Business of Fashion: Behind the Flurry of Store Openings in Australia

SYDNEY, Australia — 2011 was an extremely busy year for luxury retail expansion in Australia. In April, Burberry opened a new flagship on Sydney’s George Street. In July, Prada and Miu Miu opened flagships in Sydney’s Westfield  shopping mall, where Gucci also opened its own two-level emporium in November. Then, in a dramatic end-of-year crescendo, Louis Vuitton opened a grand Maison on George Street and Bottega Veneta and Gucci opened stores in Sydney hotel and casino The Star.

This year, store openings in Australia are set to continue at a similar pace. Chanel is planning to expand its flagship on Castlereagh Street and relocate its Melbourne store to a stand-alone building, while Christian Dior will open its first Australian boutique on the site of the old Louis Vuitton store on Castlereagh Street.

So what’s behind the flurry of store openings in Australia?

A Relatively Rosy Macroeconomic Picture

On a macro-economic level, Australia is the only advanced economy that did not enter a deep recession during the global financial crisis. The country’s economy did slow in 2008 and 2009, but recovered quickly thanks to government action in the form of a stimulus package and trade agreements with Asia. “Seventy-five percent of Australia’s exports go to Asia and commodity prices have been very high in recent years,” said Peter Jolly, head of research at National Australia Bank, referring to the spectacular rise in prices, over the last decade, of the country’s major commodity exports to Asia, including iron ore, thermal coal and gold. “The Australian economy is leveraged to China and more generally, Asia, and these economies have continued to grow well in recent years,” he continued.

Indeed, today, the country boasts above-average growth, very little foreign debt and a stable banking system, which, along with a strong Australian dollar, have made the market highly attractive to international brands.

“I think this new move is quite symbolic of how ourselves [sic] and, I believe, the rest of the industry is considering Australia today,” said Yves Carcelle, chairman and CEO of Louis Vuitton, at the press conference for the opening of the brand’s new Sydney store.

“We see great potential in thriving flagship markets globally, and Sydney and Melbourne, with their cosmopolitan local populations and strong tourist flow, are no exception,” commented Burberry CEOAngela Ahrendts.

The Importance of Asian Tourist Flows

Indeed, Australia is not only a comparatively vibrant, ‘Western’ economy. It’s also part of the rapidly-growing Asia-Pacific region, making it doubly attractive to international brands who stand to benefit from the country’s healthy flow of Asian tourists, especially from China. In fact, Philip Morrice, director of The Friday Group, a Sydney-based consulting company, estimates that up to 35 percent of Australian retail traffic can be attributed to tourists.

“[Luxury brands] are boosting their presence and catering to the travelers coming to Sydney from Asia,” said Peter Esho, chief market analyst at City Index, a factor Carcelle acknowledged: “[Australia is] one of the big centres of interest for Asia-Pacific. You are quite a centre of attraction for high-end tourists from this part of the world.”

In 2010, the number of tourists from China grew by 24 percent (figures for 2011 have yet to be released) contributing $3.26 billion to the Australian economy. And in July of 2011, Tourism Australia unveiled its China 2020 Strategic Plan, which aims to further increase the number of Chinese tourists over the next eight years. Part of their sales pitch: Australia as a luxury shopping destination.

“While we know Australia’s incredible nature experiences are the main reason why Chinese travelers choose to visit, other aspects such as our food and shopping experiences are also part of the mix,” said managing director of Tourism Australia Andrew McEvoy. “Certainly the increasing presence of luxury brands in Australia will help to enhance the shopping options for Chinese visitors when they are here.”

Importantly, the price of international luxury goods is substantially less in Australia than in China, meaning that shopping in Australia can mean significant savings for Chinese tourists. “[They avoid] China’s mainland sales tax of up to 17 percent, consumption tax as much as 56 per cent and hefty import duties,” said Melinda O’Rourke, director of Sydney-based consultancy MO Luxury.

Targeting Asian tourists is such an important part of a successful Australia retail strategy that some luxury brands have even launched special Australia-inspired products which, experts say, are much more likely to resonate with visitors than locals. For example, to celebrate the opening of the brand’s 7,500 square foot flagship at Westfield Sydney, Gucci launched a limited-edition ‘Sydney’ collection, which included monogrammed koala, crocodile and kangaroo key chains and bags emblazoned with the Australian flag and the stars of the Southern Cross.

Store openings in hotel and casino complexes — Gucci, Bottega Veneta have opened in Sydney’s The Star, while Louis Vuitton, Prada and Burberry have stores in Melbourne’s Crown Casino and Entertainment Complex — are also designed to help brands tap the tourist market, said O’Rourke.

What’s more, brands are placing significant importance on recruiting multilingual retail staff to cater to tourists. “Right now, as the Chinese tourist market is strong, it is part of the strategic plan of brands to ensure they have Chinese-speaking staff on the floor,” said O’Rourke.

But as China’s economic growth rate declines — year-on-year growth in China has slowed for four straight quarters — can luxury brands depend on tourist spending to boost their Australia sales?

An Uncertain Future in Australia

“The vast majority of our business is done with the Australian consumer. The tourist business is a welcome addition, but in this world it is very unpredictable,” said Philip Corne, CEO of Louis Vuitton Oceania.

“If luxury brands are forecasting and managing their businesses correctly the tourist dollars should be the cream on the top,” said O’Rourke. “Budget and profit targets should be achieved with local consumer spending.”

But local spending in Australia may not be as dependable as once thought, either. Indeed, much of the country’s economy — not just tourism — is dependent on China’s growth, which has driven astounding demand for Australian commodity exports over the last decade.

However, as Philip Bowring reports in a recent Wall Street Journal article entitled “Australia’s Economic Luck May Not Last,” with China’s engine of growth slowing, Australia’s economic outlook is looking less rosy. “One of the challenges will be how China and Asian economies perform,” said Jolly. “Although on this front we have some comfort, as we expect soft-landings for presently slowing Asian economies.”

But according to Bowring, commodity prices can move much more violently than changes in demand, painting a worrying picture for the commodity-dependent Australian economy. “The bottom line is that Australia is more vulnerable than is usually assumed.”

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