Tapestry deepens its entry into the Chinese market, the luxury market is sluggish

Casey Hall

SHANGHAI (Reuters) – Baoji, China’s northwestern industrial city of 3 million people, doesn’t fit most people’s perceptions of the luxury market. Soon, however, it will be home to the American brand’s Coach store.

The company’s Asia-Pacific president, Yann Bozec, told Reuters that the store was one of 30 that Coach parent company Tapestry Inc plans to open in China over the next 12 months.

Tapestry’s planned expansion in China is unusual because of the company’s willingness to move into lower-tier cities that most Western rivals are reluctant to set foot in, and because of its timing — as it has done amid a slump in luxury sales in China like that. Tapestry has opened about 60 stores in China over the past two years.

Analysts say Tapestry, one of China’s largest luxury retailers, can leverage its position as a supplier of so-called “accessible luxury” as many premium brands move further upmarket and into the Chinese market, a business Strategy. Consumers have become more cost-conscious.

Brands from Louis Vuitton to Gucci and Burberry have a foothold in China’s biggest metropolises such as Beijing and Shanghai, as well as second-tier cities such as Wuhan and Xi’an.

By contrast, lower-ranked cities — determined by indicators such as economic output, consumer behavior and population size — have been shunned, with many brands arguing that they lack the luxury malls their exclusive prestige demands.

But while a Louis Vuitton bag or a Gucci dress can fetch thousands of dollars, Tapestry has a lower price point. Coach sells mostly bags under $1,000, while Kate Spade, another Tapestry brand, sells dresses for about a few hundred dollars.

Baoji will be Tapestry’s second foray into a fourth-tier city after opening a Coach store in Daqing, a northeastern city known as the “China Petroleum Capital” two years ago. Tapestry also plans to target other fourth-tier cities as candidates for 30 new stores this fiscal year.

“A lot of our existing customers are already from third- and fourth-tier cities, so we believe there is a cluster there that will allow us to scale. We never want exclusivity or selectivity, we want to be close to what our customers are,” Bozek said .

boom, then plummet

China has closed its borders throughout the pandemic, diverting much of the luxury spending that should have been domestically overseas. The domestic market has doubled in two years, with annual revenue reaching 471 billion yuan ($65 billion) by 2021, according to Bain & Company.

Research by real estate firm Savills also shows that 55% of the world’s luxury stores opened in China last year.

But luxury sales in China are now in decline – China’s zero-coronavirus policy and frequent lockdowns, a slowing global economy and a regulatory crackdown on an industry that has contributed to soaring youth unemployment have hit consumer confidence hard.

Tapestry has not been spared either. Sales in China fell 32% year over year in the quarter ended July 2. Sales in China generally account for about one-fifth of its total sales.

“We know COVID makes things unpredictable, but our customer research and economic research is very optimistic about the long-term growth potential of the Chinese market,” Bozec said.

He declined to comment on investment figures in China — a major growth market where Tapestry seeks to boost global revenue to $8 billion in fiscal 2025 from $6.7 billion in the year just ended.

Consolidate the leading edge

Among Tapestry’s closest competitors, Ralph Lauren said it would stick to a plan set in 2018 to open 150 stores in Greater China by the end of April next year, up from 135 currently, with a focus on first-tier cities.

However, compared to the past two years, most luxury brands have remained silent on opening new stores in China.

“Overall, lockdowns and declining consumer confidence have encouraged retailers to pause and reassess expansion plans,” said James MacDonald, head of China research at Savills.

Michael Kors and Tory Burch, both competitors in the “accessible luxury” space, did not respond to Reuters’ requests for comment on their plans in China.

Tapestry also intends to expand its product line in China, such as adding handbags to its third brand, Stuart Weitzman.

Another change to cater to Chinese consumers’ tastes will be the introduction of “live studios” in some Coach stores, allowing customers to spread their shopping experience to social media followers, Bozec said.

Analysts see Tapestry’s quest for more stores as an opportunity to consolidate its leading position in brand penetration in China.

The company has 360 stores in 80 cities in China. By comparison, Michael Kors owner Capri Holdings had 288 stores as of 2020. Tory Burch lists 68 mainland China stores on its website.

Coach also has more than twice the luxury market share of Michael Kors in China and more than three times that of Ralph Lauren and Tory Burch, according to Euromonitor.

Cowen analyst Oliver Chen said Tapestry could benefit from price increases of as much as 60 percent for top luxury brands in recent years, making Coach look more attractive in terms of value.

He added that the coach’s “footprint is still undersaturated relative to opportunity.”

(Reporting by Casey Hall; Editing by Brenda Goh and Edwina Gibbs)

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