The Decline of Esprit Holdings

by wgyuvs8a on 2012-02-20 20:01:14

The well-known fashion brand ESPRIT has experienced a decline in profitability for three consecutive years. According to the latest annual financial report, as of June 2011, ESPRIT's net profit for this fiscal year dropped from HK$4.23 billion last year to HK$79 million, a decrease of 98%. The stock price also fell by HK$4.1 billion in just one day. What exactly happened to this brand that once served as the fashion enlightenment for Chinese consumers?

Although ESPRIT was founded in 1968 in San Francisco by Susie Tompkins and Doug Tompkins, it was a Chinese person, Ting Li Yuan, who truly globalized the brand and turned it into an international brand. His second wife is the famous Hong Kong actress Brigitte Lin. In a certain sense, Ting Li Yuan can be called the most influential Chinese person in the world clothing industry to date.

In 1972, Ting Li Yuan became ESPRIT's agent and established Esprit Far East Ltd., mainly responsible for ESPRIT's business in Asia. This part of the business and assets were listed on the Hong Kong Stock Exchange in 1993 (then named ESPRIT Asia Holdings Ltd.). Later, Esprit Far East gradually acquired the brand management rights and business of ESPRIT in Australia and Europe, and bought 63% of ESPRIT USA's equity in 1996. In 1998, ESPRIT Asia Holdings Ltd. was listed on the London Stock Exchange.

In 1997, the world faced one of the more severe financial crises of the century, causing many companies to slow down their expansion. However, Esprit Global went against the trend and expanded at low market points, completing its layout at a low cost, which later became a good story. In 1997, Esprit Far East Ltd. acquired the private business of ESPRIT held by WTL and renamed the company "Esprit Global Holdings Ltd."

The next year, Esprit Global formed a joint venture with China Resources to establish China Resources Esprit Industrial Co., Ltd., further expanding its business in mainland China. In 2002, Esprit Global completely acquired the remaining shares of ESPRIT, making ESPRIT a globally unified managed and operated brand. Ting Li Yuan held 42% of the shares and became the largest shareholder of Esprit Global (00330.HK). Accompanying the growth of Esprit Global, Ting Li Yuan also entered the ranks of the top 500 wealthy people in the world.

During its glorious period, ESPRIT's market value reached as high as RMB 170 billion, with stores spread all over the globe, most of them located in mainstream markets such as Europe and the United States. Unlike domestic enterprises that rely on low-cost subcontracting to go global, ESPRIT remains the only brand controlled by Chinese people with influence worldwide.

However, since 2006, Ting Li Yuan successively resigned from his positions as Chairman and CEO of Esprit Global Group, and continuously reduced his holdings in Esprit Global. Statistics show that he reduced his shares more than 10 times, and by 2010, he had completely sold off his shares in Esprit, cashing out approximately HK$23.328 billion.

In proportion to Ting Li Yuan's sale of stocks, after his departure from Esprit Global's management team, Esprit Global's stock price plummeted like a waterfall, falling from a high of HK$133 per share in 2007 to today's HK$11. Its market capitalization also shrank from HK$170 billion to less than HK$16 billion.

We cannot verify the reasons for Ting Li Yuan's sale of ESPRIT, but one point is clear: in 2006, the year Ting Li Yuan began to cash out, fast-fashion companies were rising rapidly. Even the international clothing giant GAP started to feel the impact of the Spanish brand ZARA.

In contrast, at this time, ESPRIT's performance was still slowly growing, but hidden worries were already evident. First, from a strategic perspective, ESPRIT lost focus in its European strategy and missed the opportunity to rise in the Chinese market.

In 2007, sales in Europe accounted for 86% of Esprit Global's global business, and until 2010, this ratio remained above 83%. ESPRIT focused on the European market but failed to keep up with the times and change with the consumers in that market. After 2000, fast-fashion brands like ZARA, H&M, and C&A became dominant, revealing the outdated business model and styles of ESPRIT.

In China, it wasn't until 2011 that ESPRIT's sales accounted for 11% of its global sales. The influence of the Chinese market on the global clothing industry is self-evident. While ZARA and Uniqlo were racing ahead, opening new stores quickly, ESPRIT's development remained unhurried. In China, ESPRIT neither achieved high-profit-driven high growth like luxury brands LV and PRADA, nor relied on scale to win like ZARA and Uniqlo. After Ting Li Yuan left, the leaders and management team of ESPRIT were mostly foreigners, clearly lacking a clear strategy for the Chinese region.

Secondly, ESPRIT had positioning deviations and lacked a sense of fashion. Even in the past, ESPRIT's positioning was merely a mid-range brand, far from forming the traditions and unique styles of luxury brands. Compared to fast-fashion brands, its designs were too monotonous, unable to lead fashion trends or meet the needs and tastes of different regional markets.

At the same time, in recent years, Europe has been entering an aging society, while in China, post-80s are the new generation with strong purchasing power. Unfortunately, ESPRIT could not satisfy the needs of either market. A few years ago, my judgment on the future Chinese market was a gourd-shaped society, and this trend is becoming increasingly obvious. Consumers tend to consume higher-end products like handbags and shoes, while they tend to consume lower-end products like T-shirts.

In this situation, luxury brands benefited from the appreciation of the RMB and the strong purchasing power of Chinese customers, with continuously rising performance; under the influence of trends, low-priced popular fashion brands like ZARA, Uniqlo, and GAP hit a larger consumer base. When the consumer structure changed from the previous pyramid shape to a gourd shape, ESPRIT's positioning coincidentally fell at the narrowest part of the gourd waist, making it inevitable that growth would stagnate.

Finally, ESPRIT's channel model is outdated, neither fast nor large. From the channel perspective, currently, ESPRIT's channel model remains single, mainly relying on retail and wholesale. Franchise retail heavily depends on shopping malls. Although there are a few large flagship stores, the crossover of various retail formats instead brought high management costs and poor replicability. Originally having a first-mover advantage, ESPRIT was dragged down by multi-format and multi-sub-brand operations. This is reflected in retail stores where it is no longer possible to achieve the "large store model" of over a thousand square meters, and supply chain efficiency does not meet the requirements of "fast fashion." On the other hand, ZARA, Uniqlo, and GAP are similar in style, model, and size, with good replicability and high efficiency in their global supply chain systems.

All these factors together have led to the decline of Esprit Global today. However, with decades of history, Esprit Global still has a solid foundation. If it can develop a clearer and deeper strategy in China, I believe there is still an opportunity for transformation.