As the mature economies of Europe and the USA are seemingly still too shy to fully embrace a recovery, China, and indeed Asia as a whole, with their fast-paced growth rates associated with populations of billions of potential consumers, now represent the central focus of the interest of the global luxury industry. Giuseppe Milito, Managing Partner of Hong Kong-based Stones International, investigates.
Renowned Harvard University economist and author John Kenneth Galbraith once said: "The only function of economic forecasting is to make astrology look respectable." Press, media, financial institutions and specialized agencies regularly publish figures about market trends and market shares in any industry. However, they rarely get it right.
More useful and reliable, but certainly more challenging, is attempting to plot analysis based on input provided directly by luxury brands about their two to three year projects, expansion plans, investments, targeted market shares and new openings. Such information, based on confidential figures and expansion plans, is usually inaccessible, especially when it comes to luxury brands.
Stones International specializes in the fashion and luxury sector across Asia and we have unrivalled contacts. So I decided to go straight to them, for unique inside information on what is happening - but more importantly, what is going to happen over the next three years.
The following article represents a summary of the first-hand insights and opinions provided to me by some of the Asian fashion and luxury sector's most influential leaders. The study was conducted by Stones International under a transparent agreement with the parties provided their information on the understanding that firstly the brand name and interviewee's details added to the pool of data collected would remain anonymous, and secondly, that the interviewee was expressing his/her own personal views and expectations of the luxury industry in Asia and its medium term trends, as privileged and knowledgeable observers operating in the region.
The Overall Outlook
In 2011, in Asia the luxury market will continue growing by a healthy 20%, with the only exception being Japan, the most mature and sophisticated market in the Asian region which unfortunately is expected to see a contraction by 9% of its luxury sales in 2011, due to the recent adverse events, with key markets for luxury being Greater China and South Korea. India probably requires a separate analysis.
South Korea, though in many aspects a mature market with unique features - almost 50% of the country's sales of luxury goods are through the duty-free channel - will still experience an average annual growth rate of 12-15% in the next three years.
With its population of 240 million people, surprisingly Indonesia is also playing an increasingly important role in the luxury goods market, which is accompanying a gradual new phase of partial secularization of its society (nowadays, it is not unusual to find pork and wine sold in the supermarkets of Jakarta).
Through our survey, it was clear that, as expected, the most important luxury market is, and will be, for several years to come, China.
When asked about growth plans, we noticed a general consensus, indicating an average 24-26% expected annual growth - astonishing by Western standards - for the next three years in China. More than one of our respondents commented that if an established luxury brand in China is forecasting anything below 20% for the next three years, well, there must be something wrong in their approach.
In a country where the number of RMB billionaires ($US millionaires) has been growing at a rate of 50% a year in the last 10 years, those millionaires are in average 15 years younger than their overseas peers with similar net worth. They also are proud to display their wealth and newly-achieved social status first and foremost through what they wear and drive, since entertaining guests at home is not a typical Chinese tradition. Yet.
Possibilities of growth for luxury brands in China are still immense, if accompanied by sensible expansion plans and the availability from headquarters to destine huge investments to the expansion in the territory. Some of our respondents even indicated that, provided a luxury brand can count on conspicuous investments and the availability of available spaces in shopping malls, the expected 20-25% yearly growth in China could easily grow much higher. Once again, these figures may sound astonishing, especially if compared to the current trends in Europe or the USA, but we should not forget that Chinese already are the No. 1 client for Louis Vuitton. Greater China also represents almost 30% of the sales of Swatch Group, but is also a considerable, growing share for key luxury names such as Richemont, Gucci, Bulgari and Hermes, to name a few, though 55% of luxury goods purchased by Chinese are bought outside of Mainland China.
Expectations for the luxury market in India
India, with its population of 1.2 billion, for sure is the next most important market, after China, for many product categories, but surprisingly, in real terms, not necessarily for luxury products. In a country where rich are often very rich (by any standards), luxury products are still purchased by an exiguous portion of the population. India still is a place where luxury products are subject to heavy duties and taxes, not to mention that, whenever purchasing a luxury item, the shop is required to take note of the purchaser's personal details for tax reasons. However, the rich who can afford to buy luxury products in India, are often foreign-educated, affluent individuals who travel regularly to Milan, London, Paris or New York, where they can buy luxury items duty-free; and, worthwhile mentioning, with nobody informing the Inland Revenue Department back home about an expensive purchase that could raise a flag in their tax return. We often see India being labeled as "the next big market in the luxury sector", while continuously compared to China in terms of growth trends.
I am not sure this will be the case, at least in the medium term. Today, India can count on fewer big cities than China in terms of concentration of consumers with a portion of their revenue available to be destined to the purchase of luxury goods. Various second and third tier cities in China, probably still unknown to the average European or American, have populations of 6-8 million people, the size of an important European capital, many of them potential consumer eager to allocate anywhere between 10-15% of their household annual income to the purchase of luxury goods.
In a comparison between the two countries, China is following the path of accurate urban and infrastructure planning that allows also luxury brands to be informed well- ahead of future developments, new shopping malls, train stations, subway extensions and new urban developments. As a matter of fact, important infrastructures (for instance Kunming Railway connecting China to the rest of South East Asia, all the way down to Singapore) that influence the flows of travelers (hence consumers) and the development of urban areas, are part of the business plans and feasibility studies that luxury groups have in place for China, thanks to the open information exchange with the Chinese Government. Probably, the same extent of exchange and infrastructure planning has not yet been achieved by India.
What will be the growth pattern of the luxury industry in China in the years to come?
"On one side, in the longer term, the good news is that we will see more Chinese luxury brands which, overcoming any inferiority complex, will no longer need to appear French or Italian, but will proudly claim a heritage of good tastes, balance, elegance, art and craftsmanship that dates few thousand years back. We should not forget that while Italians probably produce the most glamorous and comfortable shoes in the world, and the French are renowned for silk scarves and exclusive prêt-a-porter, neither of the two countries has invented elegance and grace that, as a matter of fact, have influenced Chinese art and society for millennia. My friends in Italy are always magically fascinated whenever I give them a silk scarf from Shanghai Tang as a gift.
In line with this approach, I am sure that Hermès' launch of the new Chinese luxury brand Shang Xia will lead to triumphal results, and will set a trend for new Chinese brands to follow.
While waiting for new Chinese luxury brands to conquer the marketplace, in the short/medium term, the strong will get stronger. The acquisition of new brands to be added under the same group umbrella seems to be the most popular rule of the game. Whenever new glamorous shopping malls open, big groups are 'naturally' given the option to choose prime locations and the comfortable space they need. Independent brands, smaller brands and artisanal hand-made products can only choose what is eventually left to them. With just one option: take it or leave it.
This explains, for instance, the reason of Bulgari's recent acquisition by LVMH Group, and the numerous, new acquisitions which, unavoidably, will follow in the near future.
The real estate battle recently broke out between Hong Kong's Shanghai Tang, owned by the Richemont Group, and American casualwear brand Abercrombie & Fitch for sure is an indicator of the current climate. Abercrombie & Fitch was able to secure a prime new location in the middle of the city's Central district for $HK7 million ($US900, 000) per month; an extraordinary 250% jump compared with $HK2 million rent Shanghai Tang had been paying for the same premises.
Besides the voracious acquisition of prime locations, luxury brands in China are also experiencing another kind of pressure: attracting and retaining management talent, a variable for which China has a chronic shortage due to the unceasing growth of the luxury sector.
I know of an American luxury brand that recently tried to attract a c-level executive from a European luxury brand, offering double the already generous six figure salary the executive was receiving. The offer was declined because the executive preferred the European way of doing business. But this example illustrates that the American luxury brands making inroads into Asia have the money - and are prepared to spend it lavishly - on getting the best people. Smaller groups will undoubtedly suffer. I expect c-level salaries in the luxury sector in Asia to increase from between 20- 40% over the next two to three years.
It goes without saying that, besides the battle for prime locations, if the new rule to attract management talent becomes paying huge premiums, the game is going to be really tough.