Hugo Boss Plays Catch-Up in China

Even though it’s the world’s hottest market, especially for luxury goods, China offers no guarantees. Just ask Hugo Boss (BOS). The German luxury clothing maker began selling its apparel through franchisees or by wholesaling goods to independent retailers in Hong Kong as early as 1982, but it didn’t open its first company-run stores in China until 2006, 15 years after Italian suitmaker Ermenegildo Zegna.

That slow start, and an emphasis on opening stores in lots of cities rather than concentrating on the most affluent metropolises, have taken a toll. Although Hugo Boss now has about 90 of its own stores in Greater China (which includes Macau and Hong Kong) and 30 percent of all its shops in Asia, the region made up a mere 15 percent of the clothier’s €2 billion ($2.67 billion) revenue last year. At Burberry Group (BRBY), Asia sales almost equaled European revenue last year, at 32.6 percent.


“They entered China in too timid a way, and now they need to change their distribution strategy” to retailing, says Armando Branchini, founder of luxury consultancy InterCorporate in Milan. “Competition is much tougher than years ago. The wholesale strategy does not provide the service quality and product assortment that the consumer wants for luxury items.”

Makers of pricey apparel and accessories cannot ignore China’s brand-conscious consumers. Luxury goods sales in Greater China climbed 29 percent, to €23.5 billion in 2011, Bain & Co. estimates, with Chinese customers accounting for more than 20 percent of global luxury consumption. To raise its brand’s profile among the mainland’s affluent, Hugo Boss will open about 20 stores in China this year, including an 800-square-meter (8,600 square foot) flagship in Shanghai, start online sales, and invite 1,500 guests to a fashion show in Beijing in May. “If you want to be successful in China, you need to be visible in Beijing, in Shanghai, as well as in Hong Kong,” Chief Executive Officer Claus-Dietrich Lahrs says. “In the past, we underestimated the need to make an impact in those three cities.”

Hugo Boss elsewhere sells a variety of lines, including lower-priced sportswear and leisure clothing. But in China, it’s pushing its high-end Selection line, with suits for €649 ($865) and jeans for €249. That’s expensive, but frequently less so than Zegna, which offers suits for €1,490 and leather shoes for €380.

Under Lahrs, who joined Hugo Boss in 2008 after stints with Christian Dior and LVMH Moët Hennessy Louis Vuitton (MC), store locations are improving, says Anna Patrice, an analyst at Berenberg Bank. He’ll add a store in Taipei 101, the world’s second-tallest building, in May. Hugo Boss’s two-story Shanghai store, to open in December in the Jingan district’s Kerry Center, is near Gucci, Giorgio Armani, and Montblanc stores. “If there are sophisticated, high-end stores in those new luxury malls, it’s the right place for Hugo Boss also to be,” Chief Financial Officer Mark Langer says.

Although the Hugo Boss brand is almost 90 years old, it didn’t begin operating company-owned stores until the 1980s. It had 622 stores worldwide at the end of 2011. The wholesale model works well in Europe and the U.S., where department stores have long hawked multiple high-end brands. Not so on the mainland. “In China, our typical wholesale distribution model does not exist,” CFO Langer says. By 2015, Hugo Boss hopes to build its own retail operations to 55 percent of its total revenues, up from 45 percent currently. Retail staff may also make up the biggest proportion of employees for the first time this year, says Lahrs, who wants to raise Asia sales to more than 20 percent of Hugo Boss’s total by 2015.

Still, the company is expanding in China after the “gravy train” has passed, figures Luca Solca, global head of European equity research at brokerage CA Cheuvreux. That’s because growth in luxury sales is slowing even as competition increases. Michael Kors Holdings (KORS) will open 15 stores in Greater China in 2012 and hopes to have a total of 100 in five years. Zegna this year will add 10 stores to the 82 it has in China, which is its strongest-growing market. And Hermès International (RMS) plans to open a flagship store in Shanghai in late 2013. “I expect that our catch-up activity in this part of the world will eventually help us to go beyond what we see as a slight slowdown of activity in the retail world,” Lahrs said in March.

The bottom line: Hugo Boss was slow in operating its own stores in China. Now it gets just 15 percent of sales in Asia, far less than some luxury rivals.
 

Cruz is a reporter for Bloomberg News.
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Speaking up for religious tolerance

Differences of religion should not make people fight one another, rather they should cooperate in doing good and warding off evil.

AS a Muslim I am deeply distressed and perplexed at the incendiary view, allegedly emanating from the Saudi Grand Mufti, that all churches in the Arab peninsula be destroyed.
This view, if it were really expressed, is offensive. It violates all canons of decency, international law and the human rights of our Christian brothers.

It contradicts many exquisite passages in the Quran and the practices of Prophet Muhammad. It runs contrary to centuries of Islamic history of peaceful co-existence with other religions. The syariah gives ample guidance on inter-faith relations.

Multiplicity of faiths: In innumerable passages, the Quran recognises religious pluralism. In 2:256, it is stated: “There is no compulsion in religion.” In 109:6, there is the exquisite passage: “Unto you your religion, unto me mine.”

In Surah 11:118, it is declared: “If thy Lord had so willed, He could have made mankind one people: but they will not cease to dispute.”

In Surah 10:99, Allah gave this admonition: “Had your Lord willed, those on Earth would have believed, all of them together. Will you then compel people against their will to believe?”

In 18:29, it is commanded: “Let him who will, believe; and let him who will, disbelieve.”

Common fountain: In the Quran 42:13, it is implied that the divinely-revealed religions all stemmed from the same source. “He has ordained for you the same religion which He ordained for Nooh (Noah) … and which He ordained for Ibrahim (Abraham), Musa (Moses) and Esa (Jesus) saying you should establish religion and make no divisions in it.”

“Every nation has its messenger” – 10:47. “Nothing has been said to you save what was said to the messengers before you” – 41:43.

Respect for all prophets: Plurality of prophets and multiplicity of revelations reflect a divine will. The Prophets of all revealed religions are brothers and there is no difference between them with regard to the message. Muslims are obliged to believe in them all.

In Surah 2:136, it is stated: “We believe in Allah and that which has been sent down to us and that which has been sent down to Ibrahim (Abraham), Ismail (Ishmael), Ishaq (Isaac), Yaqoob (Jacob), and to Al-Asbaat (the offspring of the 12 sons of Yaqoob), and that which has been given to Musa (Moses) and Esa (Jesus), and that which has been given to the Prophets from their Lord. We make no distinction between any of them, and we are Muslims in submission to Him.”

According to the renowned Malaysia-based Afghani scholar Hashim Kamali, “Islam sees itself as the third of the Abrahamic religions.

“The Hebrew prophets and Christ are deeply respected by Muslims. The Virgin Mary is given the most exalted spiritual position in the Quran: a chapter of the Quran is named after her, and she is the only woman mentioned by name.

“The tombs of the Hebrew prophets, who are also Islamic prophets, are revered by Muslims to this day.”
All Christians and Jews are given the special status of ahle-kitab (believers in a book).

Respect for places of worship: All places of worship are sacred and must be defended. In Surah 22:40, the Quran speaks of monasteries, churches, synagogues and mosques “as places in which God is commemorated in abundant measure”.

In Islamic history, the clergy in the churches were given full authority over their flocks with regard to all religious and church matters. Mosques were often built next to churches. When the Muslims conquered Egypt, they gave the Coptic churches back to the Copts and restored their rights.

In the early history of Islam, Muslims and Christians often prayed simultaneously in many churches, e.g. at the Cathedral of Saint John in Damascus. Likewise, Prophet Muhammad allowed the Christians of Najran to pray in Muslim mosques. When Prophet Muhammad migrated to Madinah, there was a large number of Jews in the city. One of the first affairs of state that he dealt with was to establish a treaty with them, according to which their beliefs were to be respected and the state was obliged to ward off harm from them.

Duty of civility: In the book Civilisation of Faith by Mustafa as-Sibaa’ie, it is stated that the Quran obliges the Muslim to believe in all the Prophets and Messengers of Allah, to speak of all of them with respect, not to mistreat their followers, to deal with them all in a good and gentle manner, speaking kindly to them, being a good neighbour to them and accepting their hospitality.

Differences of religion should not make people fight one another or commit aggression, rather they should cooperate in doing good and warding off evil (Quran 5:2, 5:5).

“Allah alone is the One who will judge between them on the Day of Resurrection” – Quran 2:113.
“And do not argue with the People of the Scripture except in a way that is best” – Quran 29: 46. “And insult not those who invoke other than Allah, lest they should insult Allah wrongfully without knowledge” – Quran 6:108.

In the light of the above, it is obvious that any view that exhorts Muslims to destroy Christian places of worship is in serious conflict with the letter and spirit of tolerance in the Quran.

The Malaysian Consti­tution honours this spirit. Article 3 states: “Islam is the religion of the Federation; but other religions may be practised in peace and harmony.”

The alleged view of the Saudi Mufti has been repudiated by the top Muslim cleric in Turkey, Mehmet Gormez, who has stated categorically that the Islamic civilisation is not hostile towards previous religions.

Those whose hearts are filled with hate and whose lips drip the blood of vengeance must remind themselves of the caution administered by Kamali that fanaticism is not part of Islam, as the Prophet confirmed in a hadith: “One who promotes fanaticism (asabiyyah) is not one of us, nor is one who fights for asabiyyah, nor the one who dies for asabiyyah.”

Shad Saleem Faruqi is Emeritus Pro-fessor of Law at UiTM and a consultant to USM.

China FDI at record pace: overseas uptick, policy steady

Q1 inflow leaves country on course to surpass 2011 record of US$116bil

* FDI momentum is slowing though and trade outlook difficult

* Suggests policy will be biased towards supporting economy

BEIJING  - Reuters:  China bagged foreign direct investment (FDI) at a record-setting pace in the first three months of 2012 but an easing in its monthly momentum and a difficult trade outlook will keep monetary policy poised to compensate for any dip in capital inflows.

The first quarter inflow of US$29.8bil leaves China on course to surpass 2011's US$116bil record, even though inflows compared with a year earlier have fallen for five successive months, Commerce Ministry data showed.

A 53% leap in inflows to US$11.8bil in March from February typical after the Lunar New Year was a fresh sign that capital flow is firming enough to underpin money supply growth, following a US$124bil first-quarter jump in foreign exchange reserves, providing policy stays on its current pro-growth bias.

“I don't think this changes anything for monetary policy,” Alistair Thornton, economist at IHS Global Insight in Beijing, told Reuters.

Steady growth: Workers assemble automobile parts at Changan Ford Mazda Automobile plant in Chongqing. A 53% leap in inflows to US$ 11.8bil in March from February is a fresh sign that China’s capital flow is firming enough to underpin money supply growth— AP

 

China's government has been fine-tuning economic policy settings since the autumn of last year as the outlook for the global economy darkened, export growth sank and capital inflows a core component of money supply stalled.

The People's Bank of China (PBOC) has cut by 100 basis points (bps) the ratio of deposits banks are required to keep as reserves (RRR) to keep credit and money supply growth steady. The two moves added an estimated 800 billion yuan (US$127bil) of lending capacity to the economy.

The PBOC said last week that broad money supply rose 13.4% in March from a year earlier, stronger than market expectations for 12.9% and ahead of the previous month's 13% pace.

Economists forecast another 150 bps, or 1.2 trillion yuan in RRR cuts, for the rest of 2012 to help cushion China's worst slowdown since the global financial crisis of 2008-09.

“There are signs that the economy has reached a bottom, but there's nothing to suggest in recent data that equity investors should be positioning for a strong rebound or anything like a V-shaped recovery,” Thornton said.

EXTERNAL DEMAND

China's economic growth has slowed for five straight quarters. The annual growth rate in the first quarter eased to 8.1% from 8.9% in the previous three months, below an 8.3% consensus forecast in a Reuters poll.

Reasonably strong FDI and a return to an overall trade surplus of US$5.35bil in March heralds the prospect that a revival in global growth is lifting overseas demand just in time to compensate for a slowdown in the pace of domestic activity.

FDI is an important gauge of the health of the external economy, to which China's vast factory sector is orientated, but is a small contributor to overall capital flows compared to exports, which were worth about US$1.9 trillion in 2011.

Ministry of Commerce spokesman, Shen Danyang, told a news conference on the FDI data that the government was confident of achieving its target for trade growth in 2012 despite a difficult international economic backdrop.


China targets 10 percent growth for exports and imports in 2012, but both goals were missed in March when imports rose 5.3 percent and exports increased 8.9 percent over a year earlier.

Beijing has pledged to bring its current account into balance as it refocuses the economy more towards domestic consumption and away from volatile foreign demand for manufactured goods.

China's two biggest export markets faltered through 2011. Demand from the European Union was dogged by the sovereign debt crisis, while a U.S. recovery was slow to take hold, especially among consumers.

For the first quarter as a whole, Customs Administration data from China shows the value of total exports was $430.02 billion, while imports were $429.35 billion - bringing the trade account roughly into the balance targeted by the government.

"If we want export growth to be stable, we must ensure that policies are stable," Shen said. "If there are any policy adjustments, these adjustments will be more towards pro-exports rather than limiting exports."

CURRENCY RISKS

But he said some exporters were nervous about the outlook for their business, particularly after China loosened its tightly controlled currency regime by doubling to 1 percent the daily trading band for the yuan against the dollar.

"Some exporters are a little bit worried, so they are not so sure about taking long-term orders, but only took short-term orders, mainly because they are not confident in managing exchange rate fluctuations," Shen said.

The change, a crucial one as China further liberalises its nascent financial markets, underlines Beijing's belief that the yuan is near its equilibrium level, and that China's economy is sturdy enough to handle important, long-promised, structural reforms despite its cooling growth trajectory.

Slower growth is cautiously welcomed by China's leadership as it allows them to make reforms, particularly to prices the government sets, with a reduced risk of igniting inflation that the ruling Communist Party fears could trigger social unrest.

The widening of the yuan's trading band is the most significant adjustment made to China's currency regime since a landmark decision in 2005 to de-peg the yuan from the dollar, which set the Chinese unit on an appreciating path that has seen it gain about 30 percent against the dollar.

In tandem, China has encouraged direct settlement of international trade in yuan, amounting to 2.08 trillion yuan ($333 billion) in 2011, more than triple that in 2010, central bank data shows.

Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said 11.7 percent of March FDI flows were settled in yuan, up from 9.5 percent in February, 8.5 percent in January and 3.2 percent for all of 2011.

"Direct investment has become a new frontier for Chinese yuan internationalisation," he wrote in a note to clients.

Beijing targets $120 billion in FDI inflows for each of the next four years, drawing up new rules to encourage foreign investment in strategic emerging industries, particularly those that bring new technology and know-how to China.

The Q1 numbers are on course to achieve that.

"For foreign investors, China remains attractive compared to other countries," Zhao Hao, economist at ANZ Bank in Shanghai, said.

China's efforts to expand its own direct investments in foreign countries are surging. Outbound FDI rose 94.5 percent in the first quarter versus a year earlier to $16.55 billion.

"In the future, the trend is that FDI inflows will pick up while outbound FDI will rise even faster, so the net inflows will fall," Zhao said.

By Zhou Xin and Nick Edwards