Luxury brands booming in China

August 27, 2013 by Andrea Park

New York. Paris. Milan….Dalian.. Hangzhou.. Wuxi? The major Western cities we know. But what of the others? These are a few of the store locations of Hermes, the luxury brand behind one of the world’s most coveted handbags, the Birkin – starting price around $9,000 and even more expensive in China, after adding import taxes.

It might seem strange that a prestigious brand like Hermes should set up camp in Chinese second-tier cities, but the French high fashion house is far from the only luxury brand to do so. Luxury brands are booming in China, with the number of luxury retail stores today hovering around 1,000 – double the number five years ago, according to brokerage CLSA Asia-Pacific Markets.

Between 2007 and 2011, luxury brands had double-digit annual growth in China, which meant that many of these companies focused their strategy on expanding within the country. This meant using Chinese brand ambassadors at events and putting more emphasis on menswear and accessories- two segments that are more popular in China than they are in the West. A 2011 Bain report showed that watches and leather goods led the growth in luxury brands because of China’s gifting culture – customers reported spending over 20 percent of their overall luxury spending on gifts. “Luxury gifts always pleasantly surprise my clients and they help me get the deal done more easily,” said a luxury consumer in the report.

Accessories make up a bigger chunk of sales in China, in part due to gifting but also because they are less expensive but more showy. These small accessories boast logos for customers who cannot afford to buy different luxury products each season for their everyday consumption.

As Tom Doctoroff, Asia-Pacific CEO of JWT Advertising and author of Billions: Selling to the New Chinese Consumer, puts it: “Chinese people have very few ways of expressing their aspirations and identities, and one of the ways to do that is through goods, and luxury goods in particular. Luxury goods help people move forward and declare their intentions on the journey of success.”

With millions of Chinese having become wealthier over the last 20 years, the luxury brand companies have come to realize that the Chinese are rapidly becoming their most important customers. China’s luxury market has already become the world’s largest, and according to a 2012 McKinsey report, China’s share of global luxury spending will surpass one-third by 2015.

Western fashion houses have ceased to assume that they will set the trends and Chinese customers will follow. Now, Chinese customers are driving the brands’ marketing strategies and luxury groups and related business are going out of their way to accommodate Chinese consumers.

The results are conspicuous. In June, cutting edge designers Proenza Schouler, Rag & Bone and Marchesa held a fashion show at the Ming Dynasty City Wall Relics Park in Beijing. High-end e-tailer Yoox opened its site last fall and online luxury publication Nowness, owned by Louis Vuitton Moet Hennessy, is available in two languages: English and Chinese.

Though the fashion industry was once notorious for excluding non-Caucasian models, it is quickly changing its tune. Chinese models Sui He, Ming Xi, Liu Wen are omnipresent on the catwalks and fashion magazines like Vogue and W Magazine have published pieces on fashion’s Who’s Who in China for forward-looking readers.

However, the old formula is not good enough. “Many brands expected that an increase in Chinese sophistication would reduce the cultural gap with their overseas consumers,” said Pablo Mauron, General Manager China of Digital Luxury Group, in a report this year. “In some cases, it actually contributed to the development of unique local preferences, independent from Western tastes, thus challenging luxury brands in terms of product offering but also opening up the way for new opportunities to grow in the Chinese market.”

Both Western and Chinese companies are seizing opportunities to expand their presence in China. French luxury house Kering, formerly known as PPR, bought Chinese luxury jewelry brand Qeelin last year, and plans to buy more Chinese luxury brands. Hermes also has its hand in the pot, and launched a Chinese homeware brand in 2010 called Shang Xia.

Chow Tai Fook, the world’s biggest luxury jewellery company, is based in Hong Kong and listed as the most desirable jewellery brand in China. With Chinese-inspired designs and gold that comes close to 24 karats in purity, catering to Chinese tastes has served the brand extremely well and shows that consumers in China are not just looking for Western aesthetics anymore.

Thus, there is great potential in the market for homegrown luxury brands, which companies like Kering already realize.

However, it is widely acknowledged that China has a branding problem due to a lack of marketing and long-term vision. Investors want to see fast results and do not value creativity and innovation or even quality. As Timothy Beardson notes in Stumbling Giant: The Threats to China’s Future, “Branding needs corporate leadership that is competent and comfortable with communication, marketing, design and sales … Creating a brand … requires some innovative thinking and much patient and thoughtful building.” Beardson argues that Chinese companies could improve the culture of brand positioning by employing more transparency and a long-term mentality.

A few Chinese brands are successfully grabbing a hold in the market: haute couture brand Guo Pei turned down an offer to show in Milan Fashion Week in order to focus on shows in China. Designers like Ma Ke and Liang Zi have already made waves in Western fashion publications; a market growing as quickly as this one has room for both foreign and domestic players.

The Chinese luxury market is not without its problems. Due to crackdowns on government corruption and officials becoming more careful about lavish spending, some luxury sectors, such as watch retailers, have seen a decrease in sales. But overall, the industry is experiencing steady growth; China’s moneyed government officials are not the only consumers of luxury goods – the rising middle class aspires to luxury as well.

Professor and China watcher Sam Crane blogged his observations of a few middle class Wuxi ladies during a recent trip to China: “I imagine that the cries of neo-conservatives, who call for the preservation of some kind of authentic Chinese-ness, would fall on deaf ears with the Wuxi ladies,” he wrote of the French handbag-carrying women. “They simply want new, good, fun stuff; and, whatever that stuff is, it all now transforms into a globally-informed and novel experience of Chinese-ness.” The material nature and newness of China’s middle class means brands have customers hungry for luxury products and open to new brands.

Recently, a larger-than-life Hugo Boss men’s ad stole the spotlight on both the ground and second floors of the Time Warner building in New York. Chinese model Zhao Lei stood side by side with Swedish model Alex Lundqvist. A well-heeled young man walked past the Hugo Boss stores and noticed the ads. “Oh – an Asian model,” he says. “I’ve never seen Hugo Boss use an Asian model before. Interesting.” No doubt the customers of China’s 105 Hugo Boss stores – slated to grow by 60 more stores by 2015 – would agree.

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