It's all about distribution, luxury execs say

Patrick Thomas, Chief Executive of luxury goods firm Hermes, attends the Reuters Global Luxury Summit in Paris on June 8, 2009.

PARIS (Reuters) - Luxury goods groups with their own network of shops are weathering the downturn better than those relying on wholesalers or third-party distributors, executives told the Reuters Global Luxury Summit in Paris.

They can better manage the flow of goods hitting the shelves, avoid the brand being harmed by discounts and do not have to rely on distributors, sitting on unsold stock, who need to keep their cash to pay rent and staff as banks let them down.

Hermes (HRMS.PA), the world's second-largest luxury goods group behind LVMH (LVMH.PA) in terms of market value, is a case in point. It readily admits that its store sales are doing much better than those generated by wholesalers.

"Our stores are doing extremely well," Hermes Chief Executive Patrick Thomas said this week.

Hermes makes 80 percent of revenue from its own stores, which has helped it resist the crisis better than many peers.

"Distributors are reducing inventory for cash management," Thomas said. "The areas of our business affected by the crisis are the three sectors where we sell through distribution channels (wholesalers and third party distributors) -- perfumery, watches and tableware."

Young Swiss luxury watchmaker Parmigiani Fleurier, which competes with Patek Philippe, said creating its own retail network was essential to ensure its long-term growth.

"The companies that are best positioned today are those who own their own retail networks," Chief Executive Jean-Marc Jacot said. "We are thinking more and more now of setting up our own distribution network."

Parmigiani, which sells through individual retailers or department stores such as Harrods in London, currently has only one shop, in Dubai.

SOARING RENTS

It said it was planning to open a shop in Moscow and in Istanbul this year and one in China "as soon as possible."

Jacot said it was important for the brand to have a shop in which customers could see a watchmaker working behind a window.

"It is like when you go to a famous restaurant, you want to see the kitchen and the cook," he said.

Swatch Group (UHR.VX), the world's largest watchmaker, has said it has gained more insight into demand for its products thanks to its own retail network. That way, it could react more quickly when demand fell.

Its own stores made up around 15 percent of group sales.

"With wholesale distribution you are never sure what exactly is going on with the end-consumer, so it makes sense to have your own retail network," said Kepler Capital Markets analyst Jon Cox.

In Dubai, one of the world's fastest growing luxury retail hot spots, some shop tenants said they could face closure if rents did not come down.

The United Arab Emirates shopping mecca has seen retail rents soar as shop owners flocked to secure space in malls but unlike real estate, shopping center developers have been reluctant to reduce prices hoping to ride the worst of the financial crisis.

($1=1.092 Swiss Franc)

($1=.7208 Euro)