Oct 2, 2007 - It started with a trickle of top brands cautiously ... Asia's favourite brand, opened in China in 1992. ..
China luxury
China is set to become the second biggest consumer of luxury goods by 2015. Liana Cafolla talks to luxury brands about the bumps along the way
F
or luxury retail in China, the numbers on offer are nothing short of lip smacking: An estimated 300,000 millionaires and rising. A middle class of around 250 million people. A 1.3 billion population, long starved of retail opportunities, that spent US$6 billion on luxury goods last year, according to Ernst & Young estimates. And a prediction by investment bank Goldman Sachs that China’s consumption of luxury goods will rise from 12 percent to 29 percent by 2015 – making it second only to Japan – in a global luxury market worth an estimated US$80 billion a year. China has indeed come a long way. A luxury consumer market that didn’t exist 20 years ago is now on a seemingly unstoppable path to dominate top end retail. How did it happen? And is it all as good as it sounds? Continuing double-digit economic growth is filling pockets and encouraging consumers to
[ 24 ] A Plus
+
October 2007
Glam & Young. This is clearly good news for the luxury goods retailers. The first to act on the potential were the older European brands who still have the biggest piece of the market and whose heritage and quality ticket resonates with status-hungry Chinese consumers. It started with a trickle of top brands cautiously opening a few outlets in the 1990s. Now the influx resembles a stampede: Luxury retailers can’t get in fast enough, and once in, they are spreading themselves around the country like wildfire. “Luxury items didn’t really exist in China 10 to 15 years ago,” says Shaun Rein, managing director of China Market Research Group in Shanghai, but Chinese consumers are more than making up for it now. Louis Vuitton, consistently rated Asia’s favourite brand, opened in China in 1992. Unlike other brands who occasionally experiment, LV has stuck closely to the core message of its brand and the strategy ticked, says Stewart of Jigsaw: “LV is very clearly, explicitly, top-end luxury.” Its publicity events are huge-scale and, in a country where top locations are difficult to pinpoint, the status of its shops is unquestionable, he says. Its Shanghai flagship, for example, is in Plaza 66, a building that now draws other top brands – Hong Kong’s
Joyce recently opened its first Shanghai store there. LV and Gucci are the bestperforming brands on the mainland, according to Nick Debnam, a KPMG partner and head of consumer markets, Asia Pacific. LV has been profitable since its first year in China, with annual growth of almost 50 percent, according to Radha Chadha and Paul Husband who wrote The Cult of the Luxury Brand. Gucci, which has 16 stores on the mainland, recorded sales growth of more than 65 percent last year, Chief Executive Mark Lee said in an interview with the South China Morning Post. The mainland ranks second following Hong Kong in Gucci’s sales in Asia excluding Japan. The Italian retailer opened six stores in 2005 and last year, and will be expanding its mainland operation at a similar pace in the coming few years, according to Lee. Plenty of other famous names are investing heavily on the mainland. Like LV, Montblanc, which specializes in luxury pens, watches and jewellery, entered the China market in 1992 and now a quarter of its 350 stores worldwide are in the mainland. It is set to open its 87th store in Shanghai, which at 6,100 square feet over two levels will be its biggest anywhere in the world. Dunhill opened its first shop in
October 2007
+
A Plus [ 25 ]
ORIGINAL IMAGE: IMAGEZOO/GETTY IMAGES; ILLUSTRATIONS BY HHW
move away from the savings culture of older generations. “The philosophy is ‘enjoy life today’ against the old Chinese custom of saving, saving, saving,” says Lawrence Lau, management controlling director in the consumer product division at L’Oréal China. Changing demographics also fuel the furious spending. The mainland’s one-child policy created a generation of cosseted only children, each raised by six adults. Now of consumer age, these little emperors are addicted to the novelty of acquiring the western-style trappings of wealth. The younger generations have become more in sync with global trends, thanks to access to the Internet and foreign media, increased freedom to travel and the experience of overseas education. “They want exactly what’s happening in the rest of the world, now,” says David Stewart of Jigsaw International, a lifestyle research agency in Shanghai. Their spending power has also jumped dramatically in the last five years, he says. Rapid economic growth guarantees that the spending trend will keep going. “[China’s] luxury market is growing at a rate of 20 percent annually, until 2008 we expect,” says Conway Lee, partner and industry leader of the retail and consumer products practice at Ernst
China luxury
the mainland 14 years ago and now has 73 outlets located in 39 cities. Relatively new to the market is fashion brand Chloé, which opened its first store in 2005 but has rapidly expanded from three outlets a year ago to 10 now. The primary attraction is clear: the ever more enticing numbers. Nobody will talk precise figures, but their excitement is palpable. The China market’s growth, in the words of Jim Siano, Montblanc’s Asia Pacific chief executive, is “phenomenal.” “High double digits,” he says. Chloé and Dunhill say the same. The mainlanders’ desire for status (“In China, there’s a great feeling that you wear your wealth on your sleeve,” according to Debnam of KPMG) and an embedded gift-giving culture combine to produce almost frantic levels of spending.
Mainland customers often descend on luxury shops, with some purchasing entire window displays or the shop’s entire stock within hours, according to Chadha and Husband, authors of The Cult of the Luxury Brand. “Yes, we are finding people coming in and spending inordinately large sums of money in one spend,” confirms Helen Willerton, managing director of Chloé Asia Pacific. The Chinese tradition of relationship building, or guanxi, which “oils the wheels of government bureaucracies and business alike,” is the single biggest factor spurring the growth of luxe in China, according to the authors. “Since [the customers] were mostly men, China’s branded
Montblanc The luxury retailer most famous for its handmade pens has been present in the China market since 1992. Recalling his first visit to Montblanc’s Shanghai store, a tiny retail space it shared with mid-range pen brands, Asia Pacific Chief Executive Jim Siano says “we looked absolutely horrible” and were lucky not to have damaged the brand. Now things have changed. Montblanc has a presence in 41 Chinese cities and in November will open its world’s biggest store on Nanjing Road in Shanghai at a whopping 6,100 square feet. “We want to have eventually two flagships. We are still looking at Beijing for another flagship,” he says. China is now the company’s fifth largest market, up from the 20th a year ago. “Business couldn’t be better,” he says. “This year we are tracking at least to be third or fourth and we will see how close we come to the second largest market.” For luxury pens, Siano says, “we probably have 90 to 95 percent of the market, at least.” In fact, the company’s biggest problem is production shortages: Demand in China is so high that the hand-made production operations in Europe can’t keep up.
[ 26 ] A Plus
+ October 2007
Montblanc’s next move is to expand the size of its outlets, rather than increasing the number of shops. The plan is to improve the ambience of the shops, entice more female customers and provide the best possible showcase for the products. It introduced its fine jewellery line in February this year. “One of our strategic focuses around the world is to increase our female usership and it’s great timing for China because if you look at the luxury business 10 years ago, it was mostly men spending the money, but now women are a force in their own right.” Pens now account for about 50 percent of sales, he says. “Watches are increasing incredibly fast for us.” Siano notes vast regional differences and says the luxury business here is different. “The per capita income goes from south to north. Guangdong has much higher per capita income than north cities, but luxury sales are higher in north than south.” The reasons for the difference are probably cultural, he suggests. “People in the north like to maybe show off more than people in the south. The south is more into real estate or food.” The profusion of counterfeit products is a “source of annoyance,” he says. “The Chinese government has been very responsive in many ways, much more than you read in the press. Fakes at least are a sign of your success in the market.”
Dunhill markets became highly male skewed – men’s ready to wear, accessories and watches dominate, and brands like [Ermenegildo] Zegna, Hugo Boss and Dunhill are leaders.” Giving gifts to those who helped you set up your store is part of the cultural norm, says Tim King, managing director of Dunhill for North Asia. Recipients appreciate the luxury gifts because they make them feel they are being well looked after. “We’ve done well on the gifting by being very well known in China,” he says. The learning curve Yet, the road to establish a brand as a status symbol is not a smooth path. The figures may be more than gratifying but none of the retailers say brand building has been easy. The golden road to retail heaven is still pitted with mines even today. The biggest difficulties are location and marketing, which require major investment, says Nick Debnam of KPMG. “There are so many malls, but few five-star malls,” concurs Conway Lee of Ernst & Young. Retailers say choosing a prime location is often a case of hit and miss for top brands. “It’s very difficult still in China to control the retail environment,” says King of Dunhill. Pavement hawkers and decrepit bus shelters may damage the prestige of a luxury shop. To play safe, most of Dunhill’s outlets are located in foreign-owned department stores or international hotels. As developers spend more on their malls, the situation is improving, but brands still have to check out the neighbours. When trying to rent a space, King says landlords often claim that other top brands are opening outlets in the same mall, but it often turns out to
Specializing in men’s wear, leather goods and accessories, Dunhill has been doing extremely well in mainland China, thanks to its early move into the country back in 1992. Its biggest competitors in the mainland are Ermenegildo Zegna, Hugo Boss and Dior Homme. “Probably ourselves and Zegna are running neck in neck,” says Tim King, Dunhill’s managing director, North Asia. He says China’s diversity means marketing campaigns are costly. Many magazines don’t have countrywide coverage. “And none of us can afford TV,” he says. “We do things like billboards. Airport billboards, billboards in main streets in Beijing and Shanghai. It’s never enough.” He says only a relatively small percentage of Chinese have enough income to buy luxury products – “a small number in a huge area, compared to Hong Kong – a large number in a small area.” Of Dunhill’s 73 shops on the mainland, 37 are fully owned and 36 are franchises. Both have their advantages, says King. “The franchises are very
useful in the tertiary cities, where they are basically the people who know the city. They know how it works. They are our eyes and ears.” But the brand has less control over the stock with franchises, he says. “When you work with franchises, they come into a showroom... and they decide what to buy, they decide what they can sell.” That can lead to different outlets having different stock, he says. Wholly owned stores are more profitable because all stock is sold at retail prices. Half of Dunhill’s China business is wholesaling to franchisees. It’s a balancing act exemplified by the company’s own plans: Over the next year, the company will take over four to five franchises to make them wholly owned stores but will also open four or five more franchise operations, says King. Like many other luxury brands, Dunhill products cost more (about 38 percent) on the mainland than in Hong Kong because of tax and customs duties, prompting more Chinese consumers to buy in cheaper markets like Hong Kong or Europe. “It’s an issue that I think most brands are trying to address,” King says. “We do want people to buy in market.”
be untrue. As a result, foreign luxury brands in China communicate much more closely with each other than they do elsewhere to unearth such deceptions, he says. “We make sure we see letters of intent from landlords.” Communication for marketing, given China’s diversity, is another challenge. Getting it right in one city doesn’t mean a media campaign will work countrywide. Most magazines and newspapers do not cover the whole country, and brand awareness differs tremendously from one city to another. Only Shanghai
October 2007
+
A Plus [ 27 ]
China luxury
Chloé Thanks to high-profile designers such as Stella McCartney and Phoebe Philo, Parisian fashion house Chloé won the hearts of women around the globe with its chiffon dresses and signature Paddington and Edith handbags. The brand opened in China two years ago and operates through franchised stores, even after the government lifted rules that banned foreign companies from owning more than 60 percent of a retail business in December 2004. Helen Willerton, Chloé’s Asia Pacific managing director, says the brand has no immediate plan to set up wholly owned shops because it has had huge success with its franchised operations. “There is a growth which is clearly quite unheard of within any other country, ” she says.
While Chinese consumers are eager to try new brands, Willerton says, at the same time some are beginning to develop brand loyalty. “I think people underestimate the mainland consumer. We’re starting to see brand loyalty.” She attributes it to increased travel and time spent studying overseas, which is changing the mainland consumers and exposing them to more information about brands. The brands that succeed will be those that give consumers a sense of value for money, says Willerton. With travel restrictions eased for many mainland Chinese, they will be able to compare prices abroad and shop around. “These people aren’t stupid.” Looking ahead, Willerton says: “We’re enjoying great growth. I think we’re set to enjoy continuing and strong growth in the short to medium term.”
and Beijing are considered to have a similar level of brand consciousness to Hong Kong, but beyond that it’s another story. Many cities are cash rich but shop starved. “No history of brands, no internationalism but a lot of money,” is how David Stewart of Jigsaw International describes some second and third tier cities. “The key challenge for people working in China is to grasp and segment the whole country,” he says. Jim Siano of Montblanc agrees. “China is extremely fast-paced. If you are not in the market for three months, you get lost. And it’s continually evolving and changing, that could be from the laws, from the people, from the structure. You have to move with the market quickly. That’s the challenge.”
Luxury brands are also hurt by counterfeiting, which they say costs them billions in lost revenue annually. Tim King of Dunhill says it isn’t unheard of for low-end retailers to be selling fake luxury products next door to the real thing. Finding the right staff has also been a headache. When customers are being asked to splash thousands of dollars on a product, frontline sales staff need to provide top-notch services. King says there is no shortage of people who want to work for a luxury brand in China, but “finding staff who’ve got experience in luxury is a different matter.” Siano says hiring is easier now than before but the company still spends a significant amount on training, ranging from
[ 28 ] A Plus
+ October 2007
product knowledge to luxury selling skills and grooming. “Staffing today is so much better than even 10 years ago. It’s like night and day. But of course, we have to spend a lot of time on training and bringing staff up to international levels.” Chinese consumers want the best Chinese consumers are fast becoming more knowledgeable and more demanding as a growing number travel abroad and get a taste of what’s available outside China. That allows them to protest with their purses against small product selections, outlets that are sometimes less than inviting and higher prices at home. “A shop that wasn’t perfect [in the past] might have been
acceptable. But today, China has world class cities and they expect European standards,” says Siano of Montblanc. A Goldman Sachs report in 2004 estimated that Chinese consumers spend twice as much on luxury goods abroad as they do in Hong Kong, and estimates are that up to 100 million Chinese will travel abroad by 2015. However, some industry observers say many luxury brands in China have stores that are too small and ungratifying. “They’re like little boxes. The retailers have not done a good job of giving customers what they want,” says Shaun Rein of China Market Research Group. That advice has been taken to heart by Lane Crawford, whose three mainland operations – in Shanghai, Hangzhou and Harbin – closed recently. The luxury department store hired Rein to advise them on its new store in Beijing, scheduled to open this month. Industry watchers say Lane Crawford’s location in Shanghai was the wrong place at the wrong time and had an unwise range of products. “They put the Lane Crawford brand onto products that weren’t really controlled by them. The Beijing one I think now will be a proper Lane Crawford store,” says Tim King of Dunhill. Lane Crawford, however, cites a change in company strategy as the reason for the closures. “We haven’t closed those stores because of operational difficulties or locations,” says Monica Blanch, the company’s communications and events director. “That [Shanghai] store lived up to the expectations that Lane Crawford had for that store. We will be back in Shanghai.” The new Beijing store, measuring 80,000 square feet, will be set up as
A top brand needs a top accountant and Institute members occupy important financial positions in the Asian operations of prestigious brands. Here are some of them:
Company name
Title
Burberry Asia Ltd.
Vice President – North Asia
Louis Vuitton Pacific Ltd.
Chief Financial Officer
Bally Hong Kong Ltd.
Regional Financial Controller
Prada Asia Pacific Ltd.
Regional Financial Controller
Hermés Greater China Ltd.
Finance Director
Gucci (China) Trading Co. Ltd.
Finanial Controller
Furla (Hong Kong) Ltd.
Finanial Controller
a wholly owned operation, Blanch says. This will probably prevent the company from running into the same problems it did with its franchised stores in Hangzhou and Harbin. “Lane Crawford will not franchise its brand again. That’s all I can say,” she says. The forecast Even Gucci, which has operated in China for a decade, recently told the SCMP that its mainland operation has been profitable for only three years. “Not too many brand name owners are making a handsome profit,” according to Conway Lee of Ernst & Young. To succeed, the brands, industry insiders say, will have to target the 250 million-strong middle class. It would be a mistake to focus on just the affluent. Nick Debnam of KPMG says China’s likelihood of rising to second place in the luxury consumption ranks by 2015 does not depend on the super rich. “It
will depend on the number of people who pull through to the middle-income bracket. It’s not a mature market. The important thing is to grab as large a share of that market as you can today because that grows with you.” But nothing is certain. “Everyone’s forgotten the Asian crisis now. But one thing for sure is that [the luxury market] probably won’t pan out as everybody expects,” he says. Meanwhile, the luxury retailers are continuing to bet on the figures and fire ahead with ambitious expansion plans. Chloé’s newest store will soon open in Beijing. Montblanc’s mega boutique will open in Shanghai next month. Dunhill will open about another 10 stores over the next year. “Basically, the mainland Chinese are really into shopping,” says Tim King. “They like luxury goods. I don’t see that changing. Overall, the opportunities in China for us and other luxury brands are good.” A +
October 2007
+
A Plus [ 29 ]
