Luxury firms pin hopes on China

Dec 27 2012 07:45

Beijing - Clad in a black and orange Prada winter coat with a diamond-shaped pattern she snapped up during a trip to Milan, Jennifer Ren embodies China's nouveau riche.

For the 27-year-old exhibition planner, accessories such as Dior handbags, Chanel perfume and necklaces by French jewellery house Van Cleef & Arpels are daily fashion essentials.

"Luxury goods have become a necessary part of my life," said Ren, who earns about $960 a month in salary but gets virtually unlimited financial backup from her wealthy mother, a successful businesswoman.

"Once you start buying them, it would be hard to step down to lower-end products," she said.

Free-spending Chinese consumers such as Ren have so far proven a blessing to big name labels trying to buck global woes.

Sales of personal luxury goods in mainland China surged a spectacular 56% last year to $19bn, after a 35% climb in 2010, data from CLSA Asia-Pacific Markets showed. In comparison the world economy grew just 2.7% in 2011.

The investment group expects China's luxury market growth to slow in the rest of this decade, but still predicts it to average an impressive 20% a year over the period.

Chinese consumers are now the world's biggest buyers of luxury merchandise, according to a report last week by management consultancy McKinsey, while another consulting firm, Bain and Company, found they account for a quarter of all such purchases globally.

"Room for optimism"

This year growth has been restricted by slowing expansion in the Chinese economy and repressed gift-giving among and between officials and businessmen - a key element of building relationships, even at middle and lower levels.

The habit remains widespread, but has been affected by mounting scrutiny of corruption and stepped-up government crackdowns, along with political uncertainties linked to the country's once-a-decade leadership transition.

But global luxury brands still see plenty of long-term potential in the world's second-largest economy, pinning their hopes on China's rising middle class as Europe slogs through its debt crisis, US growth remains weak and Japan's economy fails to gain traction.

French luxury icon Louis Vuitton launched its first China Maison in July, a four-storey megastore selling jewellery, leather goods, clothing and other products in the commercial hub of Shanghai - its biggest anywhere.

In November New York-based Coach unveiled a China-language version of its official internet store to ride the country's online shopping wave.

PPR, the French owner of brands including Gucci and Yves Saint Laurent, announced this month that it had acquired a majority stake in rising Chinese luxury jewellery brand Qeelin for an undisclosed amount.

Easing domestic luxury sales this year has prompted warnings that the lightning growth rates of previous years are unlikely to be sustainable given China's economic slowdown and as the market matures.

Over the past three and a half decades China has grown nearly 10% a year, but Beijing has cut its target to 7% annually for the five years through 2015 as it tries to reduce reliance on exports and have domestic consumers play a bigger role.

"Luxury consumers do not see the future of their economy as 'cloudless' as it was a few years ago," said Elan Shou, China managing director of Ruder Finn Public Relations.

As visa restrictions ease, more mainland Chinese consumers are also making their luxury acquisitions overseas to take advantage of cheaper prices, lower purchase taxes and China's strengthening yuan currency.

But Chinese households with annual post-tax income of $16 000-$34 000 are expected to grow 12-fold in just a decade, from fewer than 14 million in 2010 to 167 million by 2020, according to a previous report by McKinsey.

"There is a lot of room for optimism because the fundamentals of rising affluence remain in place," Claudia D'Arpizio, a partner with Bain & Company said.

And as Chinese consumers' tastes diversify, the market is likely to become more nuanced.

Kevin Liu, a 25-year-old marketing executive in Beijing, said he only buys less pricey niche products for himself. But when it comes to friends' weddings, goods like Gucci purses are de rigueur.

"I think that is a rational spending pattern," he said.

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china  |  luxury goods  |  retailers



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