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China is now the world’s third-largest market for luxury goods. Even more surprising: it is not only the nation’s 300,000 millionaires who are snatching up high-end wares; white-collar employees are also indulging the urge to splurge.
C OV E R S TO RY
B Y B R I A N S C H WA R Z A N D V E N E S S A WO N G
n mid October, the Top Marques Shanghai show, held at the Shanghai International Convention Center, attracted some of the world’s most glamorous luxury cars, sports cars, yachts, furniture and fashion brands to show oﬀ their wares. Coming just days after the city’s F1 Grand Prix, which attracted thousands of attendees, the show gave exhibitors such as Bentley and Vanity Jewels the opportunity to meet “rich and aspirational Chinese” from all over country, the event website stated. During the four-day exhibition, wealthy consumers splurged US$63 million on luxury items from high-end spirits to automobiles. As the economy surges ahead, China’s growing urban-aﬄuent segment is luring luxury goods providers worldwide. More than 300,000 Chinese already have a net worth of more than US$1 million and the mainland’s millionaires control about US$530 billion in assets. The China Brand Association estimated earlier this year that about 13 percent of China’s population, or 170 million people, now buy top-tier brands. One example: British carmaker Bentley sells more Mulliner 728 limousines, the world’s most expensive car at US$1.2 million each, in Beijing than in any other city in the world. The trend is shocking in the world’s C E M B known developing nation. best E R 2 0 0 6 I N S I G H T 2 9 DE
INTENTION TO BUY LUXURY PRODUCTS IN THE NEXT YEAR (By city)
World’s third-largest luxury market
Asia is the largest target market for luxury brands, accounting for more sales than any other region. According to a report released in September 2005 by Ernst & Young (E&Y), China has become the world’s third largest consumer of high-end fashions, accessories and other luxury goods. The report, entitled China: The New Lap of Luxury, says the Middle Kingdom now buys 12 percent of worldwide luxury goods, following Japan (41 percent), the United States (17 percent) and European countries (16 percent). Martin Roll, global brand strategist and author of Asian Brand Strategy, tells Insight that by 2015, China’s share in the global luxury market is expected to grow to 29 percent, while Japan’s share will fall. According to Goldman Sachs, China will become the second-largest luxury market by 2015. The E&Y report also notes that the Chinese luxury market currently generates more than US$2 billion in sales per year. It is expected to grow 20 percent annually until 2008 and then 10 percent annually until 2015, when sales are expected to exceed US$11.5 billion. By 2010, China is expected to have 250 million consumers who can aﬀord luxury products, a whopping 17 times the present number. With this explosive growth, Western brands can enjoy healthy proﬁt margins in China, even more so than in Europe and North America due to lower cost of goods and operations, says Roll. At the moment, most of these proﬁts are going directly into funding new China ventures. John Chattock, the consumer markets partner at the auditing and accounting service ﬁrm KPMG, says: “For many luxury goods suppliers, most of the earnings in China are being reinvested into further expansion.” For example, LVMH Moet Hennessy Louis Vuitton, the world’s biggest luxury goods group, plans to open two to three stores a year in China, where its sales are rising by 50 percent annually. Meanwhile, Armani is aiming for 20 to 30 stores in China by 2008, from just three in Hong Kong, Beijing and Shanghai presently. Giorgio Armani, President and Chief Executive of the Armani Group, was quoted by a TAXI Design Network report as saying: “This demonstrates our long term commitment to this fast-growing market, in which we plan to develop comprehensive distribution and retail channels for each of the
Group’s main brands and product lines.” Gradually, growth rates will slow in response to changes in the market. David Lung, a partner in the retail & consumer products practice at Ernst & Young says, “In the next ﬁve to ten years, it will be diﬃcult for luxury goods makers to maintain such high proﬁt margins, because the prime locations in the major cities are already taken and real estate prices are at such high levels.” Across the tier-one cities in China, expansion of luxury brands is mostly taking place through upscale shopping malls. As Chinese customers prefer to shop at downtown commercial centers or large malls where they can stroll and browse diﬀerent brands and products, an isolated boutique separated from market centers may not work well, notes Lung. “In selecting a location, cold weathers and hot summers in much of the country encourage luxury goods makers to prefer large shopping malls.” China is expected to house seven of the world’s 10 largest malls by 2020, reports KPMG in Luxury Brands in China, released this fall. The report is based on an October survey jointly conducted by KPMG, Australia’s Monash University and market research ﬁrm TNS. Another likely consumer venue is established shopping districts, says Chattock: “Larger luxury ﬁrms may select a well-known shopping area, like Nanjing Road in Shanghai for a ﬂagship store, while smaller players with less capital to invest may be limited to shopping malls and department stores initially.”
Who’s buying luxe goods?
Before jumping too far into the Chinese market, high-end brands are investing aggressively into research. Take Moet Hennessy, one of the most successful luxury wines and spirits brands in China, as an example. After establishing its ﬁrst oﬃce in Beijing in 1996, the company conducted a ﬁveyear study on consumer psychology and behaviour, investigating the eﬀectiveness of various distribution channels and media advertising before its formal entry into the Chinese market in 2001. The research helped Moet Hennessy accelerate annual growth in China to about 15 to 20 percent, with “stable development” in 26 cities across the country as of the end of 2005, reports Financial Times. One ﬁnding of note for luxury brands: unlike in Western countries, where the majority of luxury consumers range between 40 and 70 years of age,
SOURCE: KPMG, LUXURY BRANDS IN CHNA, 2006
the key market in China is aged 20 to 40, reports KPMG. Many in this generation are the ﬁrst in their families to aﬀord luxury goods. In fact, luxury brand CEOs pinpoint Chinese 25- to 30year-olds as rapidly forming a signiﬁcant luxury goods consumption cluster. In Luxury Brands in China, analysts note that among the 830 respondents (from across China), the view towards luxury is equally positive across diﬀerent age and income segments in China, although higher income earners are more likely to buy luxury goods to reward themselves. More than half of respondents said they “longed to” buy luxury goods, even if they could not aﬀord them. Also, more than half saw owners of luxury brands as being successful and having good taste, while less than 2 percent regarded them as “superﬁcial.” Surprisingly, Shanghai respondents were the least impressed by luxury brands: less than 55 percent of respondents in Shanghai saw people who own luxury goods as successful, compared to almost 70 percent from medium-sized cities. Women are also gaining buying power with greater economic independence, but it is Chinese men who are the big luxury buyers, traditionally accounting for 75 percent of all luxury goods purchases nationwide. “Men have been the traditional buyers, and in 2001, three out of four consumers were men,” Emmanuel Prat, president of LVMH recently said to local media. “But now, as women are becoming more economically independent, they account for a larger share of the luxury market and there is big potential.” According to KMPG, the modern female luxury buyer includes the businesswoman, the celebrity and the newly independent rich wife. Yet the most brand conscious of all Chinese consumers are the “little emperors” (a generation of only-children now entering their teens or early adulthood) says KPMG. “Combined with an increased opening up of media, the advent of the internet and the increasing availability of Western brands, the result is a new breed of brand-savvy, luxury conscious, and in some cases spoiled children, who know what they want, expect the best and are not shy about demanding it,” reads the report.
Luxury, authors Radha Chadha and Paul Husband discuss the rapid development of the luxury retail industry in the region. Chadha tells Insight, “China’s wealth is recent and most consumers are ‘nouveau riche,’” a group that uses luxury brands as a status symbol. She says as China’s market matures, a new sector of buyers called the “nouveau chic,” who appreciate the aesthetic value of luxury products, will emerge, followed by the “nouveau cool,” who grew up in a branded world and see luxury goods as a way of living. At this stage, there are two main categories of
Men have been the traditional [luxury goods] buyers, and in 2001, three out of four consumers were men.”
CHINA’S MOST POPULAR BRANDS
If China is a country of extremes, it is also a “country of contradictions,” notes Harjot Singh, the strategic planning director for China for the BBDO ad agency. According to his research, published in October in a Wharton University newsletter, some of the most popular luxury brands in China include BMW, Giorgio Armani, Rolex and Louis Vuitton. In a culture where “face” is a strong social inﬂuence, Chinese luxury buyers have a strong need to not feel left out. Brands are important – not necessarily because people need the esteem and want to stand out, but because they actually want to ﬁt in with their family and friends. Purchasing famous brands give them the face they crave. One Shanghai-based magazine The Hurun Report, directed at the city’s wealthy, last spring interviewed 600 Chinese millionaires to identify their preferred brands. The survey showed the following “best in class” luxury makers: • Christie’s, voted as best auctioneer • Vacheron Constantin, best watch • Davidoff, best cigar • Giorgio Armani, best designer • Hennessy’s Chivas Regal and Dom Perignon, best liquors • Princess, best yacht, and • Ferrari, best sports car
From nouveau riche to nouveau cool
The concept of luxury is still in the early stages of development in China. In a new release, The Cult of the Luxury Brand: Inside Asia’s Love Aﬀair with
Chinese luxury buyers do not mind paying higher prices for brands that their friends and family believe are top quality.”
Chinese consumers, says E&Y: wealthy consumers that enjoy personalized services and visit luxury shops without concern for price; and whitecollar employees (typically working at foreign multinationals) who will splurge and spend a month’s salary on a single purchase. The second category is a spreading phenomenon in Asia, where most economies are still developing. Radha Chadha explains, “In today’s Asia, you are what you wear. Due to rapid social and economic changes, your place in society … now depends only on how much money you have.” So while European consumers tend to search for real value before they make a ﬁnal purchase decision and Japanese luxury goods buyers are more discrete in their purchases, Chinese consumers usually buy luxury items without much research and view the purchase as a symbol of their high social status and ﬁnancial success. E&Y’s Lung says, “Chinese luxury buyers do not mind paying higher prices for brands that their friends and family believe are top quality.” While consumers here lean towards ﬁnding good value-for-money, they adopt a diﬀerent mindset when buying luxury goods, which is used as a show of face. This bodes well for luxury brands, as import taxes
A surge in Chinese travelers going overseas – 31 million in 2005, up from 20 million in 2003 – has made it easier for luxury brands to build awareness. When Chinese tourists head out on holiday, they have a higher propensity to spend on luxury goods because of the limited access in many parts of their home country. Another reason: Because of relatively high import tariffs imposed by Beijing, buying luxury goods in Hong Kong or Europe offers a discount. By 2008, mainland tourists are expected to spend US$30.5 billion for luxury items per year, up from US$25 billion in 2004. Global luxury ﬁrms are also beneﬁting from the yuan revaluation last July. First, the move encourages more locals to travel abroad. Second, companies that sell luxury goods in China will enjoy slightly higher revenue when they convert their yuan into dollars, euros, or yen. Sales of certain luxury goods have received a further boost with the progressive reduction of the tariff on imported luxury goods since 2005, as part of China’s commitments to the WTO. The 28- to 40-percent tariff levied on imported watches until the end of 2004 has been cut to 12.5 percent and will be further reduced to 11 percent by the end of 2006.
make retail prices in China higher than in other markets. Ernst & Young says prices are 20 to 30 percent higher on the mainland compared to Hong Kong. Chinese buyers are particularly welcoming to foreign brands and, according to Radha Chadha, portraying a Western quality is necessary for luxury brands to succeed. Roll provides a few examples of this sentiment in his book: “When Giorgio Armani opened its retail store in Beijing in 2001, the company installed a large red-lacquer door in line with traditional Chinese design and architecture. But the Chinese did not like and it was replaced…. Vivienne Tam, a Hong Kong born designer based in New York, kept the same items she used outside China featuring Asian design elements and kept labeling her clothing as ‘Made in China’ in a new Shanghai retail store despite opposition from the local staﬀ.” “Never dilute [your brand’s] Westernness,” Chadha advises. She stresses that international ﬂair is “the key reason consumers buy [foreign brands].” She instructs international luxury brand holders to cater to Chinese consumers but “don’t dilute” the brand. KPMG agrees, advising Western suppliers that international identity gives luxury brand makers the hook for establishing a foothold in China once they convince customers of their brand value. As they strive to exude status, however, luxury brands must also be mindful of Chinese concepts of style and beauty, states the KPMG report. In the West, luxury buyers are more willing to stand out in the crowd, while studies show that Chinese women seek a more subtle, conservative form of beauty. Therefore, softer, less aggressive styles are considered more attractive among most of China’s luxury buyers.
Risk of luxury
While China’s nouveau riche may be willingly buying luxury goods priced 20-percent higher in Shanghai than in Hong Kong, a larger population of mainland Chinese are spending a fraction of the true price for counterfeit products. Experts agree that weak enforcement of China’s intellectual property laws is the biggest problem luxury goods face in the country. In addition to countless ripoﬀs being churned out at underground factories around the country, fake luxury outlets are also springing up in China. At a 2004 conference on intellectual property rights (IPR) protection in
Chinese shoppers are buying luxury goods at home and abroad
CLASSY CARS: Ferrari was chosen as one of the most preferred luxury brands in The Hurun Report.
Hong Kong, it was pointed out there were 200 diﬀerent “Valentino” brands in the country, according to Valeria Azario, an executive with V.S. Ltd., which manages the original Italian Valentino brand. The enforcement of intellectual property rights remains a serious concern, according to AmCham Shanghai’s recently published 2006 China Business Report, which ranked IP as the number-three top business challenge. Of the 274 U.S. companies surveyed, 58 percent said enforcement was ineﬀective and 44 percent had experienced madein-China counterfeits. But there are some signs of progress. This past January, Chanel, Prada and three other luxury goods companies won in a copyright suit against Beijing’s Silk Market shopping mall landlord. While the move has not wiped out counterfeit goods trade in the capital city, it has made it tougher for the pirates to operate and is a clear step toward supporting the rights of brand owners. “The verdict against the Silk Market has strengthened conﬁdence in the Chinese judicial system among luxury goods makers,” says E&Y’s Lung. Shanghai’s own pirated goods street market – Xiangyang Market – was closed this summer. After attracting thousands of visitors both foreign and local daily for years, Vice Mayor Zhou Taitong told
local media that the market had tainted the city’s image. He estimated that 80 percent of Shanghai’s piracy cases originated from the market. Slowly, China’s IP environment will improve, Roll assures, particularly as the 2008 Olympics increase pressure for China to protect its sponsors, many of which are top-end brands. While counterfeiting will continue to be a problem in the next ﬁve to 10 years, investors will eventually see a completely diﬀerent face of China, he says. “China will become the most attractive market for global luxury brands towards 2020,” Roll writes in Asian Brand Strategy. “As China develops and consumers show increasing aﬄuent buying behavioral traits, luxury brands will become beacons of success, wealth and prosperity, and the brands themselves will shape and deﬁne the social communities with which the Chinese consumers will identify themselves. Luxury brands will increasingly add character and personality to how consumers deﬁne themselves”
Brian Schwarz is a Shanghai-based freelance journalist and business management instructor at Telfort International Business Institute. He can be contacted at firstname.lastname@example.org. The article was compiled with additional reporting by Insight Managing Editor Venessa Wong.
SOURCE: KPMG, LUXURY BRANDS IN CHNA, 2006
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