How world's small luxury firms are surviving downturn

Poupie Cadolle's family has been making handmade lingerie in a workshop on Rue Saint Honore for five generations, with Qatari royals, American actresses and Swiss bankers' wives all crossing her doorstep in search of the perfect bra or corset.

Now, with times tough and sales to French and American women sluggish, Cadolle, like many small French luxury firms, finds itself struggling to tap into a $191 billion global boom driven by customers from emerging markets.

"The last four months have been difficult," said Poupie Cadolle, a small woman with a warm smile who spends her days fitting 5,000 euro bustiers and 600 euro bras.

"We thought hard about how to get clients, beyond word of mouth. It is not easy. We decided on going into Brazil, not China."

Unable to wield the financial firepower of conglomerates such as LVMH, Richemont, or PPR, small family-owned enterprises are finding modest and innovative ways to attract new customers.

Some, like Cadolle, are choosing one country over another and relying on invitation-only trunk shows and other private events.

Others are opening stores in Hong Kong but not Shanghai, while for a few the focus is on still rich markets in Japan and the United States.

All are choosing carefully. The internet is not seen as a route to market - few small luxury companies feel comfortable selling goods online given the luxury experience is one where items need to be handled to judge the quality and design.

"China is definitely the big prize and, by and large, the customer there only wants big, recognizable brands," said Pierre Mallevays, a managing partner at Savigny Partners, a corporate finance boutique specialising in luxury and retail.

"You cannot have a China-only market. For your brand to be credible, the travelling Chinese will expect to see your stores in Paris, Milan or New York."

That kind of reach is difficult for smaller brands unable to afford a presence in several European cities and major Chinese cities where real estate prices are high, salespeople increasingly scarce and the best distributors already engaged.

LVMH and other luxury giants, meanwhile, are tapping into the Chinese market by scaling back in department stores and, instead, opening giant flagship stores in large and mid-size cities across the country.

Smaller European brands hope Chinese customers, as well as the newly rich from Russia and central Asia, see the appeal of a tasteful shop in Paris with an elite clientele in the French tradition of discretion and craftsmanship.

Many are bringing design inhouse, eliminating suppliers and ensuring clients know everything is handmade by French artisans.

"BIG, BIG, BIG"

This type of branding is vital to the appeal of French luxury, yet it is not always easy to convince emerging market clients that handmade is better. Many live in countries where goods are only made in small shops out of necessity.

Corthay is a bespoke men's shoe shop in the 2nd arrondissement where Pierre Corthay works in the front room making crocodile and elephant skin shoes that take six months to complete and cost upwards of 3,000 euros.

It recently teamed up with Groupe Edmond de Rothschild to sponsor a road trip for select clients through the Alps in high-end sports cars. Chief executive Xavier de Royere said the event was expensive for Corthay but worth it because it created a sense of glamour around the brand.

"The Chinese do not always understand our store," said Royere, who joined from Louis Vuitton. "Small is not good there. They want a big shop. Lots of options. Big prices. Big, big, big."

Royere, planning to open shops in Dubai and Hong Kong in coming months, said he was in less of a hurry to go to China and will not open there until 2013 at the earliest.

In the United States, the brand is confining itself to department stores in New York, San Francisco and Beverly Hills for the moment.

"We counsel companies to go to Hong Kong first. Learn about the customer. Then go to mainland China," said Ponsolle des Portes, head of Comite Colbert, a luxury industry lobbying group.

Chinese customers need to become acquainted with the notion of truly high-end luxury, and smaller brands can still make a lot of money from established markets, she said.

"It is hard to convince some Chinese women that she should have wonderful undergarments," said Poupie Cadolle. "This is not a culture that even has nightgowns."

Asia makes up 19 percent of the luxury market but is growing faster than any other region, Bain research showed. By 2014, it will be on a par with the Americas in size.

PRESENT BUT PRUDENT

Yet it will still lag Europe, the largest luxury market. And while many customers in European shops may be tourists, small companies still see money in established markets.

Luxury brand Camille Fournet began with watch straps and has recently broadened out into handbags, wallets and pouches.

CEO Jean-Luc Dechery said opening a big store on stylish Avenue Montaigne in Paris would lend the brand instant credibility, but the cost was prohibitive.

Instead, he has invited well-heeled clients to a private showing at the George V hotel at the end of June. Items sold there, including a 34,000 euro alligator handbag, will not be available in the store.

"We are hitting that good time during fashion week but before Ramadan," he said.

He remained mindful that half the brand's clients in the Paris store were French, and that a Chinese business will be slow to start up. He is opening a store in Beijing this October.

"We want to be present," said Dechery. "But also prudent."

The advice is sound, say industry analysts, who note that any change to the tax regime in China or Hong Kong could quickly alter the dynamic and that the luxury market may be in a bubble that could burst if the Asian market ever slowed down.

"Whenever companies tell me they are going abroad I ask one question," said Joelle de Montgolfier, a director in consultancy Bain & Co's luxury practice. "Are you absolutely convinced that French women have nothing more to spend?"

copyright @ Thomson-Reuters 2012