Luxury

Spurred by demographic shifts and a growing trend towards leveraging China as an offshore producer of designer goods, the Mainland now represents the next frontier for the luxury goods sector as the maturing European and Japanese markets have already hit their stride.

Currently, the number of Chinese who can afford luxury goods is about 175m, or 13% of China's population-which is more than the combined populations of Japan, Singapore and Taiwan. By 2010, that number will reach 250m, based on a 20% year-on-year growth rate for the next five years, according to the China Brand Strategy Association.

Major luxury brands like Louis Vuitton, Prada and Giorgio Armani have staked their mainland presence and more ambitious plans are in the works. (Armani, for example, has aimed for 20-30 stores in the Mainland by 2008.)

Japan's successor
Indeed, China is widely viewed as the next Japan, where up to 41% of the world's luxury goods are now sold. And why not? China's newly rich are eager to flaunt their new status. "The first thing our Chinese customers ask us when they walk in is: ' What's the most expensive thing in the store?'" said Raphael le Masne de Chermont, executive chairman of Shanghai Tang, the up-market vendor of Chinese-inspired apparel that is majority-owned by luxury goods group Richemont.

But walk into any luxury goods store in the Mainland and chances are, the only signs of life are the sales clerks. It is estimated that only 2-5% of the world's total luxury goods sales occur within Mainland borders, yet a retail presence in the country is essential to tackle enemy No 1: counterfeits. "It's important to have proper shops because with point-of-sale, you protect the consumer from the fakes," said Le Masne de Chermont.

Equally important, the stores are there to create brand awareness that marketers hope will inspire overseas splurges, the current key driver of the mainland luxury-goods market. Mainlanders are now buying their logoed handbags, scarves and liquor on shopping sprees in Hong Kong and increasingly in Europe in order to escape the luxury import tariffs that are as high as 30% back home. Either way, luxury retailers stand to gain: China's import duties on designer goods continue to decline, and more Mainlanders travel abroad than ever before, numbering 29m last year and growing between 15-20% annually.

In any case, according to Lawrence Lam, general manager of Imaginex, which represents brands like Gucci, Hugo Boss and Coach in the Mainland, high-end products don't need a lot of foot traffic to survive. If five customers make a purchase in one day, that's just fine, Lam said.

But whether the stores are bringing in the right kind of foot traffic is another issue. Luxury retailers chasing China are frustrated by the country's lack of suitable real estate ( "everyone wants to be next to LV," Lam said). Relief may come as soon as early this year as more upscale malls are expected, owing to increased investment from overseas property developers like US luxury mall operator Taubman, which may soon put up mainland malls worth hundreds of millions of dollars.

Trends in a trendy market
Until recently, China's luxury goods market largely served men, those entrepreneurs who think nothing of plunking down some worker's annual salary for everything from flashy cars to gold watches.

Chinese women, particularly the young and upwardly mobile, are now the sector's emerging consumers, accounting for 30-35% of the mainland market, up from 10% in 2000, according to the investment bank Goldman Sachs.

It is this group that the luxury goods purveyors are counting on to bring the mainland market to a level on par with Hong Kong and particularly Japan, where addictions to labels are endemic, and where a Dior-toting gal is more likely to be an office worker than a shipping scion. Though the mainland market will need about 10 years to catch up to Japan's, some say more and more mainland women are aspiring to designer goods as status symbols.

"Even office girls earning US$1,000 a month are starting to buy them," according to Lam.

And within this fashion-conscious set, there are emerging tastemakers who, taking their cues from western fashionistas, are ready to move beyond venerable names like Louis Vuitton, according to Gregoire Grandchamp of the Shanghai-based luxury brand consulting company Easyne. He believes their cutting-edge sensibilities will usher a proliferation of luxury brands in China, accelerating the entree of niche brands like Marc Jacobs, Jimmy Choo and Stella McCartney.

"The new generation among the young Chinese-the professionals that work at Ogilvy or Morgan Stanley-they already know that LV is not that fashionable and cool," Grandchamp said. Lam agrees: "Some are starting to look for more interesting brands, even though the brand might not be so famous," he said.

Made where?
Meanwhile, recent revelations that Prada could outsource some of its production to the Mainland have raised eyebrows. Yet, for anyone in the manufacturing business, China's economy of scale and low costs are hard to resist.

Though he declined to name them, Lam said "a lot" of luxury goods makers are already moving the production of some luxury goods like casual wear and certain leather goods to China-before routing them back to Europe to get that elusive "country of origin" label (watches and tailored suits are still crafted in Europe, Lam said).

"If you can keep the level of quality the same, it's stupid not to produce in China," said Easyne's Grandchamp. Shanghai Tang's Le Masne de Chermont agrees: "There is no reason to produce in Europe and there's no shame to being made in China."

One brand that has not made a point of hiding the country of origin for its bags is Coach. So far, the leather goods purveyor hasn't lost points for coming clean on this as it continues to be a dominant brand in the US and is quickly gaining a following in Asia. Coach has done well because sophisticated shoppers in more mature markets are increasingly less brand-conscious and more quality-conscious, according to Lam. "These customers have the ability to judge for themselves whether a product is good enough or not," he said. Chinese shoppers, on the other hand, "are only concerned with the brand name, not quality." Lam, however, believes that in time, Mainlanders will put quality before labels.

Until then, don't expect to see "made in China" on that Gucci belt.