When Brand Is King
Gildo Zegna, CEO of Ermenegildo Zegna, the luxury menswear brand, recalled how his family’s business entered China in 1991. Few at the time would have predicted that one of the world’s poorest countries would someday soon become the world’s largest luxury market. “I must give credit to my father,” he said. “He truly was the one who thought China would be a major force.”1
Ermenegildo Zegna had founded his clothing company in 1910 in Trivero, a village in the foothills of the Italian Alps. His sons and their sons made a decision to venture to China. “Around the table, we decided to move on it,” said Paolo Zegna, chairman of Ermenegildo Zegna.2
For Paolo, that was the charm of a family business—had Zegna not been family owned, it wouldn’t have been able to go to China so early. “The stock market would not have understood it and would not have thought that could be the right thing to do,” he said. But with only relatives as shareholders, “you can have a long-term vision and make decisions for what you believe they can bring back to the company.”3
The return has been remarkable. Zegna now operates over 70 stores in China, from Sanya, in the far south, to Urumuqi, in the far northwest at the edge of the vast Taklamakan Desert. The Greater China region makes up a third of the company’s revenue—€1.21 billion (about $1.42 billion) in 2018. Many other luxury brands have followed Zegna into China, but Zegna remains one of the most profitable.
Zegna’s early entry is often cited as the reason for its success. In reality, that was just a small part of the story.
Zegna’s first Chinese boutique was located in the Palace Hotel in Beijing, China’s first luxury hotel. The spot was originally leased by Louis Vuitton. Yet amid political turmoil in 1989, Vuitton withdrew. Hiroshi Ogawa, a Japanese executive who led Zegna’s entry, called his boss to discuss whether to leave too. The boss’s response emboldened him: “We are not going to deal with the Chinese government. We are going to deal with the Chinese consumer.”4 Zegna opened its first store in 1991, as planned, in the location vacated by Vuitton.
In the early 1990s, Zegna’s challenge was to find customers who could afford its pricey clothing—its suits sold for more than 10,000 RMB ($1,878) each. The average annual income for a Beijing resident was then about 3,500 RMB ($656). As a result, only the capitalist vanguard could shop at Zegna.
“The typical buyer was Rich Uncle,” said Annie Hou, vice president of strategy at Ogilvy, a marketing agency.5 “Rich Uncle” refers to a middle-aged Chinese man who seized on China’s early economic reforms and made a fortune by running a private business. An Italian suit let him flaunt his gains.
Wenbin Wu was one. Born in the 1950s in an inland city, he moved to the coastal Guangdong province and opened a garment factory to contract orders from Hong Kong. By the mid-1990s, he’d made a fortune and enjoyed showing it off. He carried a brick-sized Motorola cell phone, drove a Mercedes-Benz, and dressed in Zegna. “In our circle, Zegna was well known,” he said. “People recognized it when I entered the room. They knew I was rich, and that helped build my credential to do business with them.”6 Wu bought Zegna suits not only for himself but also for others who had the power to make or break his business deals, including government officials.
But the newly rich, like Wu, formed only a tiny fraction of China’s over 1 billion people. From 1991 through 1996, Zegna endured five years of operating losses.7 That didn’t change the family’s belief that a promising future lay ahead. At least, they were establishing their brand among China’s elite. Before Zegna, the only luxury brands in China were Pierre Cardin and Montagut. Cardin made a name through a stunning women’s fashion show, and Montagut through its polo shirts. Zegna offered the only formal menswear, allowing the company to entrench itself as the iconic suit brand, representing business success for Chinese consumers.
That competitive landscape soon changed. As in other markets, China’s potential attracted a crowd. A wave of luxury brands entered in the 1990s, including Louis Vuitton, which returned in 1992. It was followed by Hermès, Gucci, Burberry, and Dior. After 2000, more flooded in. Zegna managed to maintain a strong position, owing to its reputation for product quality.
The company is vertically integrated. It has its own buyers, who purchase raw materials from Australia or China. It manufactures clothing in its factories across Europe and the United States and distributes through its stores around the world. This “sheep to shop” process is designed to ensure quality. The approach harks back to the Zegna family’s roots. Ermenegildo started the company as a textile producer. It didn’t launch its ready-to-wear men’s line until the 1960s—half a century later. Even into the 2000s, Zegna still manufactured clothing for Gucci and Versace.
For years, fabric innovation had been the company’s calling card. Members of the family traveled to Australia in the 1960s, looking for raw materials, and awarded Zegna trophies to producers of the finest wool. The company clings to that tradition. It has developed lightweight wools and wrinkle-free and stain-resistant fabrics. Heritage and craftsmanship are part of its pitch.
Yet a high-quality product wasn’t enough to win in China; local tailors could offer a well-cut suit. Zegna strived to differentiate itself with its customer service. Gildo Zegna, the CEO and a member of the third generation of the family in the business, started his career in the United States as an assistant buyer for Bloomingdale’s. There, he learned the value of developing client relationships and conceived a customer service approach for his family’s company. “ ‘After-sales service’ is an American word, but we do that with our personal service,” he said. “We keep notes on every customer, so that we always have their measurements and preferences for ready reference.”8
That concept was implemented in China by Vittorio Proietti Tocca, Zegna’s in-country retail director. He’d ventured to Asia in the 1990s, working for Zegna in Southeast Asia before alighting in China. He’d started his career as a sales associate and was known as a coddler of customers. He introduced to Zegna the concept of “clienteling,” a fancy name for the simple idea that a company should build long-term relationships with customers by tracking their purchases and preferences. A former Zegna boutique manager, who was recruited from the hospitality industry, was given a book when he arrived at Zegna by Tocca, Hug Your Customers, by Jack Mitchell, chairman of Mitchell Stores, a US clothing retailer. “That was our bible,” he said.9 He had spent 14 years with Zegna and had experienced the company’s rise in China firsthand.
By almost all accounts, Zegna was a leader in customer relationship management at the time. “When other luxury brands were taking customer information with paper and pen, we already used a computer-based system to manage all the data,” the same manager said. A key performance indicator (KPI) of Zegna’s stores was whether each customer was registered; that was linked to store employees’ annual bonuses. “Our KPI must reach 90%. It sounds so simple, but that’s the foundation of the customer management.”
The customer profile includes name, age, profession, preferences, purchasing history, spending power, and other details. When Zegna held a marketing event, it would pull data based on various criteria and target customers who were most likely to purchase.
Zegna offered a variety of services to increase customer satisfaction, such as 30-day free returns versus the industry standard of 7 days. And it provided door-to-door service. Zegna’s staffers would go to customers’ homes to take measurements and then deliver a suit in a few weeks.
Zegna entered China when the luxury clothing market barely existed and no locals had experience with the distribution or merchandising of luxury goods. As a result, it brought managers from Italy and other developed countries. They would then train and develop the Chinese staff, equipping them with the skills to meet the demands of customers who could afford to buy a suit that could cost as much as a used car. For years, Zegna was considered a “luxury academy,” and it trained a number of the members of the first generation of Chinese luxury professionals. Ken Kress, Zegna Asia Pacific president, once said: “We never cut the training budget, even amid an economic crisis.”10
Zegna also provided opportunities for employees to advance. They could choose to be a specialist luxury consultant or a manager. Each year, the company sent a group of high-potential Chinese employees to New York and Milan for training.11
With commerce flourishing in China, a relaxation of the country’s investment strictures on foreign companies further fueled Zegna’s growth. Before 2005, luxury brands entered China primarily through partnerships with local franchises or distributors. At the end of 2004, to meet obligations to the WTO, China removed this restriction, resulting in luxury brands reclaiming their sales rights. Zegna was one of the first to do so.
To gain access to the Chinese market, Zegna had operated its stores as partnerships with Chinese distributors. Starting in 2005, Zegna began to terminate these partnerships and open its own stores across the country and enlarge stores at premier locations. Zegna brought new products from its sportswear and leisurewear lines. And it adopted a decentralized buying model—a different approach from other luxury brands; retail managers could select products that were specific to individual stores.
“If the city was a more casual culture, they bought more casual collections,” said Sally Stiegler, former Zegna Asia Pacific chief strategy officer. “If it was more of an office market, like Beijing, they bought more suits.”12 Zegna also became one of the first luxury brands to expand into China’s lower-tier cities, where there was less competition and untapped demand. The China team led the effort. “They decided where to open the stores,” said a former executive who had witnessed the company’s expansion. “Back then, they had a lot of autonomy. Once the budget for China was finalized, they just went on to implement their plan. They really didn’t have to always ask for permission from headquarters.”13 Stiegler echoed those remarks: “Mr. Zegna had great trust in the China leadership team,” which then consisted of half Chinese and half foreigners with experience in Asia.
By 2008, Zegna owned all of its China stores. It could thus better manage its products, brand, and customer service. As a result, from 2006 through 2010, Zegna posted 30% of average annual sales growth in China.14 In 2010, it was one of the top five brands, which together accounted for 50% of the sales of luxury menswear in the country.15
As Chinese consumers became increasingly important contributors to the company’s revenue, Zegna began to tailor products to them. This started as early as 2005, when the company discovered that Chinese customers liked leather goods, so it developed accessories such as wallets and bags, which sold quite well. In 2008, the year Beijing hosted the Olympic Games, Zegna experimented with Olympic-themed products, like sunglasses. Again, those products were popular. One of the most successful items Zegna ever offered was a standing-collar jacket, a simple, casual look that was especially favored by government officials, whose preferences were deeply impacted by Chinese president Xi Jinping. Once Xi became president in 2012, a jacket of this style became his signature. He wore it everywhere, from a trip to a primary school in Fujian province to an appearance at Central Television. The New York Times even published an article headlined “China’s Leader Wears Many Hats, but Only One Jacket.”16 Xi’s style was soon adopted by his followers. A photo from the Xinhua News Agency showed an exhibition at the national museum in 2012: Five out of seven members of the Politburo Standing Committee turned up in similar jackets. A separate article from the news agency said: “No need for ironing, neat, stain resistant, and with a common touch, this has made the jacket a favorite informal attire for Chinese officialdom.”17 Zegna was the rare fashion house to benefit from a trend created by politicians, not a group known for being fashion forward.
Zegna would sell its China-developed products globally but usually launched them in China before expanding into other regions. But Zegna’s China experiments weren’t always successful. Its designers were based in Europe and lacked a nuanced understanding of the Chinese culture; sometimes their attempts at creativity went awry. The former boutique manager remembered the day he opened a box of new products from Europe and was appalled to see a shirt with the Chinese character “寿” embroidered on it. “That amounted to cursing people to die!” he said. “寿” means longevity in Chinese, but only the dead, before being buried or cremated, wear clothes with the character embroidered on them. Zegna ended up withdrawing the collection. Yet that incident didn’t stop the efforts to cater to Chinese tastes. The company offered Chinese Zodiac-related products and shorter versions of its suits to fit Chinese sizes. Today, about one-fifth of Zegna’s products in China are tailored specifically for Asian customers.
As China prospered, more of its younger generation became luxury customers. These people were born as China chugged toward becoming an economic power. As the only children in their families, due to China’s one-child policy, they often enjoyed allowances from their parents. The 2017 China Luxury Market Study by Bain showed that Chinese millennials had been major contributors to the growth of the country’s luxury sector: They typically start purchasing at an earlier age and bought more frequently.18
Unlike their parents, who favor more formal attire, the younger Chinese generation, like their peers in the developed world, prefer a casual look—so-called streetwear or sportswear. Many of them have traveled overseas and shopped at boutiques in New York, Paris, Milan, and Tokyo. They’re knowledgeable about fashion and zealous in their use of social media. According to research conducted by Ogilvy China in 2019, even a post-1990s consumer in China’s less affluent, lesser known cities knows the names of 30 luxury brands.19
Though Zegna had developed leisurewear in the past, it mainly styled its clothing for business settings. To broaden its appeal, the company brought back Alessandro Sartori, who headed Z Zegna, a younger and more fashion-oriented line, from 2003 through 2011. At the end of 2017, Sartori launched Zegna Couture XXX, a tailoring-meets-sportswear collection, comprising T-shirts, sweatpants, polo shirts, blazers, outerwear, and sneakers. Carrying on the tradition of fabric innovation, the collection used materials Zegna hadn’t used before, including machine-washable wool and technical silk. In China, the company recruited Hong Kong actor William Chan and Korean rapper Sehun Oh as the millennial faces of XXX and threw a three-day launch party in Shanghai. Five hundred attendees could use their WeChat IDs to unlock a variety of games and experiences, such as creating digital graffiti, making music videos, and getting personalized recommendations on XXX collections. Zegna was one of the first luxury brands to use WeChat in its merchandising. In 2017, Zegna offered 60 pairs of limited-edition Tiziano rainbow sneakers on WeChat, and those sold out within a few minutes.
The following year, Zegna extended its China-centered online marketing by opening a pop-up store on JD.com, one of the country’s leading ecommerce platforms. In 2019, it launched another virtual store on Tmall Luxury Pavilion, Alibaba’s premium brand site. One reason Zegna energetically chased this new, younger pool of potential customers was that its original pool was shrinking. An anticorruption campaign, pushed by Xi Jinping, had damped luxury demand. Zegna was one of the brands hardest hit, as a significant portion of its revenue came from “gifts.” “Starting from 2014, there was a sharp drop in sales,” said the former boutique manager. Sales in China fell 5% that year, and the Financial Times called it a nightmare year in emerging markets for Zegna.20
Despite all its efforts, Zegna’s main Chinese customers have remained professionals in their mid-30s and beyond. People in their 20s mostly aren’t interested. Zizhong Du, a 25-year-old graduate student, explained why. He’s one of the fuerdai—the second-generation rich—and comes from Chengdu, a southwestern city. Growing up, he remembered seeing his father, a real estate developer, armored in Zegna for meetings and business dinners. “Zegna is my father’s clothes,” said Du. “I don’t want to wear his clothes. I’m not that old.”21 His preferred brands included Gucci, Prada, Armani, and Louis Vuitton. One of his favorite fashion pieces was a Gucci jacket, with “Guccy” stitched on the back. That misspelling isn’t a mistake but a playful mocking of fakes. “That’s hilarious,” he said. Coming from a country where fashion knockoffs have proliferated, the Guccy collection garnered attention. Du wore his jacket to a friend’s party, and the attendees “all thought I’m cool.”
In contrast to Zegna, Gucci has made progress in terms of winning over millennials. In 2018, 62% of its more than $8 billion in sales came from people under 35 years old. And by 2019, its fastest-growing segment was Generation Z, who then topped out at age 24.22 Another brand that has become sought after among millennials is Louis Vuitton. A UBS report in 2018 estimated a third of Louis Vuitton’s sales had come from millennials.23
Zegna has so far not been able to achieve that kind of cachet among younger Chinese buyers. “Zegna being formal wear for middle-aged successful men is too ingrained,” said the former Zegna China executive. “With athleisure becoming a new trend, some other luxury brands also face similar challenges. All of a sudden, everybody is wearing sneakers.”
Zegna hasn’t given up on updating its image. In August 2018, the company announced it would buy an 85% stake in Thom Browne, a trendsetting fashion brand based in New York. Thom Browne had 31 stores worldwide, and Zegna planned to open an additional 10 in China and Japan. That deal not only refreshed Zegna’s brand but also expanded its physical presence. The company now has around 72 stores across China, more than Gucci’s 50 and Louis Vuitton’s 45. This has the potential to be a competitive advantage. According to McKinsey’s China Luxury Report 2019, 92% of luxury purchases were made off-line.24 “There is a trust issue,” said Ogilvy’s Hou. “People are still afraid of getting counterfeits online.”
In addition, though online outreach can educate and influence consumers, McKinsey found that in-person experiences mattered most when it came time to purchase for 9 out of 10 young Chinese consumers. Zegna has such a presence in nearly each of China’s 23 provinces and 4 municipalities.
As the COVID-19 pandemic took hold in China, Zegna closed stores whose locations were hardest hit by the pandemic and reduced operating hours of those remaining open. As the virus became more contained, by early April even stores in Wuhan, the epicenter, had reopened. In July, Zegna launched a new store in Chengdu, a southwestern metropolis.
Though the luxury industry took a massive hit worldwide, the Chinese market rebounded quickly. Several brands reported an uptick in China—Tiffany’s retail sales surged around 30% in April and 90% in May compared with the same months from the previous year. Burberry announced in May that sales of its clothing, bags, and accessories in China were “already ahead of the prior year.”25 And a Hermès boutique took in $2.7 million on its reopening day.26 “Leading luxury brands in China all saw double-digital growth,” said a luxury practitioner. “Zegna probably has also benefited from the trend.” The surge in sales, according to the practitioner, was mainly attributed to a shift from overseas shopping to local shopping. Chinese consumers usually make more than half of luxury purchases abroad. Yet COVID-19 keeps them from traveling and traps spending at home.
With the Browne purchase, Zegna announced to young Chinese (and the world) that it’s no longer the company that dresses dad for business meetings. But a brand like Zegna’s is also a promise to its longtime customers that whatever they value in it will endure. For Zegna, even as it repositions itself, that promise remains rooted in its heritage of delivering the finest fabrics.
The Greater China region makes up a third of Zegna’s revenue, and the company is one of the most profitable luxury brands in China. These factors were critical to its success:
These elements and other factors in the framework are noted in Table 9.1, along with our subjective assessment of the decisive factors.
|
Factor |
Explanation |
|
|---|---|---|
|
Demand |
▲▲ |
The luxury market expanded dramatically along with China’s prosperity more generally. |
|
Access to market |
Because of government restrictions, Zegna formed partnerships with Chinese distributors at first. When restrictions were lifted, Zegna reclaimed its distribution and streamlined management of its brand, products, and services, which resulted in rapid growth. |
|
|
Advantage |
▲ |
Zegna offered a genuine European heritage, impossible for a local rival to replicate. Its products offered superior quality, and its customer focus was distinctive. |
|
Commitment |
▲ |
Zegna’s origins in Italy may have contributed to its willingness to commit to China. Italy is a small market. For Zegna to keep growing, it had to go global. For an American company, global markets are nice to have. For an ambitious Italian company, they’re imperative. Yet, for the luxury retail sector, an initial commitment can be small, followed by further commitment with further success. |
|
Governance |
Zegna’s governance structure followed the typical multinational’s China model, with the China executive reporting to the Asia Pacific president. |
|
|
Leadership |
The local leadership, due to the lack of a luxury segment in China until recently, has not included mainland Chinese. Given that the development of company culture was a lodestar in the early days, selecting executives with experience with Zegna made sense. |
|
|
Strategy |
▲▲ |
Start small, build the brand, focus on the customer, and invest further with proven success. This strategy makes sense for a family business with a long planning horizon. |
|
Product |
Limited localization for the Chinese consumer. Part of the appeal of the brand is its European heritage. |
|
|
Agility |
Zegna’s choices for governance and local leadership did not maximize agility. Relative to some of the other markets discussed in this book, agility may be less critical in luxury retail. The China team did enjoy some autonomy during the rapid growth years, with authority to make most decisions within their overall budget constraints. |
|
|
Luck |
▲ |
Lucky breaks included the Chinese government allowing wholly owned subsidiaries of luxury brands to operate in China and riding the wave of Xi Jinping–style clothing. |
|
Note: Upward-pointing triangles indicate a positive factor. Downward-pointing triangles indicate a negative factor. The number of triangles is our subjective assessment of the relative importance of the factor. We omit indicators for those factors that we do not believe were significant for this case. |
||
By arriving in China early, Zegna positioned itself to profit when luck came its way. Today, the company does face challenges. Its products have been favored by the older generation in China, and the company is still working to win over younger Chinese men. As the former Zegna executive said: “It takes time to refresh a brand image.” Indeed, the enduring image that makes a brand such a powerful alpha asset when it aligns with macro trends is exactly what makes it so hard to reposition when markets change.