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2013-06-07 08:49:01
Life is getting harder for purveyors of luxury in China, but the growth
prospects are still fabulous
Jun 8th 2013 | SHANGHAI |From the print edition
IT WAS an amazing golden age, reflects Guillaume Brochard of Qeelin, a
Chinese jeweller. From 2007 to 2011 many luxury-goods firms enjoyed
double-digit annual growth in China, which became their most important market.
The first blows came last year, with an economic slowdown and jitters about the
political transition. Now, a crackdown on corrupt gift-giving and a populist
backlash against ostentation have added to the woes.
The outlook for luxury-goods firms appears to have dimmed. Internet users have
posted incriminating pictures, for example of poorly paid bureaucrats wearing
suspiciously pricey watches, which have caused heads to roll. Mobs have also
disrupted banquets deemed to be too lavish, on occasions forcing officials to
their knees to beg for forgiveness.
This has traumatised some purveyors of conspicuous consumption. Beijing
Xiangeqing, an upmarket catering outfit that is usually highly profitable,
plunged into the red last quarter. Sales of shark fin, the key ingredient of a
soup served at fancy dinners, are down by around 70% year-on-year. Imports of
bottles of Bordeaux costing more than $800 have collapsed.
But look beyond the lavish public banquets and a more complicated picture
emerges and not just because devious officials are now throwing their
extravagant parties in private. It is true that some luxury-goods firms are
grappling with slowing demand in China: imports of Swiss watches, for example,
fell 24% year-on-year in the first quarter of 2013. But Andrew Keith of Lane
Crawford, a high-end department store that first opened in Hong Kong in 1850,
reports no slowdown at his stores there or in Beijing. Burberry, a British
fashion brand, enjoyed sales growth in China of about 20% in the year to March.
Sales of private jets in China are still soaring.
So what is really going on? It seems that China remains the biggest prize in
the luxury industry, but the low-hanging fruit is gone. Luxury firms must now
venture beyond the coastal cities where they have made easy fortunes, cultivate
new types of customers and market niches, and experiment with new business
models. It will be worth the effort. Despite the recent troubles, Bruno Lannes
of Bain & Company, a consultancy, insists that Chinese have become, and will
remain for a long time, the most important luxury consumers. His firm
estimates that luxury sales in greater China (which includes Taiwan, Hong Kong
and Macau) will grow by 6-8% this year, to exceed $35 billion, making it a
luxury market second only to America.
But even that does not tell the full story. China s rich are travelling more
and farther, and do lots of luxury shopping on their travels, especially in
Europe, whose weak currencies encourage Chinese visitors to splash out.
Measured by the nationality of the buyer, China is now the world s biggest
luxury market, and growing fast (see chart). Last year mainland Chinese took
83m foreign trips, up 18.4% on 2011. Global Blue, a big tax-free-shopping firm,
says its refunds to Chinese shoppers shot up by 58% last year to more than 24
billion yuan ($3.9 billion).
To make the most of this trend, firms need to rejig their shops worldwide. They
need Mandarin-speaking assistants, VIP rooms big enough to accommodate large
tour parties and payment systems that can handle Chinese credit cards. Philippe
L opold-Metzger, who runs Piaget, a Swiss watch and jewellery brand, says he
regards the firm s outlets in China itself more as showcases than
profit-earners: half of his global business comes from mainlanders, but they
mostly buy while on foreign trips.
That said, there are still plenty of opportunities to expand sales inside
China. Kent Wong, managing director of Chow Tai Fook, the world s largest
jeweller, with over 1,700 sales outlets on the mainland, says their takings are
continuing to grow. Any weakness is seen chiefly in coastal cities exposed to
China s struggling exports. In the interior, where locals are not yet used to
foreign shopping jaunts, middle-class incomes are still rising.
Luxury firms are having to adapt to this fragmentation in the Chinese market.
Whereas flashy bling still sells to the new money in smaller, interior towns,
globetrotters from the coastal cities are returning from their travels as more
knowledgeable and demanding shoppers. Armando Branchini of Fondazioni
Altagamma, the Italian confederation of luxury brands, says such customers look
for more subtle and modern designs.
Digitally challenged
Over two-thirds of Chinese use the internet to research brands, but most luxury
firms have pitiful digital strategies. One study found that luxury websites
take four times as long to load in China as elsewhere (because most firms do
not put servers inside China s Great Firewall, which slows access to foreign
sites) and rarely offer yuan prices or purchasing options. Mobile commerce is
growing in China, but few luxury firms websites are optimised for mobile
devices.
As the tastes of rich Chinese evolve, business models combining local flavour
and global savvy are emerging. Qeelin, recently bought by Kering, a French
luxury house formerly known as PPR, is one example. Another is Shang Xia, a
homeware label inspired by local crafts, launched in 2010 by Herm s, also of
France. Under orders from the government in Beijing, foreign carmakers and
their Chinese joint-venture partners are creating new, local brands: BMW will
produce cars with the Zhinuo badge, and Mercedes will market new models under
the Denza brand.
So far, Chinese luxury buyers, especially of cars, have turned up their noses
at domestic brands. But the hybrid brands may prompt them to reassess the Made
in China label, says Michel Gutsatz of the China Europe International Business
School. At a conference the school recently held, He Haiming of CCTV, China s
dominant national broadcaster, pointed out that Made in Germany and Made in
Japan were also once derided, but are now marks of quality. As Europe s
luxury-goods firms grow from low-volume exclusivity to semi-industrial scale
thanks in large part to China s voracious appetite for their wares Mr Gutsatz
argues that they must think of economics and consider manufacturing in China
itself instead of mainly exporting to it. The business of getting wealthy
Chinese to open their wallets is bound to go on evolving, but the opportunities
for growth make it irresistible.