Ports International, originally a Canadian luxury clothing brand, raised some eyebrows in 1993 with its decision to establish two headquarters, one in New York, and the other, in China’s southern coastal city of Xiamen.
“At that time people might have said we were crazy … They thought we were taking a very big, unnecessary risk,” the firm’s managing director Alfred Chan told CHINA ECONOMIC REVIEW in his office at Oriental Plaza, a high-end luxury mall in Beijing.
“In hindsight it was a good decision.”
Chan said the firm’s China operations have seen compound annual growth of more than 55% in the last year. He expects growth to be even higher in 2008, though he declined to provide revenue figures. A recent KPMG report concluded that Ports’ decision gave the firm a “significant advantage” in establishing its brand and market presence in China.
The global luxury industry has been touting the rising buying power of Chinese consumers for years. Take Yuan Yuan, a 26-year-old former sales representative for a Beijing media group who professes a love for Louis Vuitton (LV) handbags – and has a large collection to prove it.
“If I carry the new style of LV then everyone can tell that I’m a fashionable girl and that I care about fashion,” she said.
But how many Yuan Yuans can luxury brands in China count on for revenues? Stroll through one of Shanghai’s high-end malls on a weekend and you might wonder where all the shoppers are.
“Nobody knows what the situation is, the hype is massive and I doubt anything could live up to that hype,” said Paul French of research firm Access Asia and a contributor to CHINA ECONOMIC REVIEW. The problem, he said, is that most luxury brands don’t release China data.
Consultancy Bain & Company said the global luxury market grew by 9% to US$247.5 billion in 2006. Japan accounted for 13% of that, with the rest of Asia Pacific contributing 11%. China’s luxury goods sales grew by 30% in 2006 to US$5.4 billion – 2% of the global total.
Nick Debnam, a partner with KPMG in Hong Kong, said that while the financial health of luxury brands in China as a whole was not “clear cut,” the length of their stay in China is often a good indicator of the state of their bottom line.
“The guys who went in 10 years ago, they’re all making money now. You can almost tell by looking at how long someone’s been in China whether or not they’re making money,” he said.
According to Debham, the strongest segments in the luxury market are handbags and accessories. This was confirmed by the Greater China chief executive of a multinational luxury goods conglomerate, who asked not to be named. The executive said that Asia Pacific was now the second-largest market for his company and that within Asia, China is the second-largest market behind Hong Kong and Macau. That’s up from the fifth spot two years ago. However, he declined to offer China-specific revenue figures.
“People are buying luxury in China; China is a real market. And those who came in early are starting to reap the rewards,” the executive said.
China has another advantage, in that it’s relatively cheap to maintain a presence here. Labor costs are low compared to global averages, and certain brands receive favorable deals from property developers seeking to boost the prestige of their malls.
Some global luxury brands also benefit from what some analysts called the industry’s “dirty little secret” – moving manufacturing operations to China or elsewhere in the developing world.
“It’s becoming the norm, it’s absolutely massive, everyone does it,” said French. He said that some luxury companies, which rely on the heritage and European craftsmanship of their products to drive sales, require Chinese manufacturers to sign confidentiality agreements to mask the fact that a handbag destined for Manhattan is made alongside a bag on its way to a JC Penny in Nebraska.
At Ports, which manufactures its clothing in both China and the US, Chan explained how unscrupulous brands might operate. Labor-intensive tasks, such as the hand-stitching on a pair of shoes, are carried out in an emerging market such as China. The final assembly – say gluing the sole to the rest of the shoe – is then performed in Europe, providing it with a coveted “made in Europe” tag.
“That is basically dishonest and it’s not fair either,” Chan said. “If the product is good, it can be made anywhere in the world.”
Know your market
Although operating costs in China are low, marketing to this vast and fragmented country remains a big challenge. Localization is the key.
“Luxury companies need to change their strategies for China a bit and frankly I think a lot of them haven’t done a very good job,” said Shaun Rein, managing director of China Market Research Group.
The first mistake luxury brands make in China is targeting the super-rich, rather than the rising middle class, Rein said. While wealthy Chinese are indeed consumers of luxury goods, they often do their shopping abroad. Rein estimates nearly 30% of luxury purchases by Chinese consumers are made overseas.
Brands must also be aware of China’s unique demographics. According to KPMG, the progeny of China’s one-child policy are increasingly brand-conscious and, with six sets of income to support them – both parents and grandparents on each side – their spending power is higher than ever.
Conversely, demographics mean that luxury marketers shouldn’t bank on traditional customer profiles in China. Rein recalled that one of his clients had hoped to replicate the success they found in Hong Kong selling to well-heeled matrons.
“That age group of rich women doesn’t exist here,” Rein said. “Because of the Cultural Revolution and different historical factors, the rich are either in their seventies or their thirties.”
While some brands entered China early enough to profit now, analysts agree it’s a long-term proposition for the rest.
“When you go into China you need to be very focused on who you’re targeting and make sure you don’t lose your way. If you’re a trendy brand in America, that won’t necessarily cross over into China,” Debnam said.