HERMES’s strategy to conquer China with a local brand could prove risky in the long term

SHANG XIA Shanghai

The prestigious French luxury house HERMES has launched this week SHANG XIA, a local luxury brand in China, with its first boutique in Shanghai. The move is surprising, to say the least, considering it is the first time in its history that HERMES has created a brand and it is the first time in its history that it will incur revenues from products made in China.

Exclusivity, limited production and high quality manufacturing in France have been part of its DNA since the brand was set up. Unlike Louis Vuitton or Gucci, HERMES has had, strategically, a much slower rhythm of expansion in order to preserve exclusivity and maintain its position of a true luxury brand. But there comes China, with its immense potential and HERMES must have realized it would have to make some compromises in order to take full advantage from the huge potential of the market. As it could not open tens of stores and it could not increase production, moves which could damage the reputation of the brand, HERMES has decided to launch a brand for the Chinese market.

However, HERMES executives insist their move is motivated primarily by the wealth of the Chinese culture and its manufacturing tradition. The company’s CEO Patrick Thomas insisted at the launching ceremony that SHANG XIA is not a second line of HERMES and it will not be sold in HERMES stores. But how can SHANG XIA not be regarded as a second line when the entire marketing is based on the fact that the brand was launched by HERMES ? The project is managed by HERMES executives and the brand is owned by HERMES so it is not like the new brand becomes an independent company.

During the launching event, the CEO and chief designer Ms Jiang Qiong Er presented each product category and provided information on the famous Chinese designers who have contributed to the collection. The categories presented were: ready to wear, home (table sets and small furniture pieces) and accessories (shoes, scarves etc).

At the recent inauguration of the SHANG XIA store, one could not help but notice that most products are cheaper than those at Hermes in the same category. For instance, a pair of leather shoes is EUR 250, at least 20% to 30% cheaper than an Hermes pair of shoes. Another example is provided by the cachmere sweaters, which are sold at an average EUR 600, while an Hermes one could be at least 30% to 50% higher.

As for building awareness for SHANG XIA, the association with HERMES is inevitable. It serves like an anchor and even a ”justification” for purchasing a product of the newly created brand. Given the immense success of foreign luxury brands, it is very unlikely that Chinese will prefer to buy a local brand. It seems HERMES executives have taken into consideration to some extent this aspect and that is why, it was announced that the second Shang Xia shop will be opened in Paris. This way the brand will have the ”sold in Paris” associated to its reputation. The store in Paris will be open mostly for visibility and for the Chinese customers.

For now, Hermes have not announced the pace of retail expansion for the Shang Xia brand, in a move to first see the reaction of the market or it could be a silent ”pop up” strategy. Given the irresistable potential of the market, it is unlikely that Hermes will maintain a small retail network for Shang Xia, but if they do, it will be a measure of protection for the reputation of the core brand. It remains to be seen, in time, what were Hermes’s real intentions and how they will manage and contain this new brand.

Oliver Petcu