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Hermès To Back New Brand In China: Will It Turn Off Chinese Luxury Buyers?

“Shang Xia” (”Topsy Turvy”) To Launch In China In Spring 2010

Women’s Wear Daily reported last week that French luxury house Hermes plans to support the launch of a new luxury handbag brand, Shang Xia, in China this coming spring. According to reports confirmed by French newspaper La Tribune, Hermes’ involvement in the launch of Shang Xia wil mark the first time Hermes has built a brand from the ground up, and the company’s products will be designed, manufactured and sold entirely in China.

All of this seems to make sense, since China is now the world’s second-largest luxury market and the world’s most populous country. But is this concept doomed to fail?

While this new brand is obviously a way for Hermes to experiment with “affordable luxury” in the China market, it is likely that many China luxury watchers will be less than enthused about Shang Xia. As a recent survey by the Pao Principle, a global business strategy consulting firm, found, Chinese luxury consumers don’t want to feel that China is the ”dumping ground” for cheaper or excess inventory.

If they’re going to invest in luxury goods, they want them to be expensive because they’re obsessed with exclusivity. As the study found, mainland Chinese luxury buyers value two things over all else: quality and selection.  Aside from the lowest end of luxury buyer, the target consumer wants to buy items that are shown in New York, Tokyo and Paris brand boutiques — but not in Hong Kong — rather than a mainland-only sub-brand that feels cheap in comparison to the “real thing.”

While it’s far too early to conclude, sight unseen, that Shang Xia will be of subpar design or quality — it very well might be of exceptional quality and appeal to a wide swathe of Chinese luxury buyers — it brings up critical strategic questions for foreign luxury brands: Is it better to pursue only a high-price, high-quality, exclusive tactic in the China market and limit your buyers to an exclusive core? Or is it better to focus on your high-range line only in Hong Kong, where most wealthy mainland Chinese do the bulk of their luxury shopping, while considering a supplementary sub-brand strategy in the mainland? Does involvement in mainland-only sub-brands dilute top tier brands?