Luxury Factory, Small Profits, Hidden Troubles

When the Savior market itself is in economic weakness, coupled with the government's crackdown on corruption and the advocacy of thrift, many luxury brands lose their past scenery. As the upper end of the luxury industry chain, the past foundry factories that rely on luxury brands and shine brilliantly are also affected.

Leather products are one of them. As the first luxury foundry enterprise, it went on sale in Hongkong and became famous overnight. Italy luxury brand Prada (Prada), USA Designer Brand Michael Kors, American high-end brand Coach, Fossil and Locaste are all names appearing on their long-term customers list.

Thanks to the huge increase in sales volume during the period of luxury brand, as one of China's thousands of foundry workers for other people, the leather products of the era have portrayed a high growth track in the past few years. However, its latest announced performance in the manufacturing sector reflects the challenges facing the entire luxury sector.

"In the next few months, the European sovereign debt crisis will continue to bring uncertainties to the global economy. However, the US economy has not yet recovered sharply, and it is expected to face more challenges in the next six months." In the half year earnings report up to December 31, 2012, the leather products of this era look forward to the future.

"An average business of 47 yuan per pack."

A set of data can clearly reflect the high growth of leather products in the past few years: the company's revenue increased from HK $1 billion 349 million in 2009 to HK $1 billion 726 million in 2010, and then increased to HK $2 billion 493 million in 2011, with a compound annual growth rate of 35.9%. In the year ended June 30, 2012, the income of leather goods increased to HK $3 billion 338 million, up 33.9% over the same period last year.

How did the high growth of leather products come true?

According to the results of the report, almost all of the company's revenue comes from its handbags, small leather goods and travel products for high-end and luxury brands. For a luxury brand that sells tens of thousands of bags and has a gross profit margin of at least 30%, it is easy to make money. But as a foundry factory on the upstream end, how much they can get from it is always a sensitive topic.

The company's annual results up to June 30, 2012 show that during the period, the manufacturing business sold about 15 million 480 thousand products, with sales of HK $3 billion 324 million, including total cost of raw materials, direct labour costs and manufacturing overhead, amounting to HK $2 billion 597 million.

Based on the above data, it can be estimated that the average cost of OEM for high-grade and luxury brands is 167.7 yuan per piece, and the price to be sold to the brand is 214.7 yuan per piece. For the leather products of the era, the profit of each package for high-end and luxury brands is 47 yuan.

Compared with the profit of 3000 yuan per unit price calculated by the luxury brand at ten thousand and gross profit margin 30%, manufacturers are known as sweatshops. The boss of a small bag manufacturer in Guangzhou told our reporter: "big factories such as leather goods can still rely on the volume of walking, and the survival of many small unknown factories is very difficult. A bag can only earn twenty or thirty yuan, and the quantity is not so much."

After high growth has stopped abruptly,

However, such high growth did not continue. According to the latest semi annual report, the production orders of brand leather customers from July 2012 to December were flat compared with the same period last year, with a slight increase of 4.5% in sales revenue, a total of HK $1 billion 690 million. Compared to the 34.3% growth of manufacturing business in the same period last year, the high growth of leather products suddenly stopped.

In the June 30, 2012 earnings report, Yang Huaqiang, chairman of leather products, expected that the slowdown of China's economic growth would cause some pressure on the consumer industry. After that, the government launched a high-profile fight against corruption and frugality, giving the once enthusiastic retail outlets a wait-and-see attitude towards luxury brands.

The luxurious luxury brands issued a profit warning and double-digit high growth abruptly stopped. These market realities emerged in the second half of 2012, causing the luxury industry to get into chaos. Today, there seems to be no obvious recovery in the market.

In recent years, the continuous rising cost of labor and raw materials is a common challenge faced by Chinese manufacturing enterprises. The profits of leather goods in the era also depend on whether it can purchase high-quality raw materials at low cost.

In 2011, the raw material cost of leather goods accounted for 60.7% of the company's revenue. Due to the rising pressure of raw materials and labor costs, the gross profit margin of leather goods in the second half of 2012 was also slightly lower than that of the same period last year. Yang Huaqiang thinks that the cost plus profit quotation mode of leather goods in the era will largely alleviate the pressure of cost increase.

However, this is the reason why the profit dependence of leather goods on the main customers is too high. From 2010 to 2012, five major customers accounted for 84.1%, 82.4% and 83.2% of the profits of leather products respectively.

Perhaps aware of such worries, the leather goods plan of the era accelerates the development of its own brand. Between July 2012 and December, the company's own brand TUSCAN "S" realized HK $22 million 600 thousand, an increase of nearly 5 times compared with the same period last year, but the performance in Southwest China was better. Leather goods in the era decided to regard East China as another key market for its retail business in the future.

At the same time, leather goods also said it would introduce more international luxury and luxury brand new customers, and continue to expand the manufacturing business of men's travel products and luxury handbags and small leather goods and other branches.