Chinese demographics are key to understanding this phenomenon. The liberalisation of the Chinese economy has rapidly given birth to a super-rich capitalist class. There are estimated to be some 350,000 US dollar millionaires in China. Just how quickly wealth is growing can be seen from the most recent “China Rich List”, compiled by Hurun, which shows a sevenfold increase in US dollar billionaires in the past year.
So it is no surprise that luxury car makers, hotel groups and a roll call of elite brands are racing to expand their presence in China. Whereas previously they would have focused on the major urban centres, such as Beijing and Shanghai, they are increasingly turning their attention to smaller cities, such as Shenyang, Jinan and Chengdu, as the market for luxury goods expands into previously unexploited parts of urban China.
“The Chinese market will eventually be like ten Japans,” says Radha Chadha, author of The Cult of the Luxury Brand: Inside Asia’s Love Affair with Luxury. “So far luxury brands have only touched the surface of this market.” Ms Chadha believes that luxury markets in Asia develop according to a five-step model.
China, she argues, has completed phase one (which she refers to as subjugation, characterised by authoritarian rule, deprivation and poverty, which build a hunger or a desire for luxury) and phase two (economic growth), and is currently at phase three, which she terms “the show-off stage”, where status is the key focus. Phase four is reached when this trend for displaying wealth becomes widespread, and phase five is when luxury becomes a “way of life”.
“Wealthy Chinese want to telegraph in a simple, clear manner that they have money,” she explains. “And luxury brands tell the world how well you’ve done and your status in society. The huge changes brought about by economic liberalisation have reinforced the need for status validation.”
“Luxury brands tell the world how well you’ve done and your status in society. The huge changes brought about by economic liberalisation have reinforced the need for status validation.”
Indeed, in the Conference Board’s Global Luxury Market: Exploring the Mindset of Luxury Consumers in Seven Countries, China was the only country surveyed in which a majority of wealthy consumers agreed that luxury is defined by brand. China was also one of the countries identified in the report where individuals are most likely to own “status” luxury goods.
Currently, success in China for luxury goods companies depends on being a “top” brand. The top ten brands in China for the ultra wealthy, according to Hurun Report, are: BMW, Louis Vuitton, Mercedes-Benz, Rolex, Giorgio Armani, Ferrari, Rolls-Royce, Bentley, Cartier and Vacheron Constatin. Beyond this elite, lesser brands may find it a struggle to win clients in China.
As they pursue their growth strategies in the region, luxury companies in China also face a number of specific problems: intense competition, a proliferation of brands and luxury goods companies, together with spiralling costs, a shortage of skilled workers, steep import duties and value added taxes, to name a few.
Although attempts are being made to curb the problem, counterfeiting also remains a major problem. “It is difficult to pinpoint particular strategies to fight counterfeiting since its ramifications are so wide,” says Mr Fang, the owner of Pringle.
“The good news is that Asian governments have come to realise how damaging it is even for their own economies in the long run and are starting to adhere to international controls and standards. We are now starting to see much more attention in some markets. That said, unfortunately the problem is not solved yet.”
What will it take for luxury goods companies to succeed in China? Experts say a long-term perspective is essential. Recent research by Boston Consulting Group suggested that only about one in ten overseas luxury brands were profitable in mainland China. Earlier this year, Nigel Luk, Cartier’s Managing Director for China, revealed that the company is barely breaking even after 15 years on the mainland, despite being the best-selling luxury jewellery brand in the country.
Ms Chadha believes that it will take 15 to 20 years for China to reach phase five, where a ‘culture of luxury’ is well-established, like in Japan. “Luxury brands need to continue to build relationships with consumers over this time. Those who build the right foundations will reap great rewards,” she says.
