Its Hard At The Top (Of The Luxury Market)

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The corporate world has been having a long-distance love affair with the energetic, young Chinese consumer. But as with many long-distance, cross-cultural relationships, there is plenty of room for misunderstanding and emotional pain.
High fashion tends to have high expectations, and Seattle Times reported recently that:

    “When Eric Douilhet opened China’s first Paul Smith and Moschino fashion boutiques in 2002, he didn’t expect they’d be making money by now. He didn’t think they’d be losing this much, either.

    ‘I was definitely expecting sales to be higher, the losses to be smaller’, says Douilhet, 43, president of Bluebell (Asia), which also operates Jaeger clothing and Davidoff cigar stores in China…’People are too optimistic about China’”.

I just love that quote! (So I hope regular readers will forgive me if I recycle it).

As the article points out, the whole world of fashion has arrived in China at once, with the aim of selling to a relatively small (for China) niche market. But how small is “small”?

    • “Official statistics overestimate the size of the urban middle class, which controls China’s disposable income, says Jonathan Anderson, Hong Kong-based chief Asia economist at UBS. The group’s real size is between 65 million and 75 million, not the 250 million to 300 million reflected in government figures”.

    • “To succeed, luxury-goods companies must woo the top segment of the Chinese consumer market — the 15 million people who earn 250,000 yuan ($32,000) or more a year, according to data from market researcher AC Nielsen.”

    • “The nation had 320,000 millionaires at the end of 2005, a 6.7 percent increase from a year earlier, according to a report by Merrill Lynch and Cap Gemini.”

Nevertheless, China is expected to be the top consumer of luxury consumer goods by 2015, according to a Goldman Sachs estimate. This means, as is often the case in China, intense competition. Ivan Kwok, a manager at Boston Consulting Group in Hong Kong is quoted as saying:

    “If you are not the No. 1 brand, if you are No. 2 or No. 3, the odds are good your fingers will be burned…China is a growing force in the luxury business, but the market isn’t large enough yet to accommodate so many players.”

Even though big spenders do exist, it is reported that only around 10 percent of the international luxury goods companies in China (which have to bear import duties of up to 35 percent) are making profits, and that they are the ones offering “obvious symbols of wealth” – such as LVMH Moet Hennessy Louis Vuitton”. Even such famous names as Cartier are “barely breaking even” after 15 years in the market – and expect it to take another 15 to reach its targets. Nigel Luk, their China MD advises:

    “If you are looking for quick profits, don’t go to China…It takes a long time to be profitable.”

So the luxury market is sexy, but the middle market may prove a more generous lover for the moment. The high-end folk, meanwhile, can still enjoy brief international affairs with China’s traveling elite – and the knowledge that many sweaty hands will be all over their brands at boutiques (in street markets) across China!

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One Response to “Its Hard At The Top (Of The Luxury Market)”

  1. Archive » Don’t Quote Me (On Statistics)| China Business Blog Says:

    […] the consuming middle class, it is clear that the “hypsters” are being held to account. Recent reports put them at 65 to 75 million people (rather than more frothy estimates of 250 mil […]

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