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By: Ashma Kunde

    It has been an eventful year for Esprit, the brand that was once quoted as having “lost its soul”. After both its chairman and CEO stepped down in June, Jose Manuel Martínez Gutiérrez was swiftly hired from international rival Inditex and instated as new chief executive.

    The company continues along its HK$18 billion (US$2.3 billion) “transformation plan”, involving a complete brand overhaul. However, the latest news of the company’s exit from India was teamed with an unexpected rights issue. This paints a far from rosy picture of the company’s current performance.

    Out of India

    In theory, India should have been a goldmine for Esprit. The Indian apparel market is expected to register a constant value CAGR of 6% over 2011-2016. In addition, Indian consumers tend to associate Western brands with high-quality clothing and hence are willing to pay a premium relative to domestic companies. Esprit had a well-established presence, having entered in 2005 through a distribution deal with local partner Madura Fashion and Retail.

    In reality, the losses became too much to bear, amounting to INR20-25 crores (US$3.6-4.5 million) per annum as reported by the local trade press. The only plausible explanation for Esprit’s departure from India is the brand’s failure to compete, highlighting the fact that fundamental flaws still exist in the business.

    This begs the question: how is the company going to fare in its remaining sales areas such as Western Europe, still riddled with Eurozone challenges, and China, where apparel is an intensifying rat race.

    Rights to cover wrongs

    Brazilian supermodel Gisele Bündchen, the face of Esprit, graces many pages of the company’s annual reports, steering investors’ discerning gaze away from these worrying business developments.

    The company’s stock price remains a questionable indicator of real performance, jumping 22% after former chairman Michael Ying doubled his stake in the company in November 2012. This spurred hope that he may once again re-join the board of the company that flourished under his leadership.

    In October 2012, the company’s share price fell after Esprit announced a HK$5.2 billion rights issue. This unexpected cash requirement proved to be a wake-up call for investors, making them suspicious about the company’s progress with the execution of the transformation plan. However, the issue was ultimately oversubscribed, providing a positive boost for the stock.

    Just a pretty face

    While convincing investors is a weighty affair, nothing takes precedence over convincing consumers.

    Some progress was made with the Transformation Plan, which was touted to be the brand’s “wake-up kiss,” notably in terms of distribution strategy. The brand is moving towards controlled retail stores and invested in renovating its stores to reflect a sleeker image.

    The brand also eschewed high gloss for the earthy appeal of models Gisele and Christy Turlington, attracting the woman who is “forever 30” and favours sober glamour. This target consumer base is particularly appropriate for Western Europe, whose aging demographic provides a large group of underserved women. In Esprit’s largest sales base, Germany, the average female will be well into her mid-40s by 2016.

    However, Gisele’s beauty is no replacement for a commercially viable product. Despite moving away from the basics towards more fashionable products, consumers still do not perceive Esprit’s apparel to be trendy enough. This problem is only exacerbated by Esprit’s inflated prices, which are much higher than those of Zara or H&M.

    There continues to be demand for more expensive clothing, with Inditex’s Massimo Dutti and Gap’s Banana Republic still performing well. However, be it China or Germany, consumers need a reason to buy into higher-priced brands. Supermodels alone are thus not enough to convince consumers to pay premium prices for Esprit’s clothing.

    Evidently, the brand still has some soul-searching left to do.

     

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