Luxury goods in China Essay

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 â€Å"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 â€Å"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, ? 2 ? ? 3 ? 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 Leopold- 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, â€Å"middle-class incomes are still rising. † Luxury firms are having to adapt to this fragmentation in the Chinese market. Whereas flashy â€Å"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 Hermes, also of France. Under orders ? 3 ? ? 3 ? 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 â€Å"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 â€Å"Made in Germany† and â€Å"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 â€Å"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. From the print edition: Business.