain, all grouped under the Asian management.

But would the European model work in these markets and the United States, where Esprit had rolled out an ambitious plan two years ago after buying out the original US owners of the Esprit brand for US$150 million?

In Asia, Mr Krogner's original task was to halve losses this year and achieve break even next year.

Things are going better than he expected.

'I think it [the schedule] will be achieved a year earlier than I expected. These markets may see a return to profit next year,' he said.

Six years of deflation in Hong Kong hit Esprit hard, eroding the brand's popularity and margin, and hurting profits.

By adopting the same strategy as the company did in Europe - stopping discounts while enhancing quality - Esprit's Hong Kong business was on the way back, just as in Canada, Mr Krogner said.

Brokerage firm GK Goh estimated Esprit's losses in the four markets could fall to $100 million this year. If the target was met, brokerage CLSA said it would represent an 11 per cent growth in earnings for the group.

Mr Krogner said the group would invest heavily in Hong Kong next year in anticipation of a return to profitability.

'We can roll out 40 to 50 smaller new stores in the 5,000 to 10,000 square feet range in different neighbourhoods, instead of opening more mega-stores in Hong Kong,' he said,

At present, Esprit operates 560 directly managed retail stores and more than 7,000 wholesale outlets in more than 40 countries. It is considering expanding into South Korea and Japan.

In Hong Kong, it has 20 stores, with five mega-stores ranging from 10,000 to 20,000 sqft, while in the mainland it has 150 shops in a joint venture with China Resources.

Esprit's Asia expansion plan has been prompted by Mr Krogner's confidence in the region, which accounts for 9 per cent of the group's sales compared with Europe's 84 per cent.

He said Europe's population was shrinking and getting older, while Asia was full of energy and dominated by a younger generation with rising incomes. 'Europe's market is like a 50-year-old man, US similar to a 40-year-old man, but Asia is just like a 10-year-old boy with lots of potential to grow,' he said, conceding that having a Europe-dependent business was not ideal.

'So our mission is to grow Asia faster than Europe. Or else, we will become a European company which we don't want to be. We want to be an international company and we need to balance our markets.'

He said the perfect combination was to have Europe accounting for 40 per cent, with Asia and the US contributing 30 per cent each.

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