High-End Tailor Zegna's Marco Polo Moment

The alpine valleys of northern Italy's Piedmont region are dotted with abandoned textile mills, victims of competition from China and other low-cost locales. But at a mountainside factory in the village of Trivero, menswear maker Ermenegildo Zegna turns out 2 million meters of sumptuous wool, cashmere, and mohair fabric each year—and China is the biggest buyer.

One-fourth of Zegna's annual sales now go to China. Its off-the-rack suits start at about $1,000. Bespoke garments run from $3,800 to $8,500 in the mainland and have become emblems of China's new wealth. Milan-based Zegna (pronounced Zenya) has more stores in China than either Louis Vuitton or Gucci and commands as much loyalty from Chinese clients as those larger global brands, says Shaun Rein, managing director of Shanghai's China Market Research Group. Although many of its Chinese customers are middle class, "they view themselves as on the way to total affluence," Rein says, and the Italian suitmaker plays brilliantly to that ambition.

Zegna, a century-old, family-run business with $974 million in sales, is proving that even a smallish player can thrive in the world's hottest luxury market. Bain & Co. estimates that Chinese luxury spending will grow 15 percent this year, to more than $11.3 billion, far outpacing the average 4 percent growth seen for the $187 billion industry worldwide. Zegna now has 60 boutiques on the mainland, including dozens in such smaller regional cities as Taiyuan, in northern China, and Urumqi, near the Gobi Desert, where few luxury brands have ventured.

Chief Executive Officer Gildo Zegna recalls the decision to open Zegna's first China boutique in 1991, when no other luxury apparel maker had entered the country. "We lost money at the beginning," says Zegna, the great-grandson of the founder. But his father and uncles had been selling wholesale fabric to Hong Kong tailors for many years. "They knew there was a huge opportunity," says the CEO, who was educated in Britain and worked for Bloomingdale's in New York before joining the family business. He says the China operations are profitable and have posted 30 percent annual sales growth in recent years.

Still, China was tricky terrain for Zegna. The company had to negotiate store leases with landlords who knew nothing about the luxury business—including the Chinese army, which owned the hotel where Zegna opened its first Beijing outlet. Chinese shoppers preferred stores that were bigger and flashier than Zegna's traditional European-style boutiques, with more-frequent inventory turnover. Zegna's Chinese shops receive six new collections a year, vs. four in the U.S. and Germany. And the company has brought many of its Chinese employees to Italy for training, to ensure they can speak knowledgeably about everything from Zegna family history to the intricacies of Italian tailoring.

Customers are impressed. "This is what a classic suit should look like," says Beijing businessman Wang Jun, fingering an $8,500 worsted-wool suit in Zegna's boutique near the Forbidden City. "Chinese tailors lack the styling, the cutting, and the attention to details that can make your garment a world-class suit." Wang, who is chief financial officer of development company Beijing Jianxing Group, says he also shops for clothes in Hong Kong and on London's Savile Row.

Not all luxe menswear purveyors have fared so well in China. Hugo Boss closed some stores, including one in Shanghai's trendy Xintiandi district, due to disappointing sales. Analysts say Giorgio Armani's image suffered because some of its midpriced lines, such as Emporio Armani, include items made in China. "The Chinese aspire to European style," says Luca Solca, a Bernstein Research analyst. "If they see it is made in China, they perceive it to be a fake."

As a private company with six family members in its management, Zegna has been able to maintain its investment in China despite recent weakness in the West. Rather than cutting capital spending when the global recession hit in 2007, CEO Zegna says, "We moved it from West to East," speeding the pace of store openings across the mainland. As a result, he says, "We came out of the crisis stronger than other brands."

The bottom line: Ermenegildo Zegna, a luxury retailing pioneer in China, is benefiting as growing affluence spurs demand for its pricey menswear.

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