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Discovering the finer things in life

The growing influence of international culture and the emergence of a brand-savvy upper class in China offers more opportunities for luxury brands in the Mainland, but it is no easy sale, writes RUBY ZHU

They say trends come and go, but that luxury never goes out of fashion. That may be true, but it hasn't stopped prestigious brand names from feeling the pinch during these challenging times.

Gucci, the world's third largest luxury products group, saw its profits drop 27 percent last year compared to 2001's figure. Prada, another top luxury brand, has been forced to postpone its plans to raise capital to fund its expansion. But it is not all bad news for the prestigious brands. Moet Hennessy Louis Vuitton (LVMH), the world's leading luxury products group, saw its sales last year grow to 12,693 million Euros, up from 12,229 million Euros in 2001.

Traditionally strong markets for luxury brands have been waning in recent years, especially Japan, due to the prevailing economic gloom. Although Japan is still considered to be the fashion capital of Asia, its citizens are unlikely to return to the extravagant shopping heydays of the past.

Other Asian markets, however, are becoming increasingly important for prestigious brands. For LVMH, which owns several famous labels, including Christian Dior, Givenchy and Celine, the Asian market accounts for roughly one-third of its global sales.

China's growing rich

Many luxury brands are banking on certain strong markets within Asia, especially China, to shrug off the economic slump. But in a country where official statistics show that the average Chinese urbanite earned just US$931 in 2002, what potential does the market hold for them?

Although the average urban citizen's income means luxury brands are well out of their reach, the rise of entrepreneurialism has made a lot of people in China very wealthy with a desire for the finer things in life.

Shopping habits of Mainland tourists in Hong Kong also show that the rising middle class has more money to spend than official statistics suggest. The 6.8 million Mainland tourists who came to Hong Kong last year spent on average HK$5,169, or HK$600 more than the average tourist did.

They are also not interested in bargain fashions, but designer brands, which cost about 30 percent less in Hong Kong than in the Mainland.

Despite the substantial price difference, luxury brands are finding customers in China. Louis Vuitton, which opened its first store in 1992 at the Beijing Palace Hotel, has over the past 10 years expanded to seven stores in six cities.

The company expects the opening of the retail market under China's accession to the WTO, combined with the emergence of a brand-savvy middle class of young managers, will offer numerous opportunities.

The entire market for consumer goods is expected to open in 2004, and by then all trade barriers should fall, points out market analyst Professor Stefan Hanke, from the consultancy Convensis, Stuttgard.

"At the moment, manufacturers of brand products have the best opportunities because the Chinese want to buy the West through brands," he says.

However, this continent-sized market also presents myriad challenges. In addition to a complex business operational environment, fierce competition among foreign brands and the emergence of strong local brands, the market is by no means a homogenous one.

Although luxury brands have outlets in Hong Kong, Macau and the Mainland, they are all very different in culture and lifestyle. Even within the Mainland, consumer behavior varies from region to region, as does the maturity of potential markets.

This is leading some luxury brands to adopt a cautious approach towards expanding their China presence. Last year, a Mainland hotel in a big city offered very attractive terms to a famous brand to open a boutique in the hotel. After a site inspection, the brand operator turned down the offer because it believed that the city's luxury goods market was far from mature.

Analysts estimate that total annual sales of luxury branded goods in China is about US$3 billion, which is expected to grow in line with the country's GDP growth rate of 8 percent.

To limit their operation costs, some luxury brands are turning to franchising. Givenchy, which has been in China since 1993, now has 50 franchises in China. Last year, it opened four accessories stores for ladies and men's accessories in Beijing, Shanghai, Chengdu and Kunming, and plans to open two more stores in the Mainland this year.

Fendi officially took over from its agent in China in 2001 to reposition and grow its brand in the country. Under Fendi Asia Pacific, it closed, relocated or expanded stores, which today include stores in Guangzhou, Shanghai and Beijing, and the company says by 2005, Fendi should have over a dozen stores throughout China.

But the China market for luxury goods simply cannot accommodate so many competing boutiques all dependent on a single group, so more brands are starting to offer "entry level" goods to appeal to prospective middle-class customers.

If the growth of diamond sales in China is anything to go by, then this looks like a sound strategy. In the mid-1990s, less than 10 percent of women living in China's booming coastal cities owned diamonds. Today, the number is more than one-third, and in Shanghai, which seems to set the trends for the rest of the country, more Shanghai women own diamonds than Japanese women.

The rise of wealthy consumers in China has created a new and potentially large market for quality brands, but it won't be a walkover. As LVMH stated in a press release on the tenth anniversary of its Louis Vuitton store in China:

"Louis Vuitton has ambitious plans ahead for China with the opening of two to three new stores per year, including global stores in key cities ... . The recruitment and development of high-calibre managers focusing their energies on building brand awareness, education consumers and anti-counterfeit action will support this rapid expansion."

Brand loyalty of Mainland consumers

Brand names are synonymous with wealth. Brand name clothing and accessories make a statement about the wearer's cultural background and social status. As a result of rising income levels in China and its increasingly open economy, more and more Mainland residents are embracing brand names to show that they have taste and money.

Once Chinese consumers start using branded products, retailers expect they will become loyal customers. According to a survey conducted by a Mainland advertising company, Mainland consumers have a far higher level of brand recognition and loyalty than their Hong Kong counterparts. This means that Mainland consumers loyalty towards the same brands is not entirely because of a brand's market position, but also due to their enthusiasm for a particular brand.

Because of this, prestigious brands are making an effort to put out the red carpet for Mainland shoppers. In Hong Kong, Putonghua is the language most frequently used in brand boutiques, and Mainland tourists with strong purchasing power and a zeal for brand names have kept sales ticking over for the local luxury goods sector, despite the sluggish retail sales for general consumer goods. As the income of Mainland Chinese continues to rise, they are expected to contribute further to these sales as their passion for quality brands also grows.

Brand & cultural awareness

Luxury brand names that were once unheard of a few years ago for many Chinese, have now become household names. Well-known brands such as Cartier, Max Mara, Louis Vuitton, Christian Dior, Gucci, Prada, Fendi, Bally, Burberry and Hermes, among others, have become popular among well-heeled Mainland consumers, followed by Chanel, Valentino and Shiseido. Even fledging labels like Anna Sui also appeal increasingly to Mainland consumers.

But brands tend to go where purchasing power is the strongest. In China, this means Shanghai, Beijing, Guangzhou, Shenzhen, Wuhan, Nanjing, Hangzhou, Chengdu and Qingdao, with boutiques mainly concentrated in five-star hotels. Luxury products are also available at more than 40 up-market shopping malls in 10 Mainland cities.

Very few luxury Hong Kong brands are well known in China, but many mainstream fashion brands, such as Goldlion, Giordano, Bossini, Esprit, G2000 and jewellers like Chow Sang Sang, TSL Jewellery and Chow Tai Fook, have a strong share in the China market.

Compared with strong European and U.S. brands, Hong Kong luxury brands are still fighting for the attention of Mainland consumers.

In late March, the Hong Kong Trade Development Council organized a four-day "Hong Kong Style" promotion in Beijing to promote Hong Kong brands and expand their share of the Mainland market.

Hong Kong pop culture is generally accepted by Mainlanders, which gives Hong Kong brands a slight advantage in developing their market share in China.

Cultural similarities also give them a strong advantage because marketing considerations should also take into account a country's cultural conditions, says Prof Henke.

"These this may sound obvious, but it is still not always taken into account," he said. "If you want to develop China's market for luxury goods, you really have to know the country."

Ruby Zhu is the Chamber's Assistant Economist. She can be reached at, ruby@chamber.org.hk