12 Nov 2015

Luxury brands: Into Africa

As the luxury industry looks to Africa's emerging markets, a thorough understanding of the laws of a particular jurisdiction is essential for success. Carlo Montagna and Francesca Secondari of Italian firm BonelliErede consider the issue.

Anton Balazh Anton Balazh

Focusing on expansion into emerging markets, the luxury industry looks to Africa for new opportunities and extends its sights beyond the already tested markets of Egypt, Morocco and South Africa. A number of global luxury brands have already opened stores in the Nigerian capital of Lagos and it is not the only country under the spotlight: Angola, Ethiopia, Ghana and Kenya are also coming up as hot targets for expansion.

As markets become more sophisticated, leading brands need to keep pace by making changes in terms of distribution (directly operated stores and joint ventures vs licences), product (investment in the supply chain), services (after sales, customer care, delivery lead time) and geographical presence. Even when the business analysis of a potential new market looks promising, there is still much more to consider. To identify the best way to approach a new market and secure the brand’s image, financial aspects have to be considered alongside the outcome of an exhaustive legal analysis.

Each country has its own specific features and legal system: to mention just one issue, some prohibit a foreign investor from operating directly without a local partner. The fact that local legal counsel in emerging markets may lack direct knowledge of the luxury goods industry means that, often, involvement is needed from in-house legal offices or, depending on the circumstances, a skilled counsel from the brand’s home country.

Luxury brands have historically approached emerging markets through distribution and licence agreements (for example, Ermenegildo Zegna and Hugo Boss entered the Nigerian market in 2013 with mono-brand, franchise stores).

Licence agreements are not the only choice, though. In recent years, the need to retain strict control over the distribution chain has driven many luxury brands to establish a direct presence in foreign markets. The usual approach is to set up a legal entity (or branch) to directly operate the stores; however, this is not always available or advisable. In fact, sometimes local legislation requires the brand to have a local partner to operate in the country.

The level of control that a brand wants over distribution generally dictates the most suitable legal structure between a joint venture and a licence or distribution agreement.

The very first decision to be made is business oriented: whether to outsource the distribution, even if within a given framework, or to directly manage it. In other words, a luxury brand must weigh the potential return against the required investment. Once this choice has been made, several legal considerations come into play. The main one is whether a local partner is required or local agents have to be registered. If so, the protection achievable in terms of corporate governance, control over the distribution, key employees and strategies to step out of the joint ventures retaining the rights to operate under the brand’s name can make the difference during the decision process.

Joint ventures are certainly more expensive than licencing arrangements, but they have the advantage that the brand can maintain control over the management of the stores, the merchandising mix, pricing, discount policies, training, after-sales services and inventory. The most common structure is to have the joint venture entity directly run the business by virtue of a licence or distribution agreement with the brand owner. Consequently, it is the joint venture that holds title to the lease rights, the import permits, the employment agreements, the stock and the like.

In contrast, licence and distribution agreements must – even if within the framework of contractually established guidelines – grant the third party/licensee a certain extent of freedom. Indeed, although the licensee must comply with certain guidelines, it essentially runs the business on its own according to its view of the market. This creates a serious issue when the licensee’s view conflicts with the policies of the luxury brand (merchandise mix, pricing and discount policies are the main examples). For this reason, it is essential that the brand owner’s level of protection and ability to enforce the agreement in the event of a breach are clearly set out in the agreement.

Africa certainly offers growth opportunities and is ‘a place to keep an eye on’. However, considering the still complex landscape, a thorough understanding of the local legal environment and a prudently drawn up contractual arrangement are key to success, whichever structure the brand chooses.

Carlo Montagna is a partner and Francesca Secondari is a managing associate at BonelliErede.

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