Ralph Lauren's Stock Could Jump If China Strategy Works - TheStreet

NEW YORK (Trefis) -- For Ralph Lauren (RL) - Get Report, re-positioning its brand in China into a more premium brand remains one of its highest near-term priorities.

As Europe, which is a key market for Ralph Lauren, has started showing signs of a slowdown due to the sovereign debt crisis, demand from emerging markets will be a key driver of growth in the near term.

Here we highlight the company's reasoning behind its strategy in China, the difficulties it faces in executing its strategy, and above-all the potential impact if the company succeeds in its intent.

See our complete analysis for Ralph Lauren here

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Rationale Behind Re-positioning in China

Prior to 2010, Ralph Lauren's China operation was licensed to Hong Kong-based Dickson Concepts. Using a license partner allowed Ralph to expand its geographic presence without undertaking significant capital expenditures.

However, a lack of direct control of the business and its product strategy damaged the brand's reputation in the region. Dickson focused its efforts on distributing Ralph Lauren's famous casual sportswear products such as Polo shirts for men.

However, over time, piracy of Polo shirts in China and Dickson's focus on lower price point products created a stale, low quality brand image in China, contrary to the company's premium luxury brand image in the U.S. and Europe.

In 2010, Ralph Lauren took direct control of its business in Greater China by buying the license back from Dickson. Through this acquisition Ralph Lauren hopes to elevate its brand image in China. As a first step, in 2011, Ralph Lauren closed 95 points of distribution in China (about 60% of its network in China) that did not coincide with its new brand strategy.

Major Hurdles

Though Ralph Lauren has high hopes of an image makeover in China, we believe the shift isn't going to be easy. First, due to Ralph's existence in China for many years through its licensing partnership, consumers have been conditioned for a long time to think of the brand as lower quality. Changing this perception may prove difficult for the company.

Second, the company faces stiff competition from established brands in the region that have had a presence in China for a lot longer than Ralph. This will make things difficult as Ralph competes for premium retail space and sales staff for its stores. Many of the premium locations have already been occupied by established brands such as Louis Vuitton and Prada and it will be difficult for a 'new comer' such as Ralph to convince mall owners to give the company access to choice locations.

Potential Impact

While Ralph Lauren's brand re-positioning efforts face several challenges, we remain optimistic on the company's plans in China. Ralph seems to have started on the right foot by closing a major part of its existing network in China and securing a handful of premium locations for its new stores. Over the next three years, Ralph Lauren aims to open 60 new stores in China, primarily in premium locations. Of these, 15 stores are to be opened this year covering major cities such as Beijing, Shanghai and Hong Kong.

Considering that China contributes a significant percentage of revenue for its competitors such as

Coach

(COH)

Coach and Burberry, if Ralph Lauren is successful in China it would increase retail revenues significantly in the future.

Additionally, an elevated brand image appealing to high end luxury consumers would also improve Ralph Lauren's retail margins, and better brand recognition within China should result in higher revenue in Europe and the US as well driven by demand from Chinese tourists.

Currently, many of the company's competitors derive 25% - 40% of their European sales from Chinese tourists compared to just 2% for Ralph Lauren so there could be significant upside if executed well.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.