Global Luxury Brands: Chanel in China - Research Paper Example

?Chanel in China Wordcount-4200 Introduction Global luxury brands like Chanel maintain a consistent image that is commonly understood across markets and nations. They target a single segment market that are usually on the upper scale of society but sometimes includes the middle class. They cultivate a culture of brand awareness that although afforded by a limited consumer group, sought by traders and the business community. In the bid of many luxury brands to conquer emerging markets like China, alliances and cooperation with outside entities become mandatory. As economy in China is rapidly growing, the Chinese who can afford luxury also increases. The country is considered as the third largest luxury market in the world, after the United States and Japan. This is the prime reason multinational companies of luxury goods extend presence of their products in the country. China is one of the most economically developed countries in the world. It has gained its momentum since the Chinese embraced economic transformation in the late 1970s. China has opened its market to foreign investors which attracted many multinational corporations (MNCs) to come and do business. The MNCs then become the engine of the country in its rapid economic growth that helped increase its participation in the international market. Due to global competition, many MNCs established themselves in the Chinese market mainly to seek for cost-reduction and new market. China became a favorite destination of foreign investors or MNCs because of fast investment return. The rapid economic growth opens more market opportunities but still provides cheaper but high quality resources and huge supply of inexpensive labor. This entices the idea of foreign investors to enter in the emerging market. In the study of Thang & Zhang (2008, p1), their definition of emerging market exemplified by China is “market with low-income (below 8000 US$ annually), rapid-growth countries using economic liberalization as their primary engine of growth.” Due to series of reforms aimed at transforming the country’s economy, the market environment continuously changes. This makes the political system of the country become unstable. The situation becomes an advantage to business regulators because the government reduces its focus to control economic activities (Thang and Zhang, 2008). One of the luxury companies that established a branch in China is the Chanel. Chanel with Mandarin name Xiang Nai Er, which means little more than fragrant is an international luxury goods company with over 200 boutiques worldwide. It is founded in 1909 by Gabrielle “Coco” Chanel, a famous haute couture which revolutionized women’s fashion and introduced timeless elegance and fashion. The mother branch is in Neuilly sur Seine, France. The company is one of the world’s preeminent fashions of the present genre. It offers a broad range of luxury products such as ready-to-wear clothes, make-up, fragrances, skincare, leather goods, fine jewelry and accessories. This paper will try to identify Chanel’s development of global strategic alliances, inter-company collaboration, and positioning for greater global competitiveness. Though MNCs such as Chanel have several strengths which include strong brand image, high quality products, and excellent management, they still need strategies to be able to compete in the market due to increasing number of luxury brands competing. Discussion Various business strategies are employed by companies especially MNCs in order to maintain presence, establish presence in new markets, and compete in their market segment against same products. In the case of luxury brand Chanel, its advantage may be its global presence for more than a century now, but this does not mean challenges are few. First off, Chanel like any other MNC that is new to China, needed strategic global alliance that will harmonize the market entry as well as reduce all possible risks that a foreign investor will go through. 1. Development of global strategic alliances Knoke (2009) suggested that corporations engage in global strategic alliance to preferred companies in order to facilitate work-related goals. Alliances called “social capital ties” (Knoke, 2009, p 1690) build “trust and confidence among actors, reducing the temptation to behave opportunistically towards partners, and facilitating numerous favorable outcomes,” (Knoke, 2009, p 1690). Strategic alliance developed as an evolution of the social capital concepts influenced by the global information sector defined as a “multi-industry system whose collaborative agreements grew exponentially from 1989 to 2000, creating a complex network of overlapping partnerships,” (Knoke, 2009, p 1690). Chanel is not new to global alliances considering it as native to France yet present in many major markets including most of Europe, the United States, Japan, and other developed and now developing markets. Early on, Chanel has been imported by high-end retail shops in countries where Chanel boutiques were absent until such time that demand grows and Chanel has decided to establish its store in a given foreign area. In the case of China, Chanel first had to undertake a study to determine the feasibility of alliance and market entry in China. In consideration of its late entry, Chanel was able to focus on the advantages learned from early MNCs that entered China. One of the biggest advantages is the development of the information and communication technologies that allowed MNCs such as Chanel to enter a global market with lesser risks (Knoke, 2009). However, maintenance of a physical store in one area adds to the credibility and presence of a brand in a given locality, such as China (OC&C Strategy Consultants, 2011). Another Chanel consideration is the proliferation of counterfeit goods, thus, providing added risk for online shoppers against walk-in clients. These risks are considered by Chanel for its global strategy in China. A firm such Chanel can enter to a foreign market through exportation of their products or the transfer of their resources such as technology, capital, know-how, brand name to a foreign market in which those resources can be sold directly to customers or combined with resource in the host country to manufacture product for that market. The advantage of this entry mode is that Chanel has the ability to realize location and experience curve economy. On the other hand, exporting entry mode has also disadvantages such as high transport costs, trade barriers and problem with local marketing agent (Thang and Zhang, 2008, p10). Another form of entry is the Turnkey contract. This mode has the ability to earn returns from process technology skills in countries where FDI is restricted. However, it creates efficient competitors and lacks long-term market presence. The licensing and franchising mode of entry are most likely have the same advantage. As compared to other forms of entry to foreign market, these entry modes have low development cost and risks. Nonetheless, using these entry modes will result to loss of control over technology and quality, inability to realize location and experience curve economies and inability to engage in global coordination. Likewise, joint ventures advantages are: easy access to local partner’s knowledge; sharing development costs and risks; and political acceptability. However, numerous advantages have overseen in this entry mode such as lack of control over technology, inability to engage in global strategic coordination and inability to realize local and experience economies. Firms such as Chanel can also enter foreign market through wholly owned subsidiary. However, this entry mode poses high costs and risks for the firm. On the positive side, wholly owned subsidiary entry mode has the ability to engage in global strategic coordination and ability to realize location and experience economies. In addition, it can protect its technology. This has been adopted by Chanel in most instances where horizontal agreement previously worked. As early in its history, Chanel has alliance with Theophile Bader, founder of the successful French department store Galeries Lafayette (Chanel, 2011). Among the partnerships that Chanel entered into were mostly collaborations with artists and designers for their marketing campaigns focused mainly on art exhibits. This can be said of their Chanel Culture show in Beijing in February. Among named artists that Chanel openly collaborated with includes Zaha Hadid commissioned for a travelling structure that housed in turn artworks of Sophie Calle of France, Sylvie Fleury of Switzerland, Subodh Gupta of India and the Russian collective Blue Noses, sound artist Stephan Crasneanscki, voice of the French actress Jeanne Moreau, as organized by Fabrice Bousteau, editor in chief of Beaux Arts magazine (Vogel, 2008). The exhibit was launched in Hong Kong, stopped at Tokyo, and at the time at the New York Central Park. It headed to London, Moscow and Paris. In this effort, the fashion house collaborated with governments and their logistics partners which were not mentioned except for the management of Central Park and the Central Park Conservatory as landlord and recipient. In addition, Chanel also established alliances with established designers for their line of products including Chanel has partnered with Renaud et Papi Manufacture for the RMT-10 movement of the Chanel watch (Chanel, 2011), Audemars Piguet, a prestigious Swiss watch manufacturer for the self-winding movement of 3125 personalized for CHANEL J12 Noir Intense (Kasanova, 2010). Another art exhibit has Chanel partner with Contemporary Museum to showcase its Biennial of Hawai’i Artists Kloe Kang, Abigail Romanchak, Rosa Silver, Jason Teraoka, Marc Thomas, Maika’i Tubbs and Scott Yoell (Kam, 2010). This meant that there are alliances and collaborations that Chanel has undertaken which focused mainly on outsourced services not related to art and design. Where art and design was involved, this was highlighted and publicized for marketing purposes. 2. Inter-company collaboration As mentioned earlier, inter-company collaborations of Chanel made public were limited to designers for product development, launching, and promotions. Non-art/design partnerships had been downplayed and rarely mentioned in the press, studies, or any published item that involved Chanel. Inter-company collaborations are characterized by horizontal and vertical relations. Vertical agreements between companies entail a unilateral buyer-seller relationship: one party carries out the agreement by transferring output to the other party in exchange for cash. In horizontal relationship, all parties involved in the alliance participate directly and perform various activities depending on their agreement and each share their own assets (Garcia-Canal, 1996). Non-publication of inter-company collaboration for Chanel may mean that there is no relevance for their marketing or promotional goals as well as maintenance of exclusivity considering the market involved. The implication for this is lack of knowledge and understanding by the public or outside entities about the inter-company collaborations conducted by Chanel in China or elsewhere. However, usual business practices will indicate that Chanel collaborated not only with construction and design companies for their physical presence in China as well as logistics companies such as transport and movers for the delivery of goods, merchandise, and all other objects that are seen inside Chanel boutiques in China. Horizontal character of an alliance provides a higher degree of involvement between the partners due to direct performance of activities but the alliance reduces conflict of interest. One of the economic advantages of alliances is the reduction of transactions costs in the long-run (Pisano, 1989). Alliances are formed by independent entities that can assume administrative hierarchy for the control and coordination in the performance of activities involved in the alliance, and “partners participate directly in a percentage of the residual value of the new firm, equivalent to the share of their contribution,” (Garcia-Canal, 1996, p 776). For Chanel, horizontal alliance seemed very limited to design of products or promotional materials as already mentioned. There are three types of alliances as observed by Killing (1983): dominant parent, shared management, and independent alliances. The first has one entity controlling the management of the alliance due to its ownership of majority of equity; the second allow partners to play active roles while the third has controlled role between partners. Control of one partner over the alliance is seen as a safeguard of vulnerable investments against opportunism (Pisano, 1989). On the other hand, there are also contractual alliances noted by Killing which Chanel have observed (1988): Trading that allows one party to transfer information, goods or services to the other, in a vertical relationship; Coordinated activities of which firms establish partial coordination of their activities through a fixed goal and division of tasks among partners such as research or interchange of distribution networks; Shared activities have firms consent to perform jointly to reach a common objective; Multiple activities encompass several collaborations with various activities (p 62). Chanel practiced the first two alliances mentioned by Killing (1988). Alliances reduce reliance to just one person and succeeding conflicts arising from this individual dependence, thus, organizational involvement is heightened. Performance is also harmonized between partners (Garcia-Canal, 1996). Under a contractual alliance, the agreement will specify expectations between partners so that risk is reduced when it comes to excessive costs and activities. Focus will be on the output of the contracting parties. This method seemed to be practiced by Chanel for its designers and non-designer partners. Joint-venture on the other hand provides a more precise and flexible definition of property rights on the assets being used in the performance of the activities due to a new entity created to manage and control the use of the assets (Garcia-Canal, 1996). This kind of alliance has been evident on commissioned art works for Chanel exhibits and shows. In entering China, Chanel need consider the following: The attractiveness of a country as a potential market for a firm that depends on balancing the benefits, costs and risks associated with doing business in this country; The economic potential of a foreign country that relies on size of the market, present wealth, purchasing power of customers, the likely future wealth of customers, economic growth rates and the political stability in that country (Thang & Zhang, 2008, p9). The firm must also consider the right timing to enter in the foreign market. Thang and Zhang (2008, p10) suggested that the entry is considered early when it enters the market before other company while considered late when it enters after the establishment of other international companies in the market. The early comer as the first-mover would have some significant advantages such as ability to preempt rivals and capture demand by establishing strong brand name, ability to build sales volume and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants, ability to create switching costs - costs the customers suffer from change of familiar products to a new one - that tie customers into their products or service. However, disadvantages of first-mover also occur: the major of which is pioneering cost, the cost of failure due to ignorance of the foreign environment, the cost of promoting and establishing a product offering, and the costs of educating customers. The costs increase when the business environment in the foreign market is so different from that in the firm’s domestic market. 3. Positioning for greater global competitiveness Positioning for greater global competitiveness may be one of the advantages of a high-end brand like Chanel as customers who can afford luxurious brands often are aware of well-established ones such as Chanel. However, in a study conducted by Bain & Company - the global consulting firm which has 42 offices in 27 countries – in 2010 indicated that Chanel is next only to Louis Vuitton when it came to brands customers want in China (The Independent, 2010). It has garnered 36 % of the coveted brands by 1500 customers surveyed, next to Louis Vuitton’s 46%. To level up, Chanel conducted its own local efforts to increase brand awareness through “Culture Chanel” exhibit that focused on its founder Gabrielle “Coco” Chanel’s story and design legacy. It also featured popular artists that served as inspiration if not influential on the design aesthetics of Coco Chanel at the Museum of Contemporary Art Shanghai until middle of March this year. It is an eye-opener for high-end customers although it has been established by Bain and Company that perfumes, bags and the interlocking chains logo are not recognized on clothes and other products of Chanel (Areddy, 2011). These are the considerations in the efforts to improve globalization of markets: growth of efficient online retailers, counterfeit products, reliable delivery, and the market itself (OC&C Strategy Consultants, 2011). As mentioned earlier, ICT has contributed to the current market movements and developments the past decades. Even high-end brands such as Chanel would do well to closely consider all four and work out solutions to address problems that already emerged and will emerge on those areas. Presence of retailers willing to carry the Chanel brand may be an advantage at one point but it is not easy to monitor as well as establish the reliability of such online retailers, due to another factor: proliferation of counterfeit especially China which has been described to need to combat production of about 20% counterfeit in the total luxury market. Even high street retailers carrying the Chanel brand may be problematic, as it is an open knowledge that black markets peddle both original and counterfeit brands and respected retailers may also fall prey to counterfeits (The Independent, 2010). Reliable delivery involves alliance with another entity or entities which will provide efficient pick-up and delivery systems in a global manner. In China, this would mean a partnership with one that already has established local presence but of global identity. This will entail expertise in local areas as well as culture and politics. Market movements on the other hand have always shown volatility due to the emergence of new luxury brands that may entice even loyal customers, continuing efforts of competing brands, and economic conditions. The OC&C Strategy Consultants (2011) offered the following for Chanel to consider in its globalization strategies in China: Build a credible brand name by advertising on target media, such as magazines or internet websites for high-end consumers and leverage presence of physical stores to emphasize that it is a credible real business, not just a virtual store online. Provide special product selection, an edited offer with unique brands, unique merchandise or latest products that customers cannot find elsewhere. Offer a risk free shopping environment to customers by providing free exchange and return. Provide loyalty program and superb customer service to increase repeated purchase. Provide user generated content and community features in the website to enhance stickiness of the website (P 15). International strategy is the most common business strategy. It is mostly used by firms with valuable core competence that indigenous competitors in foreign markets lack. Relatively, the firm tends transfer skills and product developed in their domestic market and attempt to implement it internationally. This strategy can be very profitable if the firm faces relatively weak pressures for local responsiveness and international integration. However, firms that pursue this strategy may lose out if the local responsiveness is strong (Nyland & Zhu, 2009, p6). Multi-domestic strategy, attempts to achieve maximum local responsiveness. It involves internalization with locally adapted products or service through marketing and production processes specific to the host markets that target country-specific customer needs. This strategy is driven by a multiple managerial philosophy which requires strategic variety as subsidiaries of each country may pursue its own strategy. In practice, this strategy indicates that the company allows subsidiary to operate relatively independently, each being free to customize most aspects of its operations to meet the specific needs of its local customers. This strategy maximizes the firm’s competitive response to the idiosyncratic requirements of each market. Multi-domestic strategy is most effective when there are high pressures for local responsiveness while global integration is not a big issue (Nyland & Zhu, 2009, p7). In a research done by KPMG (2007, pp18-21,) several strategies have been suggested. One of which is marketing where luxury companies give special attention and invest large money to promote their product and this is because many Chinese lack familiarity with the product. They have low levels of brand awareness which resulted to low levels of brand loyalty. Brand building not only includes advertisement in print and broadcast media but also through organizing social activities just to provide awareness to consumers. Diffusion strategy on the other hand, includes increasing variation of product lines to entice the less affluent and raise brand recognition among aspiring young shoppers. This is called segmentation where different classes or ages are targeted for a certain brand. Luxury companies also adopt local lines strategy wherein they integrate local relevance of the product. They create a product customized for Chinese customers. Some companies boost their presence in the market to take advantage of cheaper local manufacturing; this strategy is called local manufacturing. Most Western luxury brands also customize their parent store format in China. Store format strategy is also effective because many Chinese shoppers are embracing international retail concept. In rapid expansion strategy, luxury firms are extending their operations to second and third tier cities in China to establish consumer awareness of their product in order to gain wider scale of clients. Some firms also use local partners to navigate the market to reduce risks (Nyland & Zhu, 2009). Luxury retailing in China has offers many opportunities, however it also faces several risks and issues which need immediate counteractions. The most popular threat to luxury companies is the product counterfeiting. Based on research of KPMG (2007), China is one of countries in the world with high piracy rate in which 20% of consumer products are counterfeited. However, the government is now enforcing stricter regulations with regards to Intellectual Property Rights to protect the producers and consumers from piracy. The biggest challenge in luxury companies is the longer-term returns. The high demand of luxury goods in China is not a guarantee of fast return of investment. Many companies expect to claim their profit in 5 to 10 years. Likewise, shortage of service providers also posed significant problem to luxury films. Ineffective advertising and media is another problem, followed by staff shortages, brand positioning, managing risk and promoting a culture of luxury. As far as concerns the global strategy, the company offers standardized products because they view the world as a single marketplace targeting only high-end consumers. It is driven by a shared material philosophy. This strategy is commonly employed by company serving multiple host country markets with internationally branded goods that are produced from a single location. Usually, firms that adopt this strategy face high pressure of global integration but weak or low pressure of local responsiveness (Nyland & Zhu, 2009, p7). The significance of the transnational strategy is that it combines the benefits of global scale with the advantages of local responsiveness. The effective implementation of this strategy often produces higher performance than the other mentioned strategy. For a firm to achieve both high global integration and local responsiveness, they need to assign responsibilities for various tasks to the part of the organization (Nyland & Zhu, 2009, p7). As mentioned earlier, one of the most characteristic of luxury brands like Chanel is consistency. It has reinforced the quality and image of its founder Coco Chanel through adherence to quality. Its most famous bag, the Timeless CC but mistakenly called as the 2.55, is handmade, in 180 stages, in an unmarked location outside of Paris. Each bag went through the hands of craftsmen and women who took pride in what they do, so unlike sweatshops that proliferate in manufacturing industries (Picardie, 2009). Chanel in China To strengthen Chanel’s market in China, various methods and strategies were adopted. In 2009, Chanel’s creative director Karl Lagerfeld brought the Mtiers d’art “Paris Shanghai” collection by the Huangpu River after which a boutique was set up. That year, Chanel’s revenue rose about 84%. It also expanded in Beijing and Hangzhou with a target of 33 mainland cities and 85 outlets for its beauty and fragrance retails alone (Junquian, 2011). As magazine editor Hung Huang of the China Interactive Media Group that publishes premier i-Look magazine and others, China does not have its own luxury brand manufacturers and that they follow what the West dictates. The publishing house that focuses on affluent female consumers “tell people about searching for a local designer that will probably never come to China…creative ideas behind major brands…so that people can think critically about making expensive purchases. We provide them with a cultural background in order to establish emotional bond between our readers and the products they consume,” (Montgomery, 2006, p369). Through sustenance of a trademark quality and mystique, Chanel has penetrated Chinese market through relevant alliances with targeted media, advertising, and partnership with builders and designers that meet their strict and rigid design and quality requirements. Conclusion Chanel in China adopted a global strategy that worked for the brand and label for more than a century now: consistency in quality and craftsmanship, as well as exclusivity which also meant minimal exposure for any forms of alliances where it was not considered promotional. Chanel management has maintained its top-down approach to conducting business where alliances are almost always under the radar or kept confidential from popular media, as much as their own website provides. What it does for awareness focuses on their cultural approaches that are mostly limited to fashion show launches, opening of flagship stores, as well as exhibits in museums showcasing the design not for popular consumption but as a cultural product that is savored, respected, and lived with. In turn, Chanel conducts its own bidding for alliances and joint ventures in a horizontal manner or contractual where a certain product will be demanded from their partners. On the part of China, it is highly probable that certain a human resources company provided for their staff screening and hiring. When it came to their physical presence, it is also assumed that Chanel contracted its store building development for their flagship stores and branches where the right requirements are met. Thus, it maintained a consistent management approach that extended to all its branches including China. A strategy that was employed all throughout was indicated through its consistency of quality and craftsmanship whether in its introductory promotions, events, advertising, as well as products down to their store built and designs. References: Areddy, J.T. 2011. Teaching Chanel to China. The Wall Street Journal, February 8, 2011. Accessed from http://online.wsj.com/article/SB10001424052748704709304576124993621054916.html Chanel. 2011. Accessed from http://www.chanel.com/en_US/Watches/chanel_and_you-faq Garcia-Canal, E. 1996. Contractual Form in Domestic and International Strategic Alliances. Organization Studies 17, 773. Junquian, X. 2011. Chanel builds a new channel in China. China Daily, February 11. Accessed from http://europe.chinadaily.com.cn/epaper/2011-02/11/content_11984506.htm Kam, Nadine. 2010. Fashion Tribe: Chanel partners with TCM artists. 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Accessed July 2011 from http://www.nytimes.com/2008/07/24/arts/design/24zaha.html?scp=1&sq=Chanel%20partner&st=Search Read More