Hugo Boss sources nearly 50% from Eastern Europe

Hugo Boss sources nearly 50% from Eastern Europe

German fashion house Hugo Boss says it sees Turkey as an important sourcing destination and will invest further in the country, despite facing criticism from unions earlier this year over the treatment of workers at its Izmir factory.

Christoph Auhagen, chief brand officer for Hugo Boss, told delegates at this year's International Apparel Federation (IAF) convention in Istanbul that the company sources around 30% of its products from Asia, and nearly 50% from Eastern Europe. Within the latter, around 26% is sourced from Turkey.

“China and Turkey are, for us, the most important sourcing markets currently and, honestly speaking, we would like to invest further in Turkey. We see it as an important pillar for us for our sourcing strategy.”

Hugo Boss's Izmir factory is seen as one of its most important globally, employing around 4,000 workers and producing the bulk of the group's women's wear items. Auhagen says the firm has invested heavily in people, training, IT and growing production there.

“This is the best suit factory you will find in the world. We produce around 6,000 women's units and close to 2m shirts. We see Izmir and Turkey in general as a very sustainable sourcing region and we will grow volume here and move to become a service provider for the other interfaces of our production portfolio in Eastern Europe.”

Auhagen says the factory will play an important role in thr group's strategic production activities in the years to come, with investment also being made in sustainability.

Earlier this year the luxury group came under fire from the Industriall global union over claims the company “puts up every possible barrier” to union organising at the Izmir production facility and “ruthlessly sacks” key union members.

Hugo Boss denied the claims and Auhagen told delegates at the Turkey conference: “Constructive observations from other organisations are very welcome. But constructive means, in our understanding, objective observations of our activities...and communicating in a constructive manner. We are investing in Turkey, we do a lot for our employees, we get a lot of feedback and we feel comfortable about what we are doing there.”

Aside from its production facility, the company operates four stores in Istanbul, two in Ankara, one in Antalya and an outlet in Izmir.

Sustainability and ethics

The comments were made as part of an update by Auhagen on the group's 2020 strategy, which focuses on sourcing and manufacturing efficiencies over the next five years.

As part of its plan, the brand chief was keen to talk about the improvements Hugo Boss has made in relation to social standards globally, which he said are monitored by annual internal and external audits, and self-assessments with raw material suppliers.

“We have a very close relationship with the International Labour Organization (ILO) and the UN. We are also a member of the Fair Labor Association (FLA). All of these help us, measure us, observe us. It is helpful for us to have direction from outside.”

Auhagen says that from the audits and surveys carried out, payment of appropriate wages is the main issue.

“It's important we follow minimum wage rules from governments, but as a premium brand we have to do more. We started a fair compensation project with the FLA and this will be implemented from the end of next year because we, as a premium brand, have a responsibility on a social basis regarding the employees in the factories of partners working for us. This is a high priority in Asia and Eastern Europe.”

Expanding on the results of the survey and audits, Auhagen says 26% of its suppliers in Asia ranked as 'good', and 37% as 'improvement needed'.

“This is okay, because we have two other positions in our ranking: 'risky' and 'insufficient' and we don't have any of those at this time.”

In North Africa and Eastern Europe, Hugo Boss's supplier rankings of 'good' are around the 60% mark, with 25% 'satisfactory', but 15% still with 'improvement needed'.

“We have found cases where overtime and salary are not paid in the right way. We didn't find child labour or anything like that. Payment terms and conditions is the factor. For 2020 we would like to see 80% of our partners within the 'satisfactory' ranking.”

As well as looking at sustainability and CSR, the plan is to also accelerate sales growth and boost margins by targeting emerging markets and upgrading its core brand. Part of this will involve entering under-penetrated markets such as Mexico, Chile, Russia and India, Auhagen says.

In Asia, Hugo Boss already has a well-developed presence, he adds, but cites Vietnam, Indonesia and Singapore as “important potential countries” for the group.

Shift in focus

The 2020 strategy, which the fashion house outlined late last year, shows how far the company has come from the wholesale brand it was some seven years ago. It is now in retail and operates more than 480 stores and 640 shop-in-shop spaces, or concessions. Employing over 13,000 staff, it ships product to over 130 countries and is now in three distribution channels: wholesale, retail and online.

“Going from wholesale to retail was the most important decision for us,” says Auhagen. “We have changed a lot in the company during the last six to seven years. We have implemented not only a successful men's wear brand [with designer Jason Wu], but we are doing 10-12% in online sales as well. We also focused on women's wear, which is an important part of our strategy.”

The group is certainly confident of solid growth for fiscal 2015, after this week recording a 40 basis points rise in gross margin to 64.5% in its third-quarter, and sales growth of 4% to EUR744.1m. Earnings fell 22.8% to EUR88.5m due to muted performances in China and the US, but CEO Claus-Dietrich Lahrs said expectations were for "improved" sales and earnings in the final quarter. 

The company's net sales development over the last four years has a CAGR of 10%, while EBITDA has grown by 15%. In terms of regions, Europe remains its largest, with 23% of net sales in the Americas and 14% in Asia.

"This balance that we currently see is, for us, fantastic,” says Auhagen. “We will invest in all of those regions continuously, and we see this balanced picture also included in our strategy for the years to come.”

As for global retail sales, the company is hoping this will account 16% of net sales at the end of the current fiscal year, from 3% in 2010. By 2020, the target is for that to reach at least 75%.

Auhagen says this is thanks to heavy investment in the brand, in retail stores, factory outlets, logistics, in its Stuttgart warehouse, and IT. 

Luxury offering

Another key area Hugo Boss has been working on is expanding its luxury offering to compliment its positioning in the premium segment. Consequently, work has gone into enhancing its Boss core brand and it hopes to double sales to around 20% of group revenues by 2020. At the same time, Boss is gradually withdrawing from the entry-price segment, which will be addressed by its Hugo and Boss Green brands.

“We decided to go more luxury with Boss to protect the brand due to our retail strategy, and use Boss Black label and White label only for our retail business,” Auhagen says. “This was a decision we made last year because we saw a different positioning of the brand on a worldwide basis. We had a different image in Asia to what we did with our majors in the US and Europe.

“You will also see we have uplifted our prices a little bit to differentiate between premium and luxury. We will not go luxury. We have no desire to go into the space of Dior, Armani, Prada, Ferragamo, but to move with the brands from this very commercial competitor environment, and just touch the luxury segment.”

Auhagen says Hugo Boss is also keen on leveraging the potential in women's wear and accessories.

“There is huge potential for us here, and this is mainly to do with a decision we made three years ago to hire an artistic director for the brand for the first time. We also went on the runway at the New York Fashion Week, and we are now seeing increasing [sales] numbers on a double-digit basis.”

Building omni-channel capabilities

As well as exploiting growth in under-penetrated markets and shifting the focus of its core brands, Hugo Boss has placed a large emphasis on growing its omni-channel capabilities – a crucial area if it wants to serve all three of its distribution channels seamlessly.

“It's very important we have this seamless experience because a lot of consumers are travelling either from China to the US to Europe or the other way round, so it's important we create one brand message on a global basis,” Auhagen explains. “We see around 80% of luxury purchases happen in the store environment. However, 65-75% of all luxury purchases are influenced by online content; therefore the online and digital business is something we have to support and develop in a perfect way.

“There are more than two billion smartphone users and it is this group of consumers we have to convince. We have to make sure consumers can order everywhere and that we can ship to anywhere. We have to have high retail availability, and ensure click and collect works and our shipments from store to store are seamless. We need a consistent platform, which is already being developed. The omni-channel distribution strategy is an important part of that.”

Auhagen adds that, given word of mouth and social media are considered as top influencers in purchasing decisions, social media content creation is another important area for Hugo Boss, particularly when it comes to attracting the Chinese customer.

“We see that 70% of mainland Chinese luxury spending is oversees, so we have to convince the Asian customers also in the European and American regions. By 2020, the Chinese are projected to represent 50% of luxury spending globally, which is important.”

Hugo Boss is also looking to capitalise on new technology in terms of design. The company is implementing a 3D visualisation system that means design decision-making can be made online, saving time and money on physical prototypes. The system is expected be rolled out within the next two years.