Discussion Papers In Economics
And Business

Retail Networks and Real Estate: the case of Swiss
luxury watches in China and Southeast AsiaThierry Theurillat
Pierre-Yves Donzé

Discussion Paper 15-28

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANRetail Networks and Real Estate: the case of Swiss
luxury watches in China and Southeast AsiaThierry Theurillat
Pierre-Yves Donzé

Discussion Paper 15-28
October 2015

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANRetail Networks and Real Estate: the case of
Swiss luxury watches in China and Southeast
Asia*
Thierry Theurillat†
Swiss National Science Foundation, Hong Kong University
Pierre-Yves Donzé‡
Osaka University
Abstract
Shopping centers are among the most significant places to sell luxury goods in East Asia. However,
the relations between retail networks of luxury companies and access to land and real estate stillneed to be addressed. On the one hand, an extensive literature highlights how the turn to luxury
industry since the 1990s has enabled some European countries to maintain their comparativeadvantage on the global market and at the same time to keep a significant part of their production
non-globalized. Yet, an issue that remains to be addressed is the way European luxury companies areable to enter and expand their sales networks in emerging countries. On the other hand, while realestate has become a major economic circuit in East Asia, there is still a lack of works about theproperty industry and companies’ concrete strategies and business models. This article is hence an
exploratory study that tackles the issue of real estate within the strategies of the main actors of the
Swiss watch industry, namely Swatch Group, Richemont and LVMH, which have massively invested intheir retail network in China and East Asia since the 1990s. While these three companies went
through local retailers until late 1990s, they managed to expand their sales networks by increasingly
controlling the retail spaces in China and in some Southeast Asia countries, such as Hong Kong,
Singapore, Malaysia, Thailand, and Taiwan, increasingly influenced by Chinese consumers. For thesecountries which now represent a major part of their respective market shares, the Swiss watch
groups rarely invest directly in large-scale real estate projects like shopping malls. They however
have various strategies of control and integration between retail and the commercial real estateindustry.

Key words: Swiss luxury watch companies, China and Southeast Asia, retail real estate
JEL Classification: L81, L85, N85, R3.

*

This work was funded by the Support Project for Strategic Collaboration Between Private Universities (Data
Science Laboratory of Kansai University, Osaka) and the Swiss National Science Foundation (P300P1_147823).
† Corresponding author: visiting research associate, Real Estate and Construction Department, University ofHong Kong. Email: theurilt@hku.hk; thierry.theurillat@unine.ch‡

Associate professor, Graduate School of Economics, Osaka University, 1-7, Machikaneyama, Toyonaka, Osaka
560-0043, Japan. Email: donze@econ.osaka-u.ac.jp1Introduction
A new geography of retailing has appeared since the early 1990s with transnational companies as
the ‘movers and shapers’ of the global economy who often facilitate changes in market structures(Lowe and Wrigley, 1996; Wrigley et al., 2005). As a result of both a saturation of home markets andthe liberalization process and opening of borders in various countries, Asia and China in particularhave been the most attractive markets for large retail groups, notably from the Western countries.
The internationalization of retailing in Asia has been increasingly documented by scholars (Dawson etal. 2003; Wang 2009; Coe and Bok 2014). The motivation and modes of market entry are the firstissue that must be faced (Wrigley et al. 2005). Then retail companies face a complex process tostabilize their operation which can take place over four phases: stability, consolidation, control, anddominance (Dawson 2003). However, success is not guaranteed and many firms may withdraw fromthe market at some stage. Business historians have stressed in this perspective that firm-specificadvantages (e.g. brand concept and operating format) are decisive factors to keep international
competitiveness in the retail industry since the 1980s (Godley and Hang, 2012). Yet, the strategies
adopted by Western luxury companies to build their distribution network in East Asia have not beenstudied (Coe and Bok 2014). This article is hence an exploratory study that focuses on luxury
companies which have massively invested in their retail network in Asia since the 1990s. This
expansion is linked with the issue of real estate, and more specifically with the business relations
luxury corporations have with commercial property development companies to access retail spacesin Asia. Access to land and real estate is also an understudied key issue of the consolidation andcontrol over distribution channels for retail groups (Meyer-Ohle, 2014).
On the one hand, an extensive literature highlights how the turn to luxury industry since the 1990s
has enabled some European countries to maintain their comparative advantage on the global market
and at the same time to keep a significant part of their production non-globalized. This ‘success’ isaltogether a result of an industrial reorganization, the construction and control of global production
chains, and specific strategies to enter markets in emerging countries, specifically in Asia. A key
factor is the control of the distribution channel, which means a verticalization of the distribution andretail networks. However, an issue that remains to be addressed is the way European luxury
companies are able to enter and expand their sales networks in emerging countries. On the other
hand, the property industry has become a major economic circuit in many countries. In Asia, realestate companies could benefit from active urbanization strategies by governments to develop theirbusiness. However, there is still a lack of works about the property industry and companies’ concrete
strategies and business models. Real estate companies indeed function as key intermediaries andlong-term partners for retail groups, and in the case of shopping center development, strategic
alliances are made between large retail groups and large property development companies (Wang etal. 2006; Wang 2009).
In order to deal with the issue of real estate in relation with the expansion of luxury retailers in East
Asia, this article tackles the strategies of the main actors of the Swiss watch industry, namely Swatch
Group, Richemont and LVMH. While these three companies went through local retailers until the late
1990s – mid-2000s, they managed to expand their sales networks by increasingly controlling retailspaces in China and in some Southeast Asia countries, such as Hong Kong, Singapore, Malaysia,
Thailand, and Taiwan, all increasingly influenced by Chinese consumers. For these countries which
now represent a major part of their respective market shares, the Swiss watch groups rarely invest
directly in large-scale real estate projects like shopping malls. They however have various strategies
of control and integration between retail and the commercial real estate industry.

2This article is divided in three sections. We first present literature related to luxury business andproperty development, to stress the lack of links between both. The second section presents thestrategies of the three groups. Third, we propose an understanding of the ways Swiss luxury watch
companies access shopping spaces. Finally, we conclude the paper with several suggestions for
future research.

1 The distribution of Swiss luxury watches and the issue ofaccess to shopping spaces in East Asia
This section introduces the major changes experienced by the Swiss luxury watch industry in
Switzerland since the 1980s and emphasizes the challenge of accessing Asian markets. It also
underlines the lack of research to understand the issue of real estate strategy in the luxury business.

1.1

The shift of the Swiss watch industry to luxury

After a decade of crisis due to its lack of competitiveness against Japanese watch companies (Donzé2012), the Swiss watch industry undertook during the 1980s-1990s a twofold process of rationalizing
its production system and up-scaling its products, typical of the European luxury industry at that time
(Bonin 2012; Merlo 2012; Donzé 2014). The industrial reorganization took the form of a highconcentration of the number of firms and the relocation of low value-added activities abroad, mostly
in East Asia.
First, the number of watch companies dropped from 1’169 in 1975 to 572 in 1990. The number
stabilized and remained at an average of 589 for the years 2000-2013. Besides, the average numberof workers by company increased at the same time (59.3 in 1990, 64.9 in 2000 and 100.2 in 2014)(Convention patronale, 2014). Likewise, most of these companies were gathered by large holding
companies and groups, the most known being Swatch Group (founded in 1983, hereafter: SG) andCompagnie financière Richemont (1988, hereafter: Richemont), while French luxury big businesslaunched in watchmaking through the merger of Swiss companies, as did LVMH (1999) and Kering(1999). Table 1 shows both the high concentration which exists today in the global watch industry
and the domination of companies established in Switzerland. The three largest companies, all Swiss,control nearly half of world markets (47.5%). Of the ten largest companies, accounting for 72.6% ofmarket share, all except Seiko and Casio base their production subsidiaries in Switzerland.
INSERT TABLE 1
Second, Swiss watch companies adopted a strategy of relocating low value-added activities,
particularly the manufacture of external parts (cases, straps, dials, etc.), in low wages countries, likeThailand and China. Although the roots of this strategy go back to the 1960s (Blanc, 1988), it
experienced a dramatic development since the end of the 1980s and takes several forms. Somecompanies carried out direct investments and opened wholly-owned subsidiaries, as SG did in
Thailand (1986), Malaysia (1991) and China (1996). Moreover, Swiss watchmakers also used
independent subcontractors to outsource some businesses. The evolution of the share of Swiss
watches equipped with foreign-made cases illustrates perfectly this growing international division oflabor: this index went from 21% in 1990 to more than 60% since 2000.

3

Yet, not all of the production of watches has been transferred abroad, mainly due to an institutional
measure aiming at keeping employment in Switzerland and ensuring the good quality of Swiss
watches: the “Swiss Made” law, adopted by the federal government in 1971.1 According to this text,
the companies which want to use the “Swiss Made” label must produce at least half of the parts ofthe movement (value) and realize the final assembly of the product in Switzerland. Hence, the Swiss
watch industry was only “half-globalized” but succeeded to cut production costs and to regain
competitiveness against Japanese rivals. This institutional measure became during the 1990s one of
the most important competitive advantages of Swiss watch companies, which followed at that time a
new strategy of repositioning towards luxury. While the volume of watches exported by Switzerland
declined from 43.7 million in 1995 to 31.9 million in 2010, their value increased in the same timefrom 6.8 billion CHF to 15.3 billion CHF. 2 Many authors tackled this transformation, emphasizing thatthe new competitiveness of the Swiss watch industry relied on marketing strategy, called by someauthors “non-technological innovation” (Jeannerat & Crevoisier 2011) which made it possible toincrease largely value-added of the products (Kebir & Crevoisier 2008; Raffaelli 2013; Donzé 2014).
Moreover, the repositioning towards luxury went together with the verticalization of distribution, as
can be observed since the 1990s in other sectors of luxury and fashion (Moore & Birtwistle 2004;
Moore, Doherty & Doyle 2010). In the watch industry, the vertical integration of wholesale and retailhas proceeded since the late 1990s, with the twofold aim to maintain tighter control over the sale ofproducts and to internalize earnings from this activity. The idea is to improve the quality of
distribution rather than to increase the number of sales outlets. Accordingly, the Omega distribution
network was restructured in 2005-06 on the German, British and Japanese markets, where thenumber of sales outlets was reduced by 20 to 25 per cent. In the same time, groups started to create
new sales subsidiaries around the world. SG had 23 such units in 1998, but their number had virtually
tripled to 65 by 2009 (Donzé 2014). Among them, a large amount were opened in emerging countries
after 2000, as for example India (2001), Mexico (2001), Russia (2002), Thailand (2002), Poland (2004),
Taiwan (2004), United Arab Emirates (2006) and South Africa (2009).
In addition, a reference should be made to the engagement in retailing. Since 2000, SG, Richemont
and independent companies like Rolex and Patek Philippe developed their own network of flagshipstores. The number of Richemont’s mono-brand stores went from 320 in 1995 to 719 in 2000 and
1’370 in 2009. In 2009, the company directly held 797 stores (58.2% of the total), the remaining 573
being managed by local partners. The number of Richemont’s directly owned stores grew to 1’056
stores in 2014. 3 This will to control retail also led SG to take interests in retail firms, in particular in
Thailand (2002), in the United Arab Emirates (2008) and in Saudi Arabia (2010).
Finally, one must mention that the repositioning of Swiss watch companies towards luxury and thefast-development of this business relied on the emergence and the growth of new markets in East
Asia (Donze and Fujioka 2015). Trade statistics show the key position occupied by Hong Kong, due totourists (Japanese in the 1980s and 1990s, Chinese since 2000) and to re-export, with an average
share of 16.4% of Swiss watch exports in 1990-2014. Japan was a key market during the years 19902003 (average of 9%), then slightly declined, but was still the no. 4 outlet in 2014 (6%). As for China,
which had been constantly below 1% until 2002, it emerged in the mid-2000s, and peaked at 8.5% in2011 (6.3% in 2014). Altogether, Hong Kong, Japan and China had a cumulative market share of 19.6%
in 1980, 26.1% in 1990, 23.3% in 2000, 31.4% in 2010 and 30.8% in 2014.
Ordinance related to the use of the label “Swiss” for watches, 23 December 1971.

1
2

Federation of the Swiss Watch Industry.

3

Source: Annual reports. No more data since 2009.

4

Consequently, literature on the repositioning of the Swiss watch industry towards luxury has exposedin great detail the process of this change in Switzerland (concentration of firms, relocation of
production), as well as the driving forces of this evolution (new marketing strategy, verticalization of
distribution and retail, Asian markets). Yet an issue that remains to be addressed is the way Swiss
watch companies were able to access new markets and new customers. We must question thenature of the links between the distribution strategy and East Asian markets. The real estate businessappears to have been a key intermediary in this process.

1.2

The property development industry: a major partner for the retail industry

Since the late 1980s, an extensive literature has opened the ‘secondary circuit of capital’ (Harvey
1982 and 1985), i.e. the built environment required for economic production (factories, roads, etc.)
and consumption (shops, homes, etc.). Whether this be from an institutionalist perspective (Ball
1998; Guy and Henneberry 2000; Healey 1991, 1999; Keogh and D’Arcy 1999) or a Marxist
perspective (Beauregard 1994; Fainstein 1994; Haila 1991), this examination of the intrinsic dynamicof real estate markets emphasized the players, institutions and processes at work in real estatemarket operations. The specific role of real estate development companies as entrepreneurs was
highlighted from the beginning. Property development companies do have strategies to respond toexisting demand, as well as to compete effectively with new products on the market. In this regard,
Charney (2001) indicates three areas on which entrepreneurs play to create supply. They canspecialize by combining location, sector (residential, retail, industrial or offices) and property (new orexisting buildings).
In various countries, the influence of the property development industry on urban development has
been boosted by entrepreneurial and property-led urban policies (Harvey 1989; Leitner 1990;
Fainstein 1994 and 2001). The contemporary transformation of the urban landscape, especially bymeans of large-scale urban projects, has constituted a favoured instrument within new and more
“entrepreneurial/neoliberal” urban policies resulting from growing local decisional competencies andfeatured by the priority given to economic growth (Fainstein 2008; Swyngedouw et al. 2002).
Debates regarding the (new and more neoliberal) forms of urbanism and urban governance thus
addressed the change to the role of the State within the framework of an accentuated market logic,
the intervention of private actors in public policies and also the restructuring of spatial scales in thedefinition and regulation of public policies (Peck et al. 2009).
In Asia, Hong Kong and Singapore (Haila 2000 and 2015; Smart and Lee 2003), as well as China (Hsing
2010; Wu 2015) are emblematic examples of property-led States. In these three countries, theproperty industry has been boosted since the 1980s and early 1990s by the privatization of land andthe active growth and urbanization policies’ strategy. In other Southeast Asian countries, theproperty industry also benefitted from urban policies based on growth objectives and even played a
key role as urban planner for large-scale urban projects and transportation infrastructures (Shatkin2008). In most countries, this has led to a consolidation in the property industry. For instance, inHong Kong a dozen of companies control the property market, some of which like Cheung Kong,
Swire or Henderson are part of multinational conglomerates in various sectors (industry, retail, tradeor finance) (Tang and Liu 2001).
The role of retailers is very important as far as commercial property development is concerned.
Tasan-Kok (2006) is one of the rare authors who showed that international retailers in peripheral
economies are key partners of property development companies. This materializes in large-scale
shopping complexes which can be seen as global urban forms since they all have similar physical5characteristics (location, size, shape, use of space, architectural style, etc.). The production of new
urban forms in China and Southeast Asian countries, such as hypermarkets, department stores or
shopping malls as new consumption places compared to traditional shops and wet markets, has notbeen addressed yet through the perspective of commercial property companies’ strategies andbusiness models, or in relation to retail groups. Some main features can however be highlighted fromthe retailer’s literature.
The access to the “right” location is a core factor to enter a market and to overcome territorial
complexity and achieve embeddedness (Wrigley et al., 2005). In Southeast Asia, this in most cases
goes along with partnerships with some local companies, which can also be enforced bygovernments in order to restrict unfair trade practices and to encourage local retailers to upgrade bylearning from foreign firms (Coe and Bok 2014). For instance, large Japanese retail groups such as
Uniqlo, Muji or Seven Eleven partnered or joint ventured with local companies which are often partof conglomerates that have interests in not only retail, distribution or logistics, but also in real estate,finance or manufacturing (Meyer-Ohle 2014). Moreover, since the mid-2000s, the location ofinternational specialty brand stores has almost exclusively taken the form of large-scale shopping
malls, either in city centers or in more suburban areas.
In China, large commercial property companies are key intermediaries between retail groups andcities. They first build the shopping centres or malls, and remain long-term partners for retailers ascommercial managers and property investors. Contrary to some Western countries where shopping
centres can belong either to retail groups or to property funds and other institutional investors likeinsurances or pension funds (Theurillat 2011), large commercial property developers in China areindeed landowners of retail areas where large retailers are among the main anchors and economic
drivers of shopping centres/malls. These long-term relations can be based on mutual strategies. For
instance, to expand its sales’ networks in the 2000s, Wal-Mart formed strategic alliances with two
major Chinese commercial property developers, Shenzhen International Trust & Investment
Corporation (SZITIC) and Wanda Group (Wang 2009). The retail market in China has become
increasingly competitive since the mid-1990s, with the development of numerous shopping centersin large cities. For instance, the control of retail spaces in Shanghai has witnessed an intensivecompetition between overseas, mainly Asian, and domestic developers with different models of key
anchors, such as department stores or hypermarket, as well as different positioning, from mid toluxury shopping centers (Wang et al. 2006).
The strategies of international retail groups to enter the various markets in Southeast Asia and China
have been documented by scholars. However, the focus so far has been put on retail groups in thefood sector and other mid-range brands (Coe and Bok 2014). The luxury retail corporate strategies
still need to be addressed, and in particular with regard to the access to shopping spaces.

2 The real estate strategy of the three largest Swiss luxury watch
companies in Asia
This section highlights the real estate strategies of the three major Swiss watch luxury groups –Swatch Group, Richemont and LVMH – to develop their sales networks in the main markets in East
Asia, namely China, Hong Kong, Malaysia, Singapore, Taiwan and Thailand.
This qualitative exploratory research (Creswell 2007) is based primarily on fifteen interviews. In orderto deal with the issue of distribution and sales, interviews were made both with managers of Swiss6

watch luxury groups regional subsidiaries in China and Southeast Asia, and with managers of themain regional distributors and retailers (Hengdeli, Hour Glass and Emperor Watch). The retailers’
perspective was furthermore compared with the perspective of developers. To understand thespecific business relations of Swiss watch luxury retailers, interviews were made with managers ofmajor commercial property development companies in China, Hong Kong and Singapore (Hong Kong
Land, Capitaland, Swire Properties, Sun Hung Kai, Shui On Land and Hang Lung) that specialized inbuilding and investing in luxury shopping malls in which luxury groups are key tenants. These
interviews took place in 2014 and 2015 in China, Hong Kong, Singapore and Taiwan. Secondly, thepoint of views of these main players in both industries were elaborated through extensive analysis ofcompanies annual reports, a close reading of materials from corporate websites and economic press,
and site visits in Shanghai, Hong Kong, Singapore and Taipei.

2.1

Swatch Group: control of distribution network and local partnerships

Swatch Group (SG) experienced rapid growth during the last fifteen years, with gross sales goingfrom 4.3 billion CHF in 2000 to 9.2 billion CHF in 2014. Asia played a key role in this expansion. Its
market share increased during these years from 29% to 58% of gross sales. Moreover, the share of
the Greater China region (mainland China, Hong Kong, Macau and Taiwan), known since 2008, grewfrom 23% of gross sales that year to 37% in 2014. 4 SG’s strategy to enter East-Asian markets andcontrol its distribution in these countries has three main characteristics.
First, this group did not internalize the real estate function. It does not wholly hold any subsidiary
active in this business outside Switzerland and has only invested directly in three projects around theworld (Nicolas G. Hayek Center in Tokyo, 2007; Swatch Art Peace Hotel in Shanghai, 2010; andGrieder-Haus in Zurich, 2014). However, even if these three buildings include shops of SG’s luxury
brands, like Omega, they are not really a part of a developed strategy to enter markets. They are
more like communication and advertising tools.
Second, SG holds a tight network of sales subsidiaries throughout East-Asia. In 2014, it had, outside
China and Hong Kong, subsidiaries in Indonesia, Japan, Malaysia, South Korea, Taiwan and Thailand.
Even if the roots of most these companies go back to the first part of the 20th century, theyexperienced a major change after 2000, when SG’s management decided to take direct control over
distribution and sales.
For example, in Singapore and Malaysia, SG used to work closely with the Amarasuriya family, who
has been active in the retail of watches and jewelry in Singapore since the interwar years and who
holds Omega’s agency in this city since 1936 (Richon 1998, p. 358). A joint venture between SG (51%)
and Amarasuriya (49%) was established in 1995 to lead watch distribution in Malaysia. The objective
was to centralize imports and logistic for all brands of SG in this region, the Amarasuriyas being incharge of selling watches in their network of shops. This relationship lasted until 2004, when SG
decided to take control of sales and purchased the shares of its partner. Consequently, SG split thisbusiness in two wholly-owned subsidiaries, one in Singapore and one in Malaysia, and made newconnections with local partners active in real estate development rather than retailing. In 2006, a
new joint venture, Swiss Luxury Watch & Jewelry, was founded by SG Malaysia (51%) and Sapura
Group (49%), a large diversified Malaysian business group, active in real estate development among
other things. Hence, in the following years, SG opened around 30 stores throughout the country anda watchmaking school in Kuala Lumpur in 2008 to train watch repairers.
4

Swatch Group, Annual report, 2000-2014.

7

The situation was similar elsewhere in South-East Asia. In 2002, SG founded new sales subsidiaries inThailand and in Taiwan, so as to no longer rely on local retailers and to control more tightly its own
network of stores. The number of points of sale was reduced and the company engaged in thecreation of mono-brand stores. Hence, since 2000, various local companies are responsible forsecuring shopping spaces in the new projects established by real estate developers. Connections at
the local level are the way SG accesses the market.
Third, SG set up a special partnership in China with the largest retailer of the country, Xinyu Hengdeli
Holdings. Other watch companies, like LVMH, Richemont, or Rolex work also with Hengdeli to
distribute their watches in China, but SG is the only one to have a member in the board of directors
and to have founded joint ventures with this Chinese partner. Hengdeli is a former State-owned
company, purchased in 1997 by the Zhang family, active in the trade of watches in Hong Kong sincethe 1980s. It dominates watch distribution retail business in China, and became after 2000 SG’s local
partner to enter the Chinese market. Both companies co-founded two major joint ventures for the
exclusive distribution of Omega and Rado watches (2003) and SG took a stake in Hengdeli, whichamounted to 6% of Hengdeli’s capital in 2006 and 9.1% in 2010 (Donzé 2014). This partnership is very
important in the twofold context of the fast growth of the Chinese market and SG’s will to control
retailing. Hengdeli’s growth sales increased from 1.5 billion RMB in 2004 to 14.8 billion RMB in 2014.
This development is based essentially on retailing, while Hengdeli had specialized in wholesale until
then. The number of stores managed by Hengdeli went from 65 in 2005 to 513 in 2014. Hence, theshare of retailing in gross sales grew from 34.9% in 2004 to 71.9% in 2014. 5 To set up these shops,
Hengdeli partners, based on a case-by-case strategy, with local Chinese developers (tier 3 and 4 cities)
and large developers from Hong Kong and China (tier 1 and 2 cities).
In 2007, SG and Hengdeli companies founded an equally-owned subsidiary to take charge of retailbusiness in China. At this occasion, Zhang Yu Ping, chairman of Hengdeli Holdings, argued that “thisagreement establishes a closer bond between Xinyu Hengdeli and the Swatch Group, as the twoparties fully utilize their resources to strengthen their relationship in the China retail market.” 6 Yet,such a strategy requires an involvement in real estate business, to secure stores in the new shopping
malls. Consequently, in 2010, SG took a 50% stake in Beijing Xin Yu Heng Rui Watch & Clock Co., asubsidiary of Hengdeli specialized in real estate in China. 7

2.2

Richemont: internalization and centralization of access control to
shopping places

The expansion of Richemont on the luxury watch market in Asia has been mostly based on its brand
Cartier. It was used to make synergies for other brands (IWC, Jaeger LeCoultre, Lange & Söhne,Montblanc, Piaget, Roger Dubuis, and Vacheron Constantin), especially regarding the development of
its retail network. This group has experienced rapid growth since the mid-1990s. Gross sales of thecompany, including divisions outside watches (fashion and jewelry), went from 1.8 billion euro in1996 to 2.9 billion euro in 2000 and 10.6 billion euro in 2014. This expansion also relies especially on
Asian markets (38.1% of gross sales in 2000 and 48.1% in 2014).

5

Hengdeli Holdings, Annual report, 2004-2014.

http://www.hmdatalink.com/PDF/C01700/e03389%2860%29.pdf

6
7

SG, Annual report, 2010 and Hengdeli, Annual report, 2013.

8

A major characteristic of this growth is the shift from wholesales to independent retailers to retailingby Richemont itself. The share of retail in gross sales evolved from 1996 to 2014. This index wentfrom 31.1% to 54.9% between these two years. Moreover, an important change can be observed in
2008-2009. While retail had a very stable share in 2002-2008 (average of 41.3%), it started to growrapidly in 2009, together with gross sales. Obviously, Richemont decided in the mid-2000s to take acloser control on retail and sales. The number of stores owned by the group increased from 444 in2000 to 1’056 in 2014.
This expansion relied both on the opening of new shops and on the purchase of mono-brandboutiques run by independent retailing companies, such as the Singapore-based Hour Glass Co. For
example, Richemont took over 45 Montblanc boutiques in China (2006) and broke the contract it hadwith Hour Glass for the management of four boutiques Montblanc in Australia and one Lange &Söhne mono-brand store in Tokyo (2011). 8 In 2012, Hour Glass explained in its annual report that
Richemont “reported an excellent set of results for FY2012 where their retail push over the past
several years has begun paying handsome dividends. Contributions from their group retail division
grew 50% faster than their wholesale distribution unit.” 9The core strategy of Richemont was to internalize and centralize negotiation regarding access to
shopping places. This was carried out autonomously by each brand until the early 2000s. A major
consequence of this centralization is that all brands can benefit from Cartier’s strong bargaining
power to extend their sales network. In Asia, the wholly-owned subsidiary Richemont Asia Pacific Ltd.
(Hong Kong) plays a key role in carrying such negotiations. In 2014, its managing director Alain Li wasactively involved in the real estate business in Hong Kong. 10 His predecessor Francis Gouten,
managing director between 2000 and 2006, used his experience and networks to launch his own firm,
Gouten Consulting, particularly involved in the development of retail and shopping malls in China.
Moreover, in 2003, Richemont appointed Simon Murray as non-executive director and member ofthe board of directors. 11 This British citizen is a magnate of finance and real estate in Hong Kong andSouth-East Asia, and was a key person to facilitate Richemont engaging in this business.
In his 2014 annual report, Richemont wrote that “the central Real Estate function supported the
Maisons in their acquisition of boutiques.” 12 For the watch companies owned by Richemont, being amember of a large multinational is an important opportunity to expand their own network of monobrand stores. In 2015, Jean-Marc Pontroué, CEO of Roger Dubuis, declared in a Swiss businessnewspaper that he “benefited from all the marketing research and surveys of the Richemont groupwhich mastered the real estate evolution of international metropolises” 13. A few weeks later, JaegerLeCoultre’s CEO stated exactly the same. 148Richemont, Annual report, 2006 and Hour Glass, Annual report, 2011.

9Hour Glass, Annual report, 2012, p. 14.

He was a member of the jury of MIPIM Asia Awards, the largest fair for real estate in Asia, according to PR
Newswire (http://finance.yahoo.com/news/mipim-asia-awards-2014-winners-013200167.html).
10

http://www.ckh.com.hk/eng/about_boardofdirector.html#list2_6
Richemont, Annual Report, 2003.
11

12

Richemont, Annual Report, 2014, p. 14.

L’Agefi, 15 January 2015.

13

L’Agefi, February 2015.

14

9(accessed

January

27,

2015)

and

2.3

LVMH: creation of two investment companies

The French conglomerate Moët-Hennessy Louis Vuitton (LVMH) is the world’s largest luxury
enterprise and the fifth biggest watch group. It invested late in watchmaking, through the takeoverof a few Swiss companies in 1999, especially TAG Heuer and Zenith, followed by other acquisitions in
the following years. The gross sales of the watch and jewelry division increased from 561 billion euroin 1999 to 2.8 billion euro in 2014. This growth relied principally on Asian markets. Their share grewfrom 23% in 2001 to 39% in 2014.
The extension of the network of stores is a driving force of this development. The number of stores in
the watch and jewelry division went from 40 in 2002 to 380 in 2014. Although annual reports havevery little detailed data about the geographical breakdown, some estimations make it possible toemphasize that most of these shops were opened in Asia. According to the store locators of Bulgari,this LVMH company had in 2015 a total number of 44 stores in Greater China, 35 in Japan, 18 inSouth Korea and 23 in South-East Asia, compared to only 16 in the US and 49 throughout theEuropean Union. 15 As for Hublot, an LVMH watch company, it had 73 mono-brand stores in May
2015, among which 16 were in Greater China, 4 in South-East Asia and 1 in Japan, that is, 28.9% of
the network in East Asia. 16 As for Zenith, it had at the same time a total of 20 mono-brand stores in
the world, of which 11 were in East Asia. 17
LVMH is the luxury company which seems to have most internalized the real estate function. It
controls in particular two investment companies which carry out business in partnership with
Chinese and Asian property developers. The most important is L Capital Asia (LCA), a company
specialized in private equity business, but which is also engaged in real estate. For example, in 2008
LCA purchased a wholesale and retail watch company in Singapore, Sincere Watch, and sold it backfour years later for more than twice the price of its acquisition. Yet, beyond the short-term financial
profit made by LCA, the fourth-year integration in LVMH group was the opportunity to develop thisretailer, which is one of its partners in Asia. According to a manager of LCA, Sincere Watch was
especially able, during this time to “lease prime locations in malls such as ION Orchard, Scotts Squareand Marina Bay Sands in Singapore as well as properties such as Starhill Gallery in Kuala Lumpur.” 18
Moreover, in 2010, LCA signed a strategic agreement with Emperor Watch & Jewellery, one of thelargest retailers in China after Hengdeli, which held 88 stores in Greater China and Singapore in
2014. 19 This cooperation was very important to support the growth of Emperor’s retail network.
Christina Teo, who oversees LCA’s investments in South-East Asia and Pacific, declared that her
company “has since helped the firm to open more than 40 outlets in China.” 20 She added that LVMH’s“good relationships with landlords can help it stake out better locations for the companies it backs.” 21The second investment company which supported the growth of LVMH’s subsidiaries is L Real Estate(LRE). Its actual activities are not known in detail. LRE invested in major shopping mall projects
through joint ventures created with a Chinese financial tycoon. For example, in 2011, it created
http://www.bulgari.com/en-jp/storelocator/ (accessed 27 May 2015).

15

http://www.hublot.com/fr/boutique/world/ (accessed 27 May 2015).

16

http://www.zenith-watches.com/fr_fr/shoplocator.html (accessed 27 May 2015).

17

The Edge Singapore, 9 April 2012.

18

Annual Report, 2014.

19

The Strait Times Singapore, 3 May 2014.

20
21

Ibidem.

10

Shanghai Luxchina Property Development, together with a company controlled by Stanley Ho, inorder to build and manage the center L’Avenue, at Shanghai, which became one of the largest luxury
malls in the world. LRE made a second investment with Stanley Ho group in Shenyang to develop
another L’Avenue shopping mall.
Although as investment funds the purpose seems to invest for a short period (5-8 years) based on anexit (sale) strategy, LCA and LRE have both enabled support, either by investing in companies or in
shopping malls, for the expansion of some of the largest watch retailers in Greater China, and hence
the sales of their own products.

3 Access and control of retail spaces
The expansion strategies of the three watchmaking groups developed in the previous section
highlight the absence of direct links between the retail networks’ control and investment in realestate projects. All the groups have to cooperate, directly or indirectly through local retailers, andgenerally speaking, on a case-by-case basis with the main property groups specialized in theconstruction of shopping spaces.
There are various kinds of shopping spaces for the sale of luxury products in East Asia, such as street
boutiques, department stores, duty free shops, shops in high-end hotels, etc. This section first
focuses on luxury shopping malls that are today symbolic sales places for luxury goods in Asia. It
secondly gives an overall view about the relations between the Swiss watch luxury groups and thecommercial property industry to access the shopping malls in China and in the main Southeast Asianmarkets.

3.1

Commercial property development industry and luxury brands

Large Japanese retail groups were the first to develop department stores and shopping centers forluxury goods in Southeast Asia in the 1980s and 1990s. This strategy was based on a specific businessmodel (introduction of luxury products to Asian consumers, Fujioka 2013) which could be
implemented in a favorable economic context such as the liberalization of foreign investment in Asiaand the economic boom and cheap access to capital in Japan, as well as the emergence of highincome Japanese tourism over all Southeast Asian countries. For instance, Sogo successively opened
large department stores in Bangkok (1984), Hong Kong (1985), Taipei (1986), Jakarta (1990) andKuala Lumpur (1994) (Satou 1994). Mitsukoshi opened stores in Shanghai (1989) and Taipei (1991),
while Isetan went to Singapore (1983), Kuala Lumpur (1990), Bangkok (1992) and Tianjin (1993). 22
Since the mid-1990s, shopping malls have become the new concept of large urban shopping places.
They first appeared in Hong Kong and Singapore and then expanded all over East Asia to become
today’s emblematic places for Western luxury goods. Table 2 shows the property owners andinvestors of the main luxury malls in several large cities in Southeast Asia and China, most of thembelonging to property companies. Two characteristics must be underlined. First, in most cases,
investors are local property companies (Bangkok, Kuala Lumpur and Taipei), which are also large
conglomerates with businesses in various national economic sectors and which are close to national
governments (Colpan, Hikino and Lincoln 2010). For instance, Berjaya Group, which built Berjaya
Times Square in Kuala Lumpur, is a company active in real estate, finance, trading, food, leisurehttp://www.imhds.co.jp/company/department_overseas.html

2211

activities, etc. 23 The Breeze Group, which owns one of the largest luxury malls in Taipei, was founded
by Paul Liao, a Taiwanese businessman who has also invested in metal and wood trading, as well as
hotels.24
Secondly, Hong Kong developers are particularly active in the sense that they have a cross-national
strategy, investing massively in China, and to a lesser extent in Singapore. In China, Hong Kong
companies have become major partners for Western luxury brands that seek partners
knowledgeable about the various Chinese cities markets and their needs. They have comparativeadvantages over Chinese developers in terms of quality of construction, commercial management
but above all in terms of commercial concept and shopping attractiveness (through marketing andvarious events for instance). Furthermore, some main Hong Kong property companies specialized inbuilding high-end shopping malls such as Swire, Sun Hung Kai and Hang Lung, have been expanding
over the country, from first tier cities (Beijing and Shanghai), to second tier cities such as Chengdu
and Chongqing, in particular where they have the support of local governments that want to
attract big international brands. In that way, the construction of luxury malls in these new cities
correspond to both luxury retailers and Hong Kong developers strategies to position themselves wellin their respective ‘high-end’ markets.
INSERT TABLE 2
On the whole, in East Asian countries developers, having either a national or inter-regional strategy,
are core partners for the luxury industry. Depending on the country, they fulfill two key functions.
They are first a way to access property in some countries where direct foreign investment in land
and/or real estate is forbidden (e.g. in Thailand and in Indonesia) or restrictive (e.g. China andTaiwan). Second, besides regulation purposes, these developers are strong local partners that enable‘embeddedness’ in various cities’ markets (Wrigley et al. 2005). They bring specific and often tacitknowledge of the local real estate markets, and in particular they have interpersonal relationships
with local governments.
Partnerships may have changed over time. In China, watch distributors and retailers like Hengdelithat wanted to expand in the whole country first collaborated with local developers that were notspecialized in the construction of luxury shopping malls. The original focus was to be in the cities’
markets. These last years, since the Global financial crisis of 2008-2009, the commercial property
industry seems to have entered a second and more competitive phase with more Chinese and Asiandevelopers building new shopping centers (Mingtiandi 2015). In this context, all three watch groups
have been in search, directly or through independent distributors, of developers who are able tobuild high quality luxury shopping malls that correspond to the groups’ marketing positioning inluxury, such as high-end commercial development property corporations from Hong Kong.

3.2

Four models of relations between Swiss watch luxury groups and thecommercial property industry in East Asia

Until the early 1990s, Swiss watch groups had not internalized retail and used a ‘traditional’ model:
they used to go through independent wholesale distributors (e.g. Cosa-Lieberman, Siber Hegner) that
had business relations with independent retailers (e.g. Cortina, Hour Glass) to reach customers
worldwide. They consequently could not hold any control over the shopping environment of their
http://www.berjaya.com/

23

Taiwan News, 22 May 2015.

24

12

products. Four main models of access to shopping malls in East Asia and of relations between Swiss
watch luxury groups and commercial property corporations since the mid-1990s, respectively as key
anchors and property owners and investors, emerge from our study. Swiss luxury watches can besold within mono-brand or multi-brand shops, depending on the brands marketing strategy and on
the significance of the locations.

First, a watchmakers’ group can negotiate directly with property corporations where they lease
shopping areas in the shopping malls. This model, used on a case-by-case basis and to various extents
by the three watch groups, requires close relationships with the real estate industry in the various
countries.
Secondly, the link between retail and real estate can be strengthened. Some real estate arms can becreated within the group, and direct real estate investment can be made in partnerships withproperty development companies. This active strategy which enables better access and control over
shopping areas requires, however, besides various skills related to the real estate business, large
capital investments. This model has been observed in the case of LVMH, especially through its
investment funds L-Real Estate. This may be related to the fact that LVMH is a generalist luxury groupwhich has a large and various portfolio of luxury products, including high fashion, which can makepossible and profitable direct investment in a shopping mall.
Thirdly, watch groups can continue going through key regional retailers they have had long-term
relations with and consequently access shopping malls indirectly. These retailers have their own
network of commercial property business. Here however luxury watch groups cannot have directcontrol over the selection of the ‘right location’ for the shopping mall and position within it. Retailers
such as Emperor and Hengdeli have been major partners for all groups, especially in Hong Kong andChina.
Fourthly, watch groups and local retailers can make property joint-ventures. This model has beenused in the case of Swatch Group, which co-founded with Hengdeli the company Beijing Xin Yu Heng
Rui Watch & Clock Co. However, the concrete activities of this company could not be clarified. 25
INSERT FIGURE 1

Conclusion
This exploratory research emphasizes the major role of real estate for Swiss luxury watch groups intheir expansion in East Asia since the late 1990s. This went along with the emergence of luxury malls
as a new form of shopping space. That corresponded to the strategies of both watchmakers anddevelopers. First, for watchmakers, the internalization of distribution and retailing led to new formsof relations with commercial property developers, as they wanted to better control sales of products
and to internalize earnings from this activity. Second, luxury malls were a way for some developers toinnovate and to build new kinds of commercial outlets which could compete against department
According to SG, this is a real estate company (Annual Report, 2014, p. 203), while Hengdeli Holdings
mentioned a property management and leasing company (Annual Report, 2014, p. 150).
25

13

stores and mid-range shopping malls. Hence, we highlight four forms of relations between both
actors.
In terms of literature implication, this article fills two research gaps regarding the retail transitions in
Asia (Coe and Bok 2014). First, it goes beyond the food sector and other mid-range brands usuallystudied by scholars, by focusing on the strategy of luxury watch groups to enter the various markets
in Southeast Asia and China. Second, the scope of this study covers different countries, while most ofliterature is focused on single national markets. The regional scale is meaningful, as several
important actors like Hong Kong developers do not limit their action to one market. Third, this article
points out the lack of works about property development industry strategies and business models, inAsia and China, while there is a quite extensive literature on these subjects concerning Westerncountries.
Finally, this paper opens new prospects for future research. At first, it appears necessary to analyze
more deeply the sales strategy of watch groups in Asia. Luxury malls are one of the major shopping
spaces, among various others like duty free stores, online shopping and shops on street. Theirrespective functions are still unstudied. Moreover, the strategies adopted by the major retailers who
used to be key intermediaries of Swiss watch companies and needed to adapt their business model.
For instance, some of them have turned to independent luxury watchmakers, like Patek Philippe andemerging artisans. The process of this mutation is however unclear in terms of distribution, access tocustomers and negotiations with developers. In addition, the strategy carried out for luxury goods
other than watches, especially culturally embedded products like alcohol and cosmetics, could be
discussed in comparison with the cases offered here. These goods belong to generalist luxury groups
like LVMH and to more specialized and smaller companies, which have limited financial means andeconomic scale. Lastly, the construction of shopping malls throughout East Asia must be further
studied to shed light specifically on access to land, financing and local property markets (e.g. finding
local partners, relations to local governments, and profitability). The property industry in East Asia
has been changing these last two decades, resulting from urbanization, economic development aswell as internationalization of real estate. These changes have had consequences on property
companies in Asia, which often belong to conglomerates, in terms of sectors (buildings: housing vs
non-housing; infrastructures) and urban models (e.g. mixed-use), positioning and business models.
This can be done through in-depth studies that consider the various corporations’ spatial andinstitutional embeddedness.

14

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Figure 1: Relations between luxury watch companies and developers in Asia

Source: draft by the authors.

18

Table 1: Ten largest watch companies of the world, 2014
Watch sales (CHF
million)World market share(%)

Switzerland

7’660

19.2

Richemont

Switzerland

6’520

16.3

Rolex

Switzerland

4’800

12

Fossil

USA

2’518

6.3

LVMH/Bulgari

France1’720

4.3

Citizen

Japan

1’492

3.7

Seiko

Japan

1’348

3.4

Patek Philippe

Switzerland

1’280

3.2

Casio

Japan

950

2.4

Audemars Piguet

Switzerland

720

1.8

CompanyCountry

Swatch Group

Source: Vontobel Luxury Goods Shop – Watch Industry, Zurich: Vontobel Equity Research, 2015, p. 16.
Note: figures for Rolex, Patek Philippe and Audemars Piguet are based on estimations, as these unlistedcompanies do not communicate their gross sales.

19

Table 2: Developers of the most important luxury malls in major East Asian cities
Beijing
Mall

Shanghai
Developer

Mall

Beijing APM

Sun Hung Kai (HK)L’Avenue

China World

Shimao (CI) & Kuok
(SG)
Parkson Group (MY)IFC MallFuxingmenParkson
Oriental Plaza

Xidan Joy City

L Real Estate (F) &LAI (HK)Sun Hung Kai (HK)

Orient Shopping
CenterPlaza 66

Whampao
Hutchinson (HK)Shin Kong
Mitsukoshi (TW-JP)& Hualian Group(CI)
COFCO (CI)Shin Kong Place

Developer

Times Square

Hong Kong
Mall

Shanghai Bailan
Group (CI)
Hang Lung
Properties (HK)
Wharf Holdings(HK)

TaipeiDeveloper

Mall

Developer

Elements

MTR (HK)

Bellavita

ChunYee (TW)IFC MallSun Hung Kai (HK)

Breeze Center

Breeze Group (TW)Landmark

HK Land (HK)

Taipei 101 Mall

New World Tower

New World
Development (HK)
Swire Properties(HK)
Wharf Holdings(HK)

Taipei Financial
Center (TW)

Pacific Place
Times Square

SingaporeMall

Developer

ION Orchard

Capital Land
(SG) & Sun
Hung Kai (HK)SPH Reit (SG)Kuala Lumpur
Mall

Developer

BangsarBangkokMallDeveloper

BRDB
Central World
Central Group
Developments
(TH)
(MY)
ParagonBerjaya Times
Berjaya Group
Emporium
The Mall Group
Square(MY)(TH)
Suntec City
Capital Land
Lot 10YTL Land &Siam Paragon
Siam Piwat (TH)
Mall
(SG)
Development& The Mall
(MY)Group (TH)
Tangs
Tang family (SG) Pavilion Kuala
Pavilion Group
Lumpur(MY)
Raffles City
Capital Land
Suria KLCC
KLCC Property(SG)
Holdings Berhad(MY)
Source: www.retailinasia.com; shopping malls were selected on the basis of the presence of Omega and/or
Rolex boutique. CI = China; F = France; HK = Hong Kong; JP = Japan; MY = Malaysia; SG = Singapore; TH =Thailand; TW = Taiwan.

20