"Made In Italy" woos Chinese

Michele Norsa, chief executive of Salvatore Ferragamo, the Italian luxury goods
group, is a man on a mission. He has just completed a tour of the company’s Asian operations, and formulating a China strategy tops his agenda.

Mr Norsa was hired last October from Valentino, a listed Italian fashion house, to help prepare Ferragamo – best known for its upmarket shoes – for a possible stock market listing some time in the next two years.

He hopes to present a three-year plan to the company’s owners by the end of April. Ferragamo last year posted sales of €632m, half of which came from the Asia region, including Japan.

“I need to understand the potential of the company, its different markets and where it is more
profitable,” he told the Financial Times. “I do know that luxury brands are growing faster than [Asia’s] economies.”

Mr Norsa is deciding how best to develop Ferragamo’s existing China business, which
comprises 25 stores in 19 cities. The aim is to open another five stores this year on the way to hitting 50 on the mainland by 2010.

The ambitious plan would catapult the group’s China presence towards its total of 72 outlets in Japan, the group’s biggest market in Asia. Ferragamo operates 480 stores across the world.

If the company’s stores in the self-governing enclaves of Hong Kong and Macau are
included, greater China already ranks third in terms of total sales. However, Mr Norsa cautions: “China is the most complex luxury goods market in the world. You cannot be sure which cities will develop.”

Annual same-store sales growth on the mainland is growing at 50 per cent. As well as this organic growth, the company has to decide how to boost “perimeter” growth: enlarging existing stores and increasing the number of outlets.

He says: “In India it is difficult to imagine where we can grow our perimeter. But in China there are up to 25 cities where it is possible to expand. Second-tier Chinese cities have 5m people, so
the potential is huge.”

Mr Norsa says that the pace of perimeter growth is driven by property development, and also y factors such as the quality of both the shopping environment and other tenants in malls.

Ferragamo licenses some of its mainland stores through franchises with local groups that, he says, “sometimes have easier access to good real estate”.

But any expansion will not be unbridled. He says: “We must be selective in our growth and wary of the wrong geography and products. China is profitable but it can be more so.”

The group’s entire product line, including 1.5m pairs of shoes a year, is produced in factories in Italy, and Mr Norsa says he sees no need – at present – to take advantage of cheaper manufacturing costs by outsourcing some production to China.

“The Chinese consumer wants a real product, with a ‘Made in Italy’ label. I believe that people are ready to spend more if they feel they are buying something exclusive.”

He is sanguine about the issue of counterfeiting, which is often cited as a barrier to the development of a sustainable luxury goods market in China.

“We don’t have a major counterfeit problem in China. The real product and fake products appeal to completely different markets, so we are not really losing sales,” he says. “In recent years the
Chinese authorities have moved to tackle the problem. It is not just a China problem, it happens even in Italy.”

Mr Norsa is pinning his hopes on the twin beliefs that Chinese consumers desire original goods
and that Ferragamo’s long history – it was founded in 1927 – appeals to mainlanders. “Ours is a story of craftsmanship, of a family-owned business. The Chinese identify with this.”

As well as finding store locations, he accepts Ferragamo will have to overcome a number of challenges if its China strategy is to succeed.

At present, sales to women in Chinese stores, on average, account for 50 per cent of the total, as opposed to 60 per cent in other markets.

The Chinese are also buying lower priced items. “We need to push the customer towards more selective products.” He feels this can be achieved through consumer education and that luxury goods will gain wider appeal as China’s social life develops.

In the US, he says, one high-profile former sports star recently walked into a store and ordered 150 pairs of bespoke shoes, at a cost of $250,000. “It shows how a single customer can effect the sales figures,” he says.

Mr Norsa rates Hermès, the French fashion brand, as his own brand’s benchmark. “It has the [right] image and product and is of consistent quality,” he says.

“We can still upgrade our image and we must be known as a luxury brand. This is what Hermès has done.”

Other sales improvements include revitalising its watches division and developing products used in hotel bathrooms and the like. “It is important for visibility and a good way to get in touch with
customers.”

To gain a competitive edge, Mr Norsa likes to holiday in markets where he feels he needs to learn more about consumer tastes. This summer he plans two weeks travelling across China, having spent recent vacations in India and south-east Asia.

“It is important to understand the business environment and the life of its people. Holidays can help achieve that.”