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June 20, 2012

Aquascutum and the Battle of the Luxury Trenches

IStock_000018310014XSmallWhat is next for Aquascutum, the UK-based luxury goods brand famous for its trench coats, following its slide into administration last month and subsequent proposed bail-out by Asian licence holder YGM Trading?

Aquascutum loses its relevance

The Aquascutum trench coat, with its unmistakable storm flaps and waist belt, was donned by Hollywood legends Cary Grant and Humphrey Bogart. Former British Prime Ministers Winston Churchill and Margaret Thatcher also wore Aquascutum. Famous as those names are, they belong to a bygone era, and this relates to one of the key reasons why Aquascutum has failed to piggyback the bullish growth story of luxury goods over the past five years.

Quite simply, the brand lost its relevance to a new generation of high net worth individuals (HNWIs) in developed markets. One would be hard pressed to come up with a modern day celebrity renowned for wearing Aquascutum's version of the iconic trench coat, for example, whereas its archrival Burberry can boast modern day celebrity wearers of the likes of Kate Middleton and Victoria Beckham.

While the two trench coat brands share a similar heritage - both companies were founded in the 1850s and both stake a claim to designing the original trench - one has moved with the times and the other has not. That message came through loud and clear last month when Aquascutum slipped to the brink of bankruptcy, blaming “challenging conditions in the UK” according to a company statement, while Burberry announced anticipated profits of £372 million for fiscal year 2011.

That Aquascutum has struggled so badly at a time of booming luxury goods demand is indicative of a flawed growth strategy. It is true that the company was over-dependent on the UK market where middle-class consumers experienced significant erosions in purchasing power after 2007, but fellow UK luxury goods company Mulberry also counted on the UK for a big chunk of sales and its revenues have soared over the past five years.

Crucially, foreign visitors from China, Brazil and Russia fuelled comparatively buoyant luxury goods consumption in the UK (albeit London, primarily) after 2008, so the 'challenging conditions' referred to by Aquascutum do not resonate for all luxury goods brands. Over the 2007-2011 period, compound annual growth of luxury goods retail spending in the UK ran at 2% (at fixed prices), according to data from Euromonitor International.

Aquascutum also missed an opportunity to steal a march on Burberry when, prior to the 2008 financial crisis, Burberry became linked in the UK tabloid press to so-called 'chav' culture (chav is a derogatory term used to describe people who are brash, often vulgar). It was Burberry that seized the strategic initiative, turning its own crisis into an opportunity for brand reinvention. Aquascutum did nothing of any substance to win over disillusioned Burberry fans.

Asian licence holder offers Aquascutum a lifeline

The competitive differentiation between Aquascutum and Burberry is not simply about branding, however. When entrepreneur Harold Tillman bought Aquascutum from Japanese company Renown in 2009, he sold the brand's licensing rights in Asia to Hong-Kong based YGM Trading. That was a critical moment because in so doing Aquascutum diluted its potential to harness China's burgeoning luxury goods growth story.

Burberry, on the other hand, moved from strength to strength in Asia, reporting regional sales of £457 million in fiscal 2011, up 62% on 2010. Indeed, concurrent with trends across the luxury goods industry, emerging Asia – and China in particular – has become central to Burberry's growth strategy.

It is ironic that YGM Trading, the company that blocked Aquascutum's potential for more profitable Asian growth, is now the one about to take charge of the brand going forward (subject to deal ratification).

The deal appears to make sense, strategically. This is because, firstly, Hong-Kong based YGM offers a commercial bridge into Greater China, which will be a key growth engine for designer apparel over the next 10 years. Secondly, YGM has potential to act as an export hub for the rest of emerging Asia. Thirdly, YGM has luxury brand pedigree – it owns Guy Laroche and distributes trendsetting apparel brands throughout Asia, such as Sweden's J Lindeberg.

The challenge for Aquascutum going forward

That YGM operates more than 200 outlets in China, with branch offices in Shanghai, Guangzhou and Beijing, ought to be a big spur to Aquascutum and help reduce some of its dependency on the UK. It will not be plain sailing, however. Turning things around will require a fundamental overhaul of the brand's image and marketing strategy.

The aspiration-fuelled purchasing patterns of HNWIs in China, and other fast growing emerging markets, means that the status value of a brand is critical. To generate the type of emerging market demand we see for Prada, Burberry and Mulberry, for example, Aquascutum will first need to re-build its profile in developed markets. What is clear from the luxury goods growth story of the past five years is that prestige value in London, Paris, Milan and New York drives demand in China, Brazil and Russia.

Re-building the brand equity of Aquascutum will be YGM's biggest challenge. The company is steeped in heritage, but having designed its trench coat ostensibly for life in the trenches Aquascutum's modern day operating environment is an altogether different battleground, characterised by fashion catwalks and fast-moving celebrity culture.

If Aquascutum can bring a modern twist to its heritage and win back market share from Burberry in key developed markets, particularly the UK, YGM will come into its own as a springboard for growth into China and across emerging Asia. That is a long-term, not a short-term, scenario and will require substantial new investment and a modicum of luck, such as a popular celebrity being photographed (candidly) wearing an Aquascutum trench coat.



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