Listing an IPO in Hong Kong
Prada’s decision to list an IPO in Hong Kong rather than Milan is controversial, especially given the history of the brand as a whole. However, its management looked at the situation the company was experiencing and realized that capturing the Chinese market while engaging investors who would be interested in sustaining operations in their homeland. Despite the fact that Prada had to sell twenty percent of the company and thus change the structure of its ownership, it was the move that deserved praise. The company’s management realized that in order to sustain its success, it was imperative to focus on the expanding Chinese market of luxury goods. Proceeding with engaging investors in China was the best solution in the management’s eyes (compared to a Eurobond in Britain or other countries) because it considered the steadily increasing demand of Chinese consumers for luxury goods. However, the expectations of earnings were not met because investors did not show the engagement that Prada needed, and prices did not get as high as the company needed them to jump.
The company’s desire to make a risk may not be fully substantiated despite the fact that it was used to working with banks rather than the Eurobond or Foreign Bond markets. However, being a successful luxury brand in Europe and North America, taking a chance and showing the interest to foreign investors could have been beneficial. From a personal perspective, I agree with the decision to list an IPO in China and Hong Kong because it allowed Prada to experiment and see where the decision would bring them. Although that China is experiencing an economic downturn, it does not mean that it will persist for years.
Justification for Issuing IPO
Issuing the IPO in Hong Kong was a brave move that Prada had to make in order to try the company’s hand in capturing the market for luxury goods in China and Hong Kong. First, the decision was justified by the fact that being a brand-name company, Prada had to establish a significant presence in the new region and strengthen relationships with local consumers. The financial community along with regular customers usually finds road shows appealing due to the wide coverage in the media. Second, issuing the IPO in the region was supported by the fact that Hong Kong was the biggest IPO market in 2010, with up to sixty billion dollars raised from almost ninety listings. Third, the decision was also attributed to the advisors’ seeing a significant potential in helping the brand’s succession by engaging local investors.
On the downside, it is possible that sooner or later, the change in Prada’s ownership structure may result in the confrontation between the original leaders of the company and those have newly-invested. For instance, new investors could be interested in lowering the prices to attract more customers during the times of an economic downturn. However, lower prices may compromise the integrity of Prada as a luxury brand and the high cost of the craftsmanship that goes into making each item. Also, the expectations of Prada to get the support of local investors were not met because the market was suffering from an economic downturn. This means that in order to issue an IPO in a specific region, it is imperative to make sure that the conditions are stable.
Changing the Ownership Model
The industry of luxury goods is dominated by family-owned businesses because of their ability to resist corporate advances as well as having better control over the direction of product lines. For instance, Giorgio Armani has always been adamant about avoiding being exploited and giving up the control of unique designs. However, Miuccia Prada and Patrizio Bertelli made the decision to change the structure of the company’s ownership because of the need to maintain the succession of the brand in the new region. Diluting the family ownership is a bold move and something that most family-owned luxury companies avoid doing.
However, given the objective that Prada had set – to raise approximately 20 billion HK$, the change in ownership structure was a necessity. Furthermore, there had been no signs of the change affecting the control over designs, which is the most feared by designers. In addition, the limitations of family-owned luxury products houses still could have taken their toll on Prada had it not made any changes. For example, it is hard to maintain the relevancy of a brand that became associated with a charisma of an outstanding founder. Because of this, ruling out the option of engaging a strategic investor may prevent the success of the brand. Therefore, despite the preconceptions that luxury companies work best if they are family-owned, Prada was bold and brave enough to overcome the usual fear designers have in terms of changing the ownership structure.
Future of Prada
The future of Prada in Hong Kong and China can turn in both directions. At the moment, the region continues to see a slowdown in the spending of luxury goods, which is challenging for companies such as Louis Vuitton, Chloe, Tiffany, Dior, Chanel, and numerous others. Nevertheless, the luxury sector is still growing, although at a very slow pace because of a significant decline in the equity markets. The good news is that the luxury sector has a potential to recover and stabilize if the volatility of markets decreases and travel to China increases. This is a positive outlook for Prada because consumers have not lost their interest and desire to buy luxury products but resist spending because of the market volatility.
Thus, Prada should not be discouraged and continue operating in the market while also considering the changes that had recently occurred in the luxury consumption patterns in the region. For instance, there is a trend of purchasing expensive products as business or personal gifts rather than for personal consumption, which points to the need for providing an appropriate selection of goods at Prada stores that will be appealing to customers who need to buy gifts. Another challenge is the fact that Chinese customers find more benefits in buying luxury products in other countries due to high taxes, which means that in order to stay successful in the region, Prada may have to lower prices.
To conclude, the downturn in the economy in China and Hong Kong is not long-term and has the potential to reduce, thus providing Prada with new opportunities. For instance, Chinese consumers who have usually bought luxury goods in Europe are now fearful of traveling there because of security issues. This means that if Prada works on making their products more appealing to the target audience by reducing prices and offering the right selection of products, it can remain relevant.