Luxury the Chinese way

The continued rise of Chinese consumers and their ever-increasing demand for desirable brands is proving to be very good news for the luxury goods sector. The Chinese will become the leading luxury consumers by 2014, overtaking the Japanese and Americans, and are expected to contribute 40 per cent to the sector’s growth over the next 10 years, according to research from Lombard Odier.

The size of the global luxury market very much depends on how the term “luxury” is defined, says Nathalie Longuet, senior analyst covering consumer goods at Lombard Odier. While “traditional luxury” products such as watches, jewellery and clothing is worth around €140bn ($180bn) annually, once “experiential luxury”, such as five star hotels and expensive furniture, plus “luxury collectibles” such as yachts and cars, are factored in, the market swells to around €900bn, she explains.

But what is clear is that the industry is growing and that it is the Chinese that are driving this growth, while global brands are best positioned to benefit.

“To understand what is going on you need to understand what is happening in China, and what will happen over the next five years,” says Scilla Huan Sun, who runs the Julius Baer Luxury Brands Fund, which has €97m invested in the sector.

“China will have more and more consumers who can afford to buy luxury products. Predictions indicate that by 2020 China will become the biggest consumer market in the world. And we know that for the luxury market the growth is even faster.

“This is driven not only by economic growth, but from the rising wages in China and the fact that the Chinese need to grow domestic consumption in order to maintain their economic growth. Urbanisation also means that incomes will rise dramatically,” adds Ms Huan Sun.

WELL TRAVELLED

It makes much more sense not to look at China as a luxury market, but to look at the Chinese, given they travel extensively and buy a lot of luxury products overseas, she explains.

“Today the Chinese make up around a quarter of the market, and when you add in the other emerging market consumers they make up around half of the global market. So luxury brands give you a high exposure to emerging markets,” adds Ms Huan Sun.

It is estimated that over 50 per cent of luxury goods sales to Chinese consumers are made outside mainland China. “A lot of Chinese go to Hong Kong, and to a lesser extent Singapore, to buy their luxury products, and they are increasingly going to Europe and a bit to the US,” says Ms Longuet at Lombard Odier.

“Import duties and consumption tax in China mean that, on average, there is a 30 per cent price differential between the mainland and Hong Kong.

“The shopping experience and merchandising is better in Hong Kong and Europe, and Chinese consumers are obsessed by counterfeit products – they are unsure about the quality they are able to buy on the mainland. When they go to Hong Kong or Europe they know they are getting the real thing.”

Chinese people like to display their wealth, she explains, and favour the status and heritage associated with Western brands. According to the Hurun Research Institute in Shanghai, the brands most favoured by Chinese millionaires are Louis Vuitton, Cartier, Hermes and Chanel.

“A luxury product is a product, but more importantly, it is a brand,” says Ms Longuet. “If we are talking about traditional luxury goods, the majority are based in the Western world because the definition of them being a luxury brand has to do with them having a strong heritage and strong craftsmanship and design.”