Luxury brands perfectly timed for China entry

Retailers prepare ground as partners of top marques rushing to gain foothold Nobody understands timing better than watchmakers, and mainland timepiece retailers are learning fast and making timely expansions to position themselves as gateway partners for foreign luxury watch brands eager to capitalise on the country's surging consuming power. Marquee names such as Omega, Franck Muller and Girard-Perregaux are in a hurry to establish a foothold in prime and second-tier cities, something major retail chains are taking advantage of. Hong Kong-listed luxury watch retailers Xinyu Hengdeli and Peace Mark (Holdings) are among chains that are aggressively buying stores to expand their networks, as they have turned their focus on second-tier cities recently. According to the Federation of the Swiss Watch Industry, sales of imported Swiss watches in China grew 15.1 per cent last year to 404 million Swiss francs (HK$2.6 billion) and logged a compound annual growth rate of 44 per cent between 2002 and 2006. However, watch ownership levels, particularly of foreign brands, were still low in China, according to Deutsche Bank. The most popular premium watch brand on the mainland was Longines, a Swatch Group brand, according to a Credit Suisse study released in March. It was followed by Omega and third-ranked Rado, another Swatch brand. China's retail sales rose 14.9 per cent year on year to 2.12 trillion yuan in the first quarter of this year. Against a backdrop of buoyant Chinese consumption of watches, wholesalers, including Singapore-listed FJ Benjamin and Sincere Watch (Hong Kong), a unit of Singapore-listed Sincere Watch, are eager to tap the retail business by opening single-branded stores in mainland cities. Peace Mark, whose core business is manufacturing timepiece components, has diversified into retailing mid-priced and luxury watches. Spokeswoman Cherry Lai said Peace Mark was betting on a surge in consumer spending power in these cities and was acquiring stores aggressively to force foreign brands to rely on the retailer if they want immediate access to the markets of those cities. Peace Mark, which operates 68 luxury watch outlets selling brands such as Rolex and Omega, aims to have 200 such stores in the mainland in three years. It acquired a six-store chain in Shenyang recently and about 20 outlets in Chongqing, Hangzhou, Ningbo, Shenzhen and other cities late last year when it began to tap luxury watch retailing. 'Our strategy is to take a 51 per cent stake in local luxury watch chains as they have already established a foothold and good reputations within the cities,' she said. Peace Mark last year formed a joint venture with Tourneau, the largest US luxury watch distributor and retailer, and is now operating four Tourneau mainland stores - two each in Shanghai and Beijing. The venture, in which Peace Mark has a 51 per cent stake, aims to have 30 luxury watch shops across the mainland in the next three years, according to Ms Lai. Luxury timepiece retailing made up 10 per cent of Peace Mark's sales in the first half of the past financial year and Ms Lai expects the proportion to increase significantly in the next few years. Peace Mark posted a 48 per cent jump in net profit to HK$119.4 million for the six months to September last year on a 29.4 per cent increase in sales to HK$1.29 billion. However, Ms Lai admitted that the gross margin on retailing luxury timepieces was lower than on mid-priced watches, prices of which range between 500 yuan and 5,000 yuan. This is so because Peace Mark makes components for mid-priced watches and because mid-priced brands are more generous than premium brands in giving advertising and promotional budgets to retailers. Peace Mark had 870 points of sales on the mainland for mid-priced watches but had no plans to boost its network significantly, as retailing luxury watches was the company's focus, Ms Lai said. Rival Xinyu Hengdeli, a watch wholesaler and distributor, is expanding its retail network through acquisitions. Last year, it tapped the Hong Kong luxury watch market by acquiring Elegant International, which has four stores in the city. Xinyu, which has 103 stores across China, is stepping up expansion in inner cities and provinces including Wenzhou, where it bought a nine-store chain last year, and Anhui, where it acquired a five-store chain. Xinyu, which sells brands including Longines, Omega, Rolex and Tudor, plans to open 20 stores each year, according to spokeswoman Sallus Wong. 'But it is a conservative target, we opened 31 stores last year. In the first quarter this year, we opened seven stores in Wuhan, and we are confident of exceeding our expansion target this year,' she said. Xinyu is stepping up expansion in the western and central regions, having established its presence in major coastal cities, according to Ms Wong. Its extensive network has attracted brands taking strategic stakes in the retailer. Swatch owns 7.24 per cent, while LVMH, an arm of the world's largest luxury products group Moet Hennessy Louis Vuitton, has a more than 7 per cent stake. Ms Lai said her company preferred not to give strategic stakes to brands because it did not want such tie-ups to hurt its relationships with other brands. Xinyu's net profit rose 64.5 per cent to 199 million yuan last year as sales grew 72.2 per cent to 2.4 billion yuan. Peter Ng Man-wai, Xinyu financial controller and company secretary, said the group also planned to retail accessories including wallets and pens. FJ Benjamin, which wholesales fashion brands and watch brands such as Girard-Perregaux and Daniel JeanRichard on the mainland, expects revenue there to form 15 per cent of its watch sales in three to five years, up from 4 per cent last year, says chief executive Nash Benjamin. 'Sales grew 60 per cent year on year in China where we sell wholesale to 65 stores,' Mr Benjamin said. Timepieces made up 41.5 per cent of the company's total revenue of S$127 million (HK$658 million) in the first half of its fiscal year. FJ Benjamin was keen to tap the mainland retail market by franchising Girard-Perregaux boutiques, Mr Benjamin said. It would open its first mainland retail store in Beijing in September and another two in Shanghai and Dalian later. Sincere Watch, which wholesales watches in Hong Kong, Taiwan and the mainland, is planning an aggressive expansion of its network in prime mainland cities, says vice-chairman Kevin Chau. Sincere, which wholesales to 41 stores and operates three stores in Hong Kong, one in Beijing, one in Taipei and one in Macau, plans to open three new stores in Beijing, Macau and Shanghai. Sincere 9 per cent of its sales from the mainland last year. It posted a 6.4 per cent drop in to HK$43.6 million for the year to March, despite a 26 per cent sales gain to HK$470.8 million. While an expansion on the mainland could help the company fend off foreign exchange losses, Mr Chau said Sincere's expansion in second-tier mainland cities was so far moderate because the people's spending power was 'not yet there'.