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Newly Affluent Seek Luxury

Consumers worldwide are now well accustomed to finding "Made in China" labels on their clothing, electronic and computer products and to benefiting from lower product prices made possible by "the world's workshop." But Chinese consumers are now doing some buying of their own, a fact not lost on the world's retailers.

The Chinese people are pursuing luxury goods like never before, and if current consumption trends continue, the country will surpass Japan as the world's leading buyer of luxury goods by 2015.

No longer are Chinese consumers intimidated by the price tags attached to goods marketed by companies from Armani to Bentley, whether clothes, watches, expensive fountain pens, glamorous cars or jewel-bedecked cell phones.

Known for its cheap labour and manufacturing, China is changing, and rapidly so. The country's luxury goods purchasers are already the world's third largest body of consumers, accounting for 12 percent of sales worldwide, up from a mere 1 percent just five years ago, according to a recent report from Goldman Sachs.

Within ten years, Goldman Sachs says, China is expected to account for as much as a 29 percent share of the world's luxury goods market.

"China is experiencing huge wealth creation, and there is lots of conspicuous consumption related to that," said Goldman analyst Jacques-Franck Dossin. "People want to show they are successful."

Sadly, for local retailers, only about 2 percent to 3 percent of the Chinese people's worldwide luxury goods purchases are made in China. Most are purchased outside the country while travelling. This means China is getting only about US$2 billion of the global luxury sales market, about 3 percent.

But luxury brand managers worldwide are gambling that this is going to change as they cast an eye toward an estimated 300,000 millionaires' appetites for luxury goods. The two groups seem made for each other.

On November 18, 2005, Bernard Amault, chairman of the LVMH Group, attended the opening ceremony of Louis Vuitton's flagship store in Beijing. The new 800-square-metre flagship store in China's World Trade Centre is a carbon copy of the Louis Vuitton flagship store on the Champs Elysees in Paris. With the brand and its presence in the market comes an exotic fashion buzz that brand buyers seem unable to resist, all contained in the company's luxury products, including trunks and suitcases, LV's clothes and accessories.

But Louis Vuitton is far from alone.

The world's top piano producer, Steinway & Sons has established a fully funded subsidiary in Shanghai. Japan's Kenzo is preparing four new stores in China, and Italy's largest fashion group, Gucci, has opened shops in Chengdu, the capital of Sichuan Province, and Hangzhou, the capital of Zhejiang Province. Italy's Ermenegildo Zegna has opened 52 branch menswear stores in China, and Armani has announced it will open 30 stores in China before the 2008 Olympic Games.

Swatch has enjoyed strong growth in China, where sales of Swiss watches rose 25.7 percent last year. Four of the five best-selling brands in China belong to Swatch, including Omega, which holds 20 percent of the market.

International auto giants, too, are racing in and find gold here. At the Shanghai Auto Show in 2003, British carmaker Bentley sold more Mulliner 728 limousines--at US$1.2 million each, the world's most expensive car--in Beijing than in any other city in the world. The following year, the same car sold for 9.88 million yuan (US$1.22 million) at the Beijing Auto Show. Also, young Chinese professionals bought 23,600 BMWs in 2005, 50 percent more than in 2004.

French perfume, Italian fashion, German cars and Swiss watches--luxury items in Europe--have all found their way to China and can be purchased locally. With luxury producers disappointed at the sliding sales in the currently anti-luxury Europe, their hopes are turning to China.

Luxury goods are no longer the exclusive province of Chinese celebrities. China's new millionaires, a growing population, are pushing demand for brands such as Longines, Omega, Pierre Cardin, Dunhill and Montblanc. They own cars, property, digital electronics, bankcards and insurance policies. They are keen, media savvy international travellers and depend on the Internet for shopping and communications.

The China Life Report 2006, released on July 1, 2006, was based on a one-year survey conducted by the China National Research Association and MasterCard International. The survey interviewed 10,000 people in 10 major Chinese cities with a combined population of 40 million, including Beijing, Shanghai, Guangzhou and Nanjing. The report said that the annual household and individual incomes of "first-world" consumers are an average of 218,000 yuan (US$27,250) and 117,000 yuan (US$14,147); about 85 percent of these consumers are between the ages of 25 and 39.

"Chinese have always had a tremendous appetite for status, ritual and luxury. As they become members of the world economy, out of this group of wealthy consumers, they will learn that brands mean status, whether Rolls Royce, Bentley, Cartier or Harry Winston for jewellery," said Milton Pedraza, CEO of the Luxury Institute, a New York-based research firm.

Conway Lee of Ernst & Young explained that China's luxury consumers are mainly the rich and young white-collars, especially the employees of foreign companies.

Lee said China's luxury market is still in its infancy and unlike developed markets in terms of age and consumption patterns. While Chinese luxury consumers are young and middle-aged people, the elderly and middle-aged are the luxury consumers in developed countries.

In China, most moneyed people consider luxury products a token of fashion. They actually don't quite understand the added value behind the luxury products when they pay for them. Luxury companies surely don't want to see this, as a pursuit of fashion cannot foster the creation of a stable consumer group.

"In China the consumption of luxury goods is very much item-driven, meaning consumers search for the latest collections or products. In more-developed markets consumers tend to seek experiences that pamper them, such as a luxury holiday or a service such as the home delivery of groceries," Lee said.

Home-grown Brands

China's own luxury brands have emerged along with the maturity of the luxury market; its consumers have begun selecting domestic brands, although there still a long way to go.

Launched in Hong Kong by David Tang Wing-Cheung in 1994, Shanghai Tang, China's first luxury brand, opened a ritzy 12,500-square-foot New York flagship store on Madison Avenue in 1997. After being acquired by Richemont in 2000, Shanghai Tang has rapidly risen to become a globally prestigious Chinese brand.

The designs of Shanghai Tang contain many Chinese elements, such as Chinese characters, landscapes, Peking Opera and kung fu. Though bereft of star designers, the brand has been favoured by celebrities from the East and the West. Its customers include Prince Charles, the late Princess Diana, Margaret Thatcher, Senator Hillary Clinton and Hollywood film star Nicolas Cage.

Raphael Le Masne, executive president of Shanghai Tang, is a Frenchman. His western team has attracted global consumers with their Chinese-flavoured designs. It sounds like a miracle, but Le Masne said his designers look on themselves as Chinese, and they gather inspiration from the Chinese culture.

"It's our characteristic and advantage," he said.

Shanghai Tang has opened 17 authorized stores around the world, and it plans to open more in cities such as Milan and Tokyo. Le Masne said the figure will increase to 30 in two years.