Date: 03/08/10

By: Evelyn Rusli

“Fashion fades, only style remains the same,” says Jasper Liu, 26, summarizing his approach to shopping by quoting Coco Chanel.

Liu, a self-described “Shanghai Hipster,” represents the nouveau riche of China. He reads English literature, watches European movies, drinks fine champagne and is a loyal patron of luxury retailers, namely Lanvin and Yves Saint Laurent.

The affection is mutual: Fashion houses with global ambitions are courting Chinese consumers like Jasper, eager to learn how they spend, why they spend and just how much they’re willing to spend.

The answer: quite a lot if the quality and label are right. In a recent study by retail consulting firm Pao Principle, the average Chinese luxury consumer will spend roughly 11% of her income on luxury handbags alone. The group’s favorite brands, in order of preference: Louis Vuitton, Gucci, Coach, Chanel and Prada.

Over the past year Patti Pao, the founder of Pao Principle, has collected data on the mainland’s elite consumers: amassing a panel of 356 individuals who have purchased a luxury handbag, watch or fine jewelry piece in the last twelve months. Her snapshots of their habits create a portrait of a misunderstood luxury consumer who is highly educated and highly motivated to identify products that will complement his or her individuality and rising power.

For Pao the project was critical to her business. After the collapse of Lehman Brothers in 2008, her retail clients fled, “I said, what would it take for you to hire us back, and they basically said, ‘The U.S. is dead, Europe is dead, Japan is dead and we’re putting all our resources in either the Middle East or in China. If you can help us … we’d be happy to speak with you again.’” The mature markets may not be “dead,” but numbers confirm that momentum is indeed swinging:

According to an October 2009 Bain & Company report, the U.S. luxury market likely fell 16% that year, Europe was off 8%— but China, which is described as the “new real frontier of luxury,” rose an estimated 12%.

And according to the Luxury Institute’s latest report on the high-end market (released in September 2009) 33% of respondents said they plan to spend less on handbags this year. “Even the wealthiest of consumers are now living within their means, which will have a somber, dampening effect on the market,” says Luxury Institute’s CEO, Milton Pedraza.

“U.S. consumers who are making $150,000 or more, spend about $3,000 a year on handbags, which is a pittance compared to the Chinese.” For comparison, 90% of Pao’s panelists who had purchased a handbag in the past 12 months are planning or considering the purchase of another luxury bag in the next six months.

For Western companies China can be a difficult market to crack due to its language barrier and inherently private culture.

In a nation still challenged by censorship issues, Pao says people are generally hesitant to share personal and honest information. But Pao, a Chinese-American whose parents are from Nanjing, says her ties to mainland China gave her a natural advantage. “All of our correspondence was done in Mandarin. We leveraged our network of friends and families, so that we were able to hand select and hand screen a panel…who because we knew them or were tied to them in some way shape or form would tell us the truth.”

That panel is highly educated and has serious spending power: 70% graduated from college, with many holding advanced degrees: 80% own a own home; and nearly 90% bought a luxury handbag in the last 12 months. The average annual salary of a panelist is 125,000 yuan, or $18,382–which may seem low compared with U.S. wages, but is more than triple the average salary in Shanghai, which is 39,000 yuan or $5,735, and goes a lot further in China.

Many of the panelists are young, college graduates from wealthy families who recently entered the work force. While their means seem modest compared to luxury buyers in the U.S., Pao found that many outspend their Western counterparts, dollar for dollar. Of the 311 panelists who bought a handbag in the last 12 months, the average purchase price per bag was $1,000 and the average panelist bought two bags, according to Pao’s data.

China’s lust for luxury may seem a pure power play, a competition to amass the greatest number of logos, but Pao says it has become more nuanced than that. As Chinese consumers become more sophisticated and savvy, they’re using fashion to differentiate themselves and project a personal statement. Twenty years ago people bought luxury goods because it signified how successful they were: “Literally, you were judged by the clothes that you wore on your back,” she says. “The trend is shifting, because in the 1970s China enacted the one-child policy,” Pao says. “Now China has a population of very wealthy households. [Their] children are cosseted, coveted, pampered … they’re self-centered and they’re spoiled,” says Pao. “It’s just how they describe themselves.”

As a result the country has moved away from a group-think mentality to a more individual-centered mindset. Luxury products that offer an opportunity for differentiation, such as limited editions, are highly sought after by her panelists, including “Shanghai Hipster” Liu. He admits China’s consumers are more brand-oriented but says that only “unsophisticated luxury shoppers would select luxuries with visible logos to show off their new ‘conquest.’ “

Pao’s report concludes that the country’s wealthy consumers and its aspirational class are willing to spend money (while scrimping and saving if necessary) to buy the finest goods, but they are more discerning than ever. Pao warns that China can no longer be used as a dumping ground for excess inventory and says designers will have to create limited editions exclusively for the market.

The Chinese consumer understands that “after 2009 they’re going to be the number one consumer of luxury goods in the world,” Pao says. “And they’re expecting acknowledgment for that.”

Date: 12/2/09
NEW YORK (AdAgeChina.com) — Chinese researcher Patricia Pao, who specializes in luxury marketing trends in China, offers ten tips to help advertisers reach affluent customers in the mainland.

1. Don’t ignore quality
Until the current recession, the Chinese appetite for luxury goods was so strong, luxury goods manufacturers could get away with doing little more than putting a label on merchandise with little regard for quality and value. Today, consumers are much more discerning about how they spend money and demand that luxury goods manufacturers provide quality.

A study conducted this year by Pao Principle shows mainland consumers no longer only care about logos and brand names. They buy luxury goods because they believe the quality is superior to comparable substitutes.

Over 88% of the study’s 448 panelists — all high net worth individuals, mostly women aged 20 to 39 — said they “strongly agreed/agreed” with the statement, “I buy products where design, quality, durability and performance were remarkably superior to other products.”

Mainland Chinese luxury consumers purchase luxury for its high quality and look, not to fit into the crowd or to display their wealth. They don’t consider their luxury consumption as a way to easily display their wealth or income and they believe in their own tastes and focus on quality and look rather than buying to reinforce their status.

While our panelists agreed luxury goods generally play the role of status symbols, they claim that they do not buy for this reason. Rather, they buy luxury goods for their quality.

2. Everyone is a customer

Train salespeople not to “judge a book by its cover.” Many affluent consumers we interviewed complained that luxury boutique salespeople prejudge people by the clothes they wear and the handbag they carry. If the salesperson feels the customer cannot afford the merchandise, the customer is treated poorly. Over 30% of our panelists cited improved service to be a motivator to purchasing more luxury goods.

3. Mainland Chinese no longer want to be one of the crowd

The one-child policy has caused a shift away from the group and towards the individual. The population policy has created a value system among these millions of only children that is “more self-indulgent and self-interested than the more communal ways of their parents. As a result, these “new” mainland Chinese are no longer content to be “one of the crowd.” They are looking to luxury goods to differentiate themselves from their friends.

We frequently heard phrases like “not wanting to follow others,” “to be myself,” “don’t blindly follow the trend,” “believe in my own taste,” “liking unique things” and “liking only what I like.”

If luxury marketers don’t understand the impact the “one-child” policy has had on the way Chinese consumers view luxury goods, they will make tactical errors in marketing, sales and merchandising. 4. Choose merchandise carefully

The days of using mainland China as a dumping ground for excess inventory are over. Luxury goods companies can leverage Chinese customers’ desire to be unique and stand out from their friends by offering limited edition items in their mainland boutiques. Bring your newest and best merchandise to China and start creating products for that market. Chinese will purchase your products if they know they can only purchase them in mainland China or if they are only available globally in a limited quantity.

5. Invest in magazines…for now

Print is alive and well in China. Over 80% of our panelists use magazines as an information source for designer handbags, watches and fine jewelry. However, magazine browsing is declining. Older consumers will keep them afloat for now, but younger shoppers are moving to the internet as their primary source of information. Browsing web sites was the second most important source of information for luxury goods, and is the most used source among 20-to-24 year old consumers.

6. Education is the key to conversion

Luxury marketers can expand their customer base in China if they help local consumers understand the value of their brand. According to our panelists, money is not the reason mainland Chinese do not purchase more luxury goods. Many of the affluent shoppers surveyed by Pao Principle admitted they possess limited knowledge about many of the brands we talked about. “Why is this handbag worth so much money?” was a common question.

Many panelists said luxury goods companies need to do more to educate mainland Chinese consumers about their brands. They cited the Hermes’ scarves exhibition at the Shanghai Art Museum in 2007 as a great example of a brand effectively educating the mainland Chinese consumer of the value and quality of the Hermes franchise.

Investing in brand education is particularly important as luxury marketers develop their operations in China’s second- and third-tier markets.

An interview with a panelist living in Xi’an, for instance, said, “I don’t speak English and I find it difficult to pronounce the products and brand names. They are not that familiar to me. I do like to use luxury brands though and they are often gifted to me so I have quite a few. What do I want from a luxury company? I would like them to add more Chinese culture when they promote in mainland China.”

7. Leverage company-owned web sites

Over 50% of our panelists say they browse web sites to gain information about designer handbags, watches or fine jewelry. Nearly 66% look primarily to luxury goods manufacturer’s sites to find information regarding designer handbags followed by online forums (30.2%) and online shopping web sites such as Taobao and Ebay (29.5%).

8. There is no “one” China

Viewing China as one country is a mistake. Market leaders such as Louis Vuitton have saturated first-tier cites and are aggressively moving into second- and third-tier markets. Take Xi’an as an example. Louis Vuitton is leveraging its experience and economies of scale to expand in the capital of the Shaanxi province. The French company is bullish about Xi’an because it is the transport hub that connects western and eastern China, and it’s a major beneficiary of government investment. But Louis Vuitton is adjusting its marketing and promotional strategies to reflect the fact that Xi’an and other cities in northwest China have the largest urban-rural gap in China, and have been hit hard by the financial crisis.

9. Recognize the gap between what you think mainland Chinese want versus what they actually need

Merchandise assortment and selection is a catch-22 in mainland China. Currently, most luxury purchases by Chinese are made in brand boutiques outside the mainland. Hong Kong is the preferred destination, because it offers goods at lower prices and with fewer taxes and is perceived to offer a better selection.

So luxury goods companies are putting more resources in their Hong Kong boutiques, but this trend creates a vicious cycle. Mainland Chinese luxury buyers like to shop in mainland China for convenience and would spend more at home, despite the higher prices, if they felt the brand boutiques carried merchandise that was either only available in mainland China or in the New York, Paris and Tokyo locations — but not Hong Kong. 10. Speak and write Mandarin fluently and learn Chinese culture and trends

Even in first-tier cities such as Shanghai and Beijing, most mainland Chinese do not speak English. It is impossible to effectively do business if you do not speak Mandarin and possess insider knowledge of China’s culture and current trends.

For example, social media is a hot marketing tool, but companies trying to leverage social media through sites such as Facebook and Twitter will be unsuccessful, because neither of these sites is currently accessible in mainland China.

Patricia Pao is CEO of Pao Principle, a global business consulting firm based in New York City.

Date: 11/25/09

By: Valerie Seckler

The X factor in China’s burgeoning luxury consumption is the country’s one-child generation — a group of people who tend to be highly individualistic and perceive luxury goods as a way to set themselves apart.

The population policy, in place in China’s cities for 30 years, has created a value system among these millions of only-children that is “more self-indulgent and self-interested” than the more communal ways of their predecessors, said Patti Pao, president and founder of strategic consultant Pao Principle and author of a new “China Luxury Panel” report.

“The one-child generation will have a huge influence,” said Pao, who was born in the U.S. after her parents fled Mainland China for Taiwan when the communists took power in 1949. Theirs is often a sensibility inclined to “bring on the Balenciaga, bring on the Yves Saint Laurent,” she added, in contrast to the rising tide of young adults globally who are clamoring for the fast-fashion, designer one-offs of stores such as H&M and Zara, and the cheap chic of players like Uniqlo.

Young adults reared by mothers and fathers who were “prodigious savers,” the urban Chinese in their 20s and 30s are receiving some funds from their parents — cash flow that is propelling luxury spending, said Michael Silverstein, a senior partner and managing director at The Boston Consulting Group, who visited Beijing and Shanghai in the summer. “The vast majority of luxury goods [in China], around 75 percent, are purchased by people under 40,” he said. “This is a young movement.”

This youthful appetite is not lost on the world’s major luxury brands, pioneers in China such as Louis Vuitton, Lanvin, Hermès, Gucci, Chanel, Prada, Cartier and Tiffany & Co. “The desire to differentiate among ‘one-childs’ will spur new merchandising and marketing efforts,” Pao forecast. “Much of the luxury [consumption] flow goes to Hong Kong, now,” rather than to the Mainland.

Roughly 300 million affluent and wealthy Chinese — including many of the 37.9 million in this cohort born since 1979 — are considered the most likely consumers of luxury in a population of 1.35 billion. The majority of this group is between 20 and 40 years old, while their counterparts in the U.S., Japan and Europe are mainly people acquiring luxuries much later in life, ages 40 to 70.

With housing and food available in China at far lower costs than is common in developed nations, annual household income of about $6,000, or 40,920 yuan, allows for savings and discretionary spending that could include luxury goods, Silverstein said. Such luxuries encompass $400 Chanel sunglasses as well as $200 Adidas and Nike running shoes, also seen as premium products in the emerging economy.

“People are very brand-conscious and buy highly visible things they can wear around,” he said, citing “watches that show big logos” as an example. In addition, Pao said the “really flashy” clothes, the “really short skirts” or the pairing of jeans with a Chanel jacket and Balenciaga bag prompted her to think: “You go out in public like that?”

“They look weird, but they look cool,” she added of the eclectic sensibilities. “They are much more aspirational.”

About 40 percent of Chinese consumers’ luxury purchases are transacted in Mainland China, 48 percent in Hong Kong, and the balance are made elsewhere, Pao explained. Roughly 60 percent of luxury spending in China stems from existing family wealth, with the rest paid for with earned income, according to the Hong Kong Trade Development Council.
“You have four grandparents and one child, so there’s going to be a lot of attention and money lavished on that child,” Edie Weiner, president of futurist Weiner, Edrich, Brown Inc., observed of the one-child generation.

“They totally distort their spending to get things they really want — big-screen TVs, high-end bikes, leather couches,” Silverstein recalled of his recent visits to middle-class homes. It was not unusual, he said of such trade-offs, to visit a home with a leather couch, “gorgeous” wood furniture, a big flat-screen TV, and a 4-by-5-foot kitchen, with a small sink, a small Haier refrigerator and a flat-top grill without a vent.

As 2009 draws to a close, China will rank as the world’s second-largest luxury goods market, topped only by Japan, with consumer purchases totaling between $5 billion and $6 billion, based on estimates of the World Luxury Association, China Market Research and Goldman Sachs. China surpassed the U.S. in January to take the number-two spot.

Purchases of luxe fashion accessories — handbags for women and watches for men — typically serve as the entry point for future purchases of luxury apparel, often bearing the same designer names as the favored accessories, Pao said, citing “The China Luxury Panel” survey of 448 individuals — most of them women ages 20 to 39 — with high net worth.

Among this group of wealthy individuals, almost nine in 10 women had bought a luxury handbag in the previous 12 months, and seven in 10 had bought two of them. Six in 10 of the men had purchased a luxury watch.

In a list topped by food/dining, apparel ranked as the sixth most “intriguing life sector” for the consumers Pao Principle surveyed in July and August. Traveling placed second, followed by home decor, music and film.

About half of the middle- to upper-class panel participants had annual income of between $7,300 (50,000 yuan) and $29,300 (199,999 yuan) and seven in 10 were college graduates. In an economy forecast to grow 6 to 7 percent this year and 10 percent in 2010, how quickly luxury consumption expands in China will depend, in good measure, on how
quickly the business sector creates senior management jobs and incomes, Silverstein said.

And if high-end consumption keeps slowing down elsewhere, new attempts to market prestige products in China are likely to accelerate. “Super high-end apparel probably will suffer more than luxury overall” through 2010 worldwide, said Claudia D’Arpezio, a partner in Bain & Co.’s Milan office. “People are still trading down a lot from pure luxury brands on the high end. In Europe, more democratic-but-fashionable chains are growing and increasing market share a lot.”

At the same time, the nature of luxury itself is fast changing. “As we move into the 21st century, many are saying that time is a luxury,” Weiner noted. “Luxury can be reducing stress, increasing the quality of relationships, getting more sleep at night.” In such an environment, people may be heading to new points on the luxury landscape, Weiner suggested, such as opting for more sophisticated electronic media and mobile communications devices, or spending more money in the virtual reality area.

The latter has become a concern of the Chinese government, Weiner added, as its affluent population boosts spending for cyber currency it can use in virtual communities — tax free and posing the possibility of inflation.

In the meantime, long-term commitments of seven to 10 years have been staked by key luxury concerns. “Big brands like Louis Vuitton and Hermès are prepared to make money there,” Pao said. “They are investing for growth over the next 10 years,” a period in which prestige consumption is expected to move from first-tier cities like Beijing, Shanghai, Guangzhou and Shenzhou into second- and then third-tier cities.

For now, they’ll be buttressed by the hundreds of millions of consumers in China who desire what Silverstein described as authentic foreign luxury brands: “The people have a hunger for wealth and prosperity that is unbreakable.”

Date: 11/25/09

By: Keith Timimi

Back in 2001, I did some consulting work for CHANEL in Asia. They are one of the
leading providers of luxury products, otherwise known as Bling, selling fashion, perfume, cosmetics, watches and jewelry, and were growing fast in Asia.

Back in those days Japan was the motherlode, while Korea was growing double digits. What about China, I asked? They had just started selling in China, I was told, but it was a bit of a shabby market for them. Chinese customers were accustomed to buying fakes and no-one was sure if there would be any appetite for high-priced luxury goods.

My, how times have changed. Who would have thought that within 8 years, China would be challenging to become the largest luxury market in the world, overtaking Japan, a market that was fairly new to the crown itself.

It feels almost inevitable now, since China is just in the process of overtaking Japan as the world’s second largest economy., and has just become the largest exporter in the world.

But for anyone who has seen that transformation, it is nothing short of astonishing, particularly when contrasted with the sudden collapse of the US, former Empire of Bling.

According to consulting company Bain & Co, the Luxury goods market has been pummeled globally. In the first half of the year, the market shrank from $220 billion to $198 billion, reporting quarter-on-quarter losses of 15% in Q1 2009 and 20% in Q2 2009.

The forecast is for a 10% drop for the year, implying a stablisation of the market.

Peer deeper, however, and you will find it is actually a transfer of wealth. Emerging Markets are rich growth areas for CHANEL and their kin, led by China and Russia. China alone is expected to grow its luxury market by a staggering 12%. The wealthy nations of the G7 – the US, Japan and Western Europe – are rapidly de-blinging. The US luxury goods market will be down 16%, Japan down 10% and Europe down 8%.

It is not that hard to understand the latter dynamic.

A report by First American CoreLogic today showed that one in four homes was ‘underwater’ – meaning that the current value of the house was less than the value of the mortgage being paid off, also known as negative equity. In Nevada, nearly one in seven homes is underwater.

Couple that with an unemployment rate that is fast approach 10% officially (and in reality is much higher); a trend towards a negative savings rate until the onset of the crisis; and the fact that wages for most have stagnated, and you have the world’s largest – and still the most important – economy with a disturbing dynamic. A small portion of the population, 1% or less, is making flabbergasting amounts of money during this Financial Crisis, thanks mostly to Wall St and crony boardrooms. Everyone else is getting poorer.

They are de-blinging not only physically but psychologically. It is now positively rude to show off wealth in the west. Unless, of course, you live within the bubble of what MarketWatch.com today memorably called the pathology of Wall St.

In China, meanwhile, almost the reverse is happening. This is an economy that will grow at a 7% – 8% rate this year.

A lot of that growth has been driven by the massive stimulus program, which has created millions of jobs and helped push up wages.

Add in also the fascinating demographic trend that we highlighted in our article on Chinese kids with six pockets being the future of the world economy. In order to stop their population explosion, the Chinese authorities have run a very successful One Child policy.

The unintended consequence of that policy is that there are six adults (two parents and four grandparents) who only have one child to lavish their attentions – and wallets – on.

This generation of Pheonix Princes and Princesses are confident, well educated, have good jobs, access to multiple funds, and believe that China is the future of the world.

In short they don’t have to worry about money – but status is important. As with any group of people that experiences sudden wealth. There is a lot of money to spend on well-known brands – Mercedes, LV, Mont Blanc, Gucci, Rolex and so on – but lack of experience leads to lack of discernment and therefore class.

A study by Pao Principle found that 90% of the well-off Chinese had purchased a designer bag within the last year; two thirds of men had bought a luxury watch, whereas a third of women had bought a designer watch and another third had bought Tiffany jewelry.

It is maybe not surprising that Chinese Netizens having been blasting their more flashy compatriots, saying that these are not traditional Chinese values of modesty, thrift and hard work.

Another commenter reminds readers that displays of wealth have been common, at least with the elite. Take a look at the Forbidden City or its KMT-lifted loot in Taipei, and you will see plenty of evidence for that.

The difference is now that hundreds of millions of Chinese are starting to feel rich enough to flaunt it – while hundreds of millions of Americans, Japanese and Europeans feel that the milk-and-honey days are over.

BMW to Build Second Plant in China

Rising Demand, Consumption Smooths the Path for BMW and Local Partner Brilliance to Further Cement Position in China

Date: 11/12/09

One of the big stories coming out of the global auto industry today is the announcement that BMW is set to build a second plant in China with their local JV partner, Brilliance Auto. While this isn’t much of a surprise, given that BMW has sold nearly 72,000 cars in China in the first 10 months of this year, it certainly is an important move on BMW’s part as it works to challenge the dominant luxury automaker in China, Audi.With its new plant, BMW will more than double its current production capacity and be well-placed to compete with the dominant luxury player in China, Audi, which expects China to become its largest single market by 2013.

In addition to doubling its capacity, BMW’s new plant — scheduled to begin construction next year, with production starting in 2012 — is a smart move for the company to show its commitment to the Chinese market and the Chinese consumer, an important marketing point upon which its chief competitors Audi and Mercedes have placed paramount importance. Reaffirming its bond with Brilliance Auto, a leading domestic brand, and its involvement in this new plant is another smart move for BMW. From a company press release:

“Brilliance Automotive Holdings Limited is a reliable joint venture partner with whom we have already worked successfully for more than six years. Our plant has reached its capacity limit – so we are now taking the next step. The decision to build a second plant demonstrates that we are investing in our future in China and that we intend to participate in the strong growth in the Chinese market,” stated Friedrich Eichiner, member of the Board of Management of BMW AG,
responsible for finance and vice chairman of BMW Brilliance Automotive (BBA). “It is also an important strategic step towards reducing our exposure to currency fluctuations,” Eichiner added.

As successful foreign companies in China have proven over the last 20 years, showing a strong commitment — and localizingyour commitment — to the China market by proving to Chinese consumers that your company actually cares about its China operations and isn’t simply dumping excess stock into the country is critical. As Patricia Pao, President of luxury consulting firm The Pao Principle pointed out in a recent Q&A, marketing to the Chinese consumer in this way is key to continued success in the mainland:
Q: What advice can you offer [luxury marketers in China]?
A: Creatively “tweek” the existing promotional program to make mainland Chinese buyers believe they are getting a deal. This can take the form of gift-with-purchase, tickets to special events, frequent buyer clubs, etc.
• Don’t use mainland China as a dumping ground for excess inventory. Instead improve selection by offering limited edition pieces and the same merchandise that is only available in New York, Paris and Tokyo brand boutiques (but not Hong Kong).
• Invest in programs that increase mainland Chinese’ knowledge of your brand. Remember that education is key to conversion.

Date: 11/11/09

By: Miles Socha

Only a few years ago, it would have been unthinkable for a designer brand to leapfrog the fashion capitals of New York and Milan and open a boutique in Shanghai first.

But as fast-growing China surges to become the top expansion priority for a wide swath of European brands, that’s exactly what Lanvin is doing this week.

“It’s an urgent opportunity,” said Thierry Andretta, executive vice president of Lanvin, which on Friday will open a boutique in Shanghai’s Plaza 66 shopping complex — and is hunting for a Beijing location for 2010. “I was at Plaza 66 on [a
recent] Saturday, and morning and afternoon it was full of people with shopping bags.”

The coming months will see a flurry of openings and events in the world’s most populous — and increasingly affluent —nation. WWD has learned Christian Dior and its couturier, John Galliano, will mount a fashion show in Shanghai in the spring in tandem with a doubling of the size of its Plaza 66 flagship and a new unit in the IFC complex in Shanghai’s Pudong financial and commercial district. The date, venue and format of the show have yet to be confirmed.

“[China] is going to be the top priority for investment,” said Sidney Toledano, Dior’s president and chief executive officer. “There’s an urgency to get the right locations in cities as they are emerging. It’s like when Manhattan was built. The ones who decided to be at Fifth Avenue and 57th Street made an incredible choice. Being in the right corner is going to be key.

“It’s the fastest-growing market, with an impact on all the region,” he continued “The potential is huge.”

Bain & Company expects the luxury market in China to grow 12 percent to 6.6 billion euros, or about $9.9 billion, this year.

Look out for Louis Vuitton, a pioneer in China with 30 store locations, inside the French pavilion at Expo 2010 in Shanghai — the only French luxury brand to have a presence. In the grand tradition of universal exhibitions, Expo opens May 1 and is expected to attract some 70 million visitors over its six months with the theme of “Better City, Better Life.” Meanwhile, Vuitton is also said to be plotting twin openings in Shanghai next year.

Ermenegildo Zegna, which already operates 75 stores across 35 Chinese cities, plans to open its second “global flagship” on Shanghai’s Huaihai Road in the spring — along with large-scale “national flagships” spanning 6,000 square feet each in four or five key cities over the next 12 to 18 months.

“It remains one of our major focuses for investment,” said ceo Gildo Zegna, noting its business in Greater China is already equal to that of North America. “We are encouraged by sustainable indications that the Chinese economy…is back on a track of robust growth, particularly in consumer spending. We are furthermore emboldened by how well we have performed there throughout the last year of market uncertainty.”

Bruno Pavlovsky, Chanel’s president of fashion, said China ranks alongside Russia and the Middle East as priority emerging markets as all three are posting double-digit growth “in existing doors and new doors.” However, China, including Macau and Hong Kong, is outpacing everything: “This area is now booming, and in terms of growth is number one for Chanel,” he said.

On Dec. 3, the French brand will open a 5,160-square-foot boutique in the Peninsula Hotel in Shanghai in tandem with a showing of Chanel’s luxury pre-fall “métiers d’art” collection in the presence of Karl Lagerfeld. A Chanel boutique in Hangzhou is also slated to open this month.

“We hope to have seven or eight stores on the Mainland next year,” Pavlovsky said. “We now feel more comfortable to start to open boutiques in other regions. We think that five years from now, we will have 15 to 20 boutiques in Mainland China.”

Executives acknowledged doing business in China is complicated, especially as the dominant strategy is direct control of retail networks.

Floriane de Saint Pierre, who runs an eponymous executive search and consulting firm in Paris, said many brands have recently established entities separate from Asia-Pacific offices for Mainland China, each with its own management, marketing, retail and merchandising directors. “Now China is a region unto its own, reporting to the head office,” she said. “For the companies, it means a lot of investment, but the growth rate and the demographics of this economy fully justifies this strategy.”

On the plus side also, China, unlike Japan, was not a licensing market, making it a “more pure” market in which to establish direct operations, noted De Saint Pierre, who opened a regional office in Shanghai in April.

Gucci Group has been allocating more than 60 percent of its total expansion investments to the Asia-Pacific market, and China in particular, “and we will continue to invest here as long as the growth trend remains strong,” said Robert Polet, president and ceo of Gucci Group. “Brands without a strong and balanced global presence are facing even greater difficulty. These brands are now trying to improve their performance by speeding up development in countries with the highest growth rates.”

The group operates 38 stores on the Mainland: 29 for Gucci, seven for Bottega Veneta and two for Balenciaga. Polet declined to divulge 2010 expansion projects, but cited consulting firm McKinsey & Co. estimates that China has already overtaken the United States as the world’s second-largest luxury market and should surpass Japan and become number one within five years.

The conglomerate’s broad strategy is to enter China with directly operated stores and franchisees — or in partnership with selected retailers.

To that end, Boucheron recently linked with Sparkle Roll Group Ltd., a distributor of luxury watches and automobiles in China, to open between six and 10 boutiques in the next five years. Sparkle Roll already took over Boucheron’s Shanghai boutique, while the first flagship is planned to open in a prime location in Beijing in early 2010.

Valérie Hermann, ceo of Yves Saint Laurent, said the brand registered 22 percent growth in China in the third quarter, underscoring the “great promise” the market holds. YSL operates two franchise boutiques — in Beijing and Shanghai — and three directly owned stores in Hong Kong. “In terms of retail expansion, China is a key priority…and where, in due time, we will continue to expand and invest in the correct positioning of the brand,” she said.

Michele Norsa, ceo of Salvatore Ferragamo, said China has reacted “faster” to the global crisis and “we are convinced that shortly, China will surpass Japan both in sales and in brand recognition by the consumer.”

Present for 15 years in the market, Ferragamo today counts 38 stores in 23 cities. “We will open two more by yearend and 10 stores in the next three years,” Norsa said. “China is the country that is investing more than anyone else in infrastructures such as roads, airports and shopping malls. There are shopping malls that do better than most in other countries, both in terms of traffic and revenues. Our Chengdu store, for example, does much better than the London one. However, the knowledge of the market and its local management is fundamental.”

Lanvin’s Andretta noted leather goods and logo products have enjoyed early success in China as such items are relatively affordable and convey status. He cautioned luxury ready-to-wear, by contrast, targets a smaller demographic and many second- and third-tier cities in China — with the exception of Shenzhen — are likely not ready to support brands devoted to that category.

“Every brand needs to have a different approach,” he stressed. “We need to accelerate [in China] but in the right way. The most important thing is to be consistent in the location you choose.”

Pavlovsky added chief challenges include setting up an internal organization and training staff. “You have to build your customer base for each boutique, and that takes time. It takes longer and it’s more expensive. Loyalty is quite expensive in the ready-to-wear business,” he said.

According to Dior’s Toledano, heritage is key in China. “They don’t just want to buy fashion. This is explaining the success of the top French names. They’re really based on a long history, excellence of savoir faire and integrity today with their past history,” he said.

Toledano described Chinese customers as bold and curious, eager to see the entire product universe a brand has to offer. To that end, Dior’s expanded Plaza 66 unit will include displays of watches and jewelry and even cell phones. “When they come to a store, they go to all the rooms,” he said.

Chief among challenges in China is the vast size of the country, making it tough to gain efficiencies, plus a dearth of suitable locations, especially in second- and third-tier cities.

Patrick Thomas, ceo of Hermès International, characterized its stores in smaller Chinese cities as a “communication investment, rather than a commercial investment. Our strategy in China is to open stores in major cities, because growth is more moderate in provincial cities. “There are no luxury centers, or very few, so it’s difficult to find the right location. That’s why we are moving slowly into “There are no luxury centers, or very few, so it’s difficult to find the right location. That’s why we are moving slowly into the provinces,” he added.

“All brands have opened stores in Beijing, Shanghai and Guangzhou, because that’s where the money is now, but expansion into secondary cities will be inevitable,” noted Patricia Pao, founder of New York-based fashion consultancy
The Pao Principle. “There are around 300 million ‘consuming’ Chinese, who live in the largest cities, but there are still around one billion ‘surviving’ Chinese who earn less than $300 a year.”

Still, brands continue to push deeper into new territories. Last month, Vuitton and Zegna christened new stores in Ulan Bator, Mongolia, and Vuitton is next eyeing and opening in Hohhot, in north central China.

French luxury brands today are present in 69 Chinese cities with 1,600 doors, compared with just 500 doors in 2005, according to the luxury association Comité Colbert.

“In the last four years, the number of our members’ own stores has grown 60 percent to 272, spread across 38 cities,” said Comité president Elisabeth Ponsolle de Portes. “The efforts of the Chinese government to build a strong infrastructure and promote urban growth away from Beijing, Shanghai and Guangzhou mean that the sky is the limit when it comes to finding real estate. We are even solicited by Chinese developers to open stores in their malls.”

In her view, it’s not too late for brands to enter the Chinese market, given high interest in Western brands — however, smaller brands are more likely to rely on collaborations with Chinese partners. “Success for newer entrants will depend
on each brand,” agreed Pao.

“Tiffany, for example, is a relatively new entry, having arrived in China around seven years ago, but it’s now the numberone jewelry brand in the country. It shows that if you have the right product at the right price and are willing to educate customers, the disadvantage of being a latecomer disappears,” said Pao.

Pao noted distribution deals in China help release the financial burden, but pose some image risks because the distributor is in charge of opening shops and training staff.

According to Zegna, second- and third-tier cities are driving overall market growth in China today, meaning brands must pick the right locations, engineer effective marketing and cultivate “homegrown” management talent to sustain customer relations.

“Failing to get any of these factors right can quickly lead to a spinning of the wheels for retailers who are unable to get the momentum and leverage they need to be successful,” Zegna said. “For those who have not adequately built their brands or presence in China, surely they are eager to catch up in order to offset revenue declines in Japan and American. Between speed and quality, though, I would counsel quality.”

Retail and brand executives also counsel not to underestimate the consumer. Andrew Keith, president of Joyce, said its strongest-performing brands in its two-year-old Plaza 66 location — which include Alexander Wang, Balmain, Givenchy and Azzedine Alaïa — echo its business in Hong Kong. “We have witnessed a fast-developing level of consumer sophistication,” he said.

“You have to make sure you have your own identity that is recognizable beyond a logo,” noted Jacopo Etro. “We organized lots of small, intimate sit-down events where we introduced shoppers to the world of Etro. Now we’ve built up a loyal clientele, especially in men’s wear, and we’re doing exceptionally well in China.”

Detractors, however, characterize expansion on the Mainland as mere marketing investments.

Paul French, director of the Shanghai-based market research firm Access Asia, said the real value in China’s market is in marketing, advertising and brand recognition. Luxury goods taxes in China make products particularly expensive, but having hundreds of stores across the country gets brands in front of Chinese consumers who might travel to Hong Kong and elsewhere to make actual purchases. Brands don’t need big sales numbers here to stay afloat, he explained, as overhead and staffing costs are low.

“The number of staff in Louis Vuitton doesn’t cost anything more than your staff in KFC. You only need to sell a few things to break even,” said French. “Then [when consumers] get on a plane to Hong Kong, they know what Burberry is.”

Kong Shuhong, economist with the University of International Business and Economics, said he believes brands are doing particularly well in smaller cities in western and northern China, where there is a mix of new wealth and previously limited options.

French said he expects brand expansion in China to continue, and Chinese investors and companies to start snapping up sluggish divisions of luxury brands that are underperforming elsewhere in the world. “There’s no shortage of Chinese firms that want to buy any and every brand that comes on the block,” he said.

Date: 11/09/09

By: Luxury Travel Advisor

Questions and Answers with Ms. Patricia Pao, president of the Pao Principle, a global business strategy consulting firm, that conducts studies of the emerging Chinese luxury consumer.

1. What are some key similarities between Chinese luxury consumer attitudes and those of Americans?

Both mainland Chinese and Americans value individualism. As a result, they look to luxury goods to help differentiate themselves from the crowd. This is a fairly recent phenomenon in mainland China resulting from its “one-child” policy. Additionally, both groups value quality. Until fairly recently, mainland Chinese were more concerned with the logo. And like Americans, mainland Chinese luxury buyers value selection. Specifically, they want what is shown in New York, Tokyo and Paris brand boutiques.

2. What are some of the key differences?

Mainland Chinese love to bargain. As a result, over 80 percent of panelists said that receiving a discount would motivate them to purchase more luxury goods.
Unlike the U.S. where demand for watches is driven by both sexes, in mainland China, men account for the majority of watch sales. Over 60 percent of our male panelists reported purchasing a watch over the past 12 months. In contrast, only 30 percent of our female panelists reported purchasing a watch over this same time period. Mainland Chinese possess more limited knowledge of luxury brands. Interviews with our panelists consistently resulted in the following question: “Why is this [item] worth so much money?” Unlike the Americans who make most of their luxury goods purchases in the U.S., the majority of mainland Chinese purchase in Hong Kong due to lower prices/taxes and better selection. Magazines continue to thrive in mainland China as they are the number one source of information for luxury goods.

3. Among luxury product category, do Chinese consumers favor specific countries’ products? i.e. which countries offer highest status?

Mainland China luxury customers tend to favor U.S., French and Italian brands for their handbags and fine jewelry purchases. With regards to watches, they tend to favor Swiss, French and Italian brands.

4. How would you say American brands rank?

U.S. brands do well in handbags and fine jewelry. Specifically, Tiffany was the top jewelry brand of choice with almost 30 percent share of panelists who had reported purchasing a piece of fine jewelry over the past 12 months and Coach tied for the #2 ranking (with Gucci) in terms of handbag purchases over the past 12 months.

5. Can you paint a picture of the fashion brands the Chinese luxury fashionista is now wearing?

The Chinese fashionista taste and style mirrors that of the New York fashionista. Specifically, she wears brands such as Chanel, Miu Miu, Balenciaga, Yves St. Laurent and Louis Vuitton but she is careful to “mix it up” as “head to toe” designer dressing is frowned upon.

6. What are some of the key mistakes luxury brands have made entering the Chinese marketplace?

There is no such thing as “one China.” Companies entering into mainland China assume they are serving a homogenous population when in fact tastes and habits differ tremendously by region. Not recognizing that there is a tremendous gap in their belief of what mainland Chinese luxury buyers want versus what they actually need. Not investing in programs that facilitate knowledge and understanding of their brand. Not understanding the impact the “one-child” policy has on the way mainland Chinese consumers view luxury goods
Not effectively dealing with the language barrier. Even in first-tier cities such as Shanghai and Beijing, most mainland Chinese do not speak English.

7. What advice can you offer these marketers?

Hire people to work at headquarters who are fluent in Mandarin both written and speaking who have demonstrated true insider understanding of current mainland China cultural trends and shifts. For example, regarding social media, brands such as Twitter and Facebook cannot be leveraged as these brands are not accessible to mainland Chinese. Maintain a close relationship with handbag buyers. They are extremely brand loyal and purchase multiple pieces. Of the almost 90 percent of panelists reported purchasing a handbag over the past 12
months, 46 percent said they would definitely purchase another handbag within the next 6 months. Those brands possessing beauty and fragrance brands need to identify and cultivate these buyers as today’s beauty buyer is tomorrow’s handbag buyer. Of the 77.8 percent of beauty purchasers in our study who had not purchased a handbag, watch or fine jewelry piece in the past 12 months, 100 percent of these buyers said they would definitely purchase an additional item from the brand with handbags being the top choice.
Creatively “tweek” the existing promotional program to make mainland Chinese buyers believe they are getting a deal. This can take the form of gift-with purchase, tickets to special events, frequent buyer clubs, etc.
Don’t use mainland China as a dumping ground for excess inventory. Instead improve selection by offering limited edition pieces and the same merchandise that is only available in New York, Paris and Tokyo brand boutiques (but not Hong Kong).
Invest in programs that increase mainland Chinese’ knowledge of your brand. Remember that education is key to conversion.