Patrice Müller: Mining for Opportunities in Emerging Markets


Imran Amed | October 19, 2009

Imran Amed talks to Patrice Müller, managing director of strategic advisory firm Ipolitis & Hubertus, about nurturing local expertise, emerging national brands and other developments that could alter the dynamics in BRIC luxury markets.

Imran Amed talks to Patrice Müller, managing director of strategic advisory firm Ipolitis & Hubertus, about nurturing local expertise, emerging national brands and other developments that could alter the dynamics in BRIC luxury markets.

GENEVA – A strategic and M&A; advisor to the luxury industry, Patrice Müller has a unique vantage point from which to assess the potential of the BRIC countries, and emerging markets in general. Indeed, much of the recent activity of his Geneva-based firm, Ipolitus & Hubertus SA, has centred on these high-potential regions.

From the emergence of native luxury brands to the expansion of BRIC distributors outside their core businesses and beyond their home geographies, Müller says the BRIC countries are entering a new stage of involvement in the luxury sector, transforming from mere consumers of luxury into active players all along the luxury value chain.

I reached Mr. Müller by telephone in Switzerland to understand better this next phase of luxury development in the emerging markets and to look even further into the future of luxury over the longer-term.

One thing’s for sure. These markets are only just beginning to flex their new luxury muscle and the biggest changes are yet to come.

IA: The emerging markets seem to be holding up better than many of the more established luxury markets. How is this impacting luxury brand growth and performance?

PM: It’s true that the emerging markets have not been hit as hard as industrialised countries, and this is for one main reason: the finance industry is directly linked to the luxury industry. The current crisis originated in the financial industry of the USA, Western Europe and Japan, which have been most affected by the crisis.

The BRIC countries, on the other hand, continue to grow. For example, brands that have seen a strong decrease in traditional markets, especially the USA, have been able to offset this decrease with growing demand for their products in the BRIC countries.

For example, Omega belongs to the Swatch Group that has been present in China for the last thirty or forty years. And today, they are still increasing market share by developing new distribution networks and points of sale and by educating new customers.

Another example is Rolex in Brazil, a country where brands must also deal with high import taxes on luxury goods. Nonetheless, Rolex is benefiting from their efforts and investments over the last ten years or so, and the brand continues to perform well.

So, I would say, the brands that are performing well in the BRIC countries have been developing a presence in these markets for many years, having taken these decisions years ago. They will increasingly reap the benefits of these efforts going forward.

IA: The BRIC countries are also developing their own expertise in the luxury sector. How is this shaping the development of luxury in these markets?

There is a new market trend in these BRIC countries, which some people may not have expected. Consumers in these countries have become more and more aware of the quality, value and significance of luxury. So, whereas in the past, they were buying Western luxury brands to demonstrate their economic success, today they are becoming increasingly aware of what they are able to produce and consume on their own.

As a result, especially in India and Russia, we are seeing the emergence of some national brands that are starting to compete in these markets with the global luxury brands of Europe and the United States.

In India, for example, the Gitanjali Group has developed seven or eight luxury jewellery brands. The Tata Group has developed the Tanishq jewellery brand, which is now the number one national high-end jewellery brand in India, competing with Cartier, Tiffany and Bulgari. These local brands have the advantage of having been developed with local cultural values in mind.

IA: Indeed, for many international luxury brands entering the BRIC countries, the hardest part is finding partners who bring this local understanding. Many partnerships, including that of the Murjani Group and Gucci Group in India, have broken down. What advice do you give to your clients about choosing local partners?

Finding joint-venture partners is not easy because the BRIC markets are very volatile and are moving very quickly — much more quickly than in established markets. You can choose a partner and then two years later discover that they don’t have the skills to develop and promote your brand as you expect, given the rapidly changing market landscape.

It is essential that western luxury brands find local partners that have the right know-how or find a way to transfer skills to local partners.

IA: Looking ahead, what other developments do you foresee in these rapidly changing markets?

One very interesting development is that the power of distributors has become stronger and stronger, as the emerging markets have become more and more important.

For example, Mercury in Russia is by far the dominant player for watches, jewellery, cars and many other luxury items. In the Middle East you have Damas or Rivoli, which has a very powerful integrated distribution and retail network. And in China, there is Xinyu Hengdeli, which is a listed company. Groups like Swatch and LVMH have taken stakes in these companies.

The next natural step, which has already started in some cases, is that these big groups are extending their activities into Europe and the United States. The BRIC countries are moving from being consumers of luxury to full-fledged luxury players, by building their own brands, investing in Western brands and expanding their distribution networks. Indeed, in the past year, we have advised several of these BRIC groups on their strategies for entering the European market.

IA: Lastly, what are your quick thoughts on each of the BRIC markets going forward?

Brazil has more than 180 million consumers and very strong financial management, which has played a part in keeping the foreign investment from leaving the country. The luxury industry in Brazil is bolstered by the presence of ample natural resources, including precious stones like emeralds and tourmaline, which enable businesses like H.Stern to be fully integrated from mines to retail. The fashion industry in Brazil is particularly dynamic and can produce everything internally, but until now it has been focused on the domestic market. However, given the local know-how for building brands, we may see the emergence of more Brazilian brands building international businesses.

Russia on the other hand has been dramatically affected by the crisis. The economy is not diversified enough and is heavily reliant on natural resources, which is a source of great wealth. Russian consumers have a good understanding of luxury products and there continues to be a strong potential for development, but it’s true that luxury brands may have expanded too quickly. The market will still grow, but perhaps not as quickly as in the recent past.

With more than one billion consumers, India has immense potential as a luxury consumer market, but this will take a great deal of time, consumer education and infrastructure development. Indian consumers are savvy about luxury, especially jewellery, but they do not buy into premium branding for jewellery, as gold is seen as more of a commodity, not a luxury. They are beginning to understand the notion of branding, but until the infrastructure and distribution network for luxury brands is further developed, growth here will be slow. Brands should think of India as a long-term investment.

And finally, China’s potential cannot be understated, with a huge number of people over the next few years who will realistically be able to buy luxury goods. But, brands should remember that China is not a homogenous market and there are important regional differences that must be taken into account. This is undoubtedly one of the most important luxury markets of the future. But, brands have been investing in China for fifteen years, and they may not have meaningful returns for another fifteen to come.

Imran Amed, Editor-in-Chief