sloaney
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Brands such as Cartier and Paul Smith, the British fashion
house known for its quirky twist on classics, lack the obvious
status-symbol cachet of Louis Vuitton or Gucci among Chinese
shoppers. That makes it difficult for them to compete at the same
level, says Boston Consulting's Kwok.
``A luxury brand in China represents middle-class
aspirations, so you can't be too hidden,'' he says. ``A lot of
products bearing visible logos don't do well outside China but are
bestsellers in the country.''
Full article
From Bloomberg
By Le-Min Lim
Jan. 2 (Bloomberg) -- 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)
Ltd., which also operates Jaeger clothing and Davidoff cigar
stores in China. ``People are too optimistic about China.'' He
declined to quantify the losses.
China's luxury market is proving harder to crack than many
overseas companies anticipated, even as incomes soar and economic
growth tops 10 percent. Dozens of high-end brands, from Cartier
and Chanel to Hermes and Versace, are chasing the nation's limited
pool of big spenders. That's made profits elusive for most.
``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,'' says Ivan Kwok, a
manager at Boston Consulting Group in Hong Kong. ``China is a
growing force in the luxury business, but the market isn't large
enough yet to accommodate so many players.''
Only about one in 10 overseas consumer-goods companies --
including LVMH Moet Hennessy Louis Vuitton SA, the world's No. 1
maker of luxury goods -- is profitable in China, Kwok estimates.
The winners are the ones whose products are seen by Chinese
consumers as obvious symbols of wealth, he says.
Even after more than doubling since 1996, the disposable
incomes of urban households averaged just $1,327 in 2005 -- about
as much as a single Louis Vuitton handbag costs.
Coveted Middle Class
Official statistics overestimate the size of the urban middle
class, which controls the bulk of China's disposable income, says
Jonathan Anderson, Hong Kong-based chief Asia economist at UBS AG.
The group's real size is between 65 million and 75 million, not
the 250 million to 300 million reflected in government figures, he
says.
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 Co.
Making their jobs harder, China's steep import duties and
value-added taxes mean luxury-goods companies have to charge as
much as 35 percent more for their goods than in Hong Kong and many
other markets.
At the Plaza 66 Mall in Shanghai, shoppers are courted by
more than 100 European and U.S. luxury brands, ranging from
Cartier and Prada to Paul Smith, Anna Sui and Brooks Brothers.
Cartier
Cartier, the jewelry and watch seller controlled by Geneva-
based Compagnie Financiere Richemont AG, is barely breaking even
after 15 years in China, even though it's the nation's top-selling
luxury jewelry brand, says Nigel Luk, Cartier's managing director
for China. He declined to give figures.
``If you are looking for quick profits, don't go to China,''
says Luk, 44. ``It takes a long time to be profitable.''
Cartier, which has 14 boutiques across China, will need
another 15 years to meet its profit targets, Luk says, without
giving details. For now, rising rental and labor costs triggered
by China's booming property market and economy are cutting into
profit, he says.
The company also spends about $9 million a year on
advertising in China to raise brand awareness -- a ``substantial
part'' of Cartier's global advertising budget, Luk says.
Status Symbols
Brands such as Cartier and Paul Smith, the British fashion
house known for its quirky twist on classics, lack the obvious
status-symbol cachet of Louis Vuitton or Gucci among Chinese
shoppers. That makes it difficult for them to compete at the same
level, says Boston Consulting's Kwok.
``A luxury brand in China represents middle-class
aspirations, so you can't be too hidden,'' he says. ``A lot of
products bearing visible logos don't do well outside China but are
bestsellers in the country.''
High-end brands seeking to tap China's rising wealth face
another setback: People are saving more as the government
dismantles its cradle-to-grave welfare system.
The cost burden on China's households has risen as the
communist government, shifting toward a market economy, phases out
benefits such as free housing, education and health care.
``The Chinese middle class may be earning a good living, but
they still feel insecure about the future,'' says Chen Xingdong, a
Beijing-based analyst with BNP Paribas Peregrine. ``That prompts
them to save a large share of their income.''
`Prudent'
Take Li Yan. The Beijing resident works as a property
consultant at a Ministry of Construction affiliate, a job that
used to guarantee lifetime employment and free housing and
benefits.
Yet Li, 28, says she doesn't carry a designer bag, own a car
or visit Starbucks Corp. coffee shops. More than half of her
annual 40,000 yuan income goes toward paying housing and medical
costs that used to be covered by the state. Li says she saves part
of her pay and spends only on necessities.
``It's better to be prudent with money,'' Li says. ``You
never know when the extra thousand or two might come in handy.''
China's aggregate savings ratio is as high as 50 percent of
gross domestic product, says UBS's Anderson. That compares with 30
percent in Japan, 39 percent in Hong Kong and less than 14 percent
in the U.S.
International luxury brands are willing to endure losses now
to position themselves for an expected explosion in China's big-
spending population.
100 Million Shoppers
The potential size of the country's luxury-goods market is as
large as 100 million people, estimates Claire Kent, a London-based
luxury-goods analyst at Morgan Stanley. China will be the world's
top consumer of luxury goods by 2015, forecasts Jacques-Franck
Dossin, a London-based analyst at Goldman Sachs Group Inc.
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 & Co. and Cap Gemini SA. That compared with 2.7
million in the U.S. and 448,000 in the U.K.
``The money is there,'' says Glen Murphy, 41, a Shanghai-
based managing director at AC Nielsen. ``The big challenge for
consumer-goods sellers is identifying who and where these people
are, and to sell them what they want.''
Paris-based LVMH has succeeded in doing that. The company,
which opened China's first Louis Vuitton handbag store in
Beijing's Peninsula Hotel in 1992, now counts China as its third-
largest market.
Louis Vuitton Bags
The 900-square-meter (9,687-square-foot) flagship Louis
Vuitton store in Shanghai's prime Nanjing Road shopping district
features a 10-meter-high glass facade etched with the brand's
trademark brown-and-beige checks. There's a waiting list several
weeks long for the season's hottest bag, a denim tote costing as
much as 24,200 yuan that sold out immediately when it arrived in
the store in late 2006, the company says.
All of LVMH's Louis Vuitton stores in China are profitable,
according to Chris Hollis, the company's Paris-based director of
financial communications. He declined to give further details on
the company's financial performance in China. LVMH's other brands
sold in China include Givenchy and Kenzo fashions and Veuve
Clicquot champagne.
For dozens of lesser-known brands vying for the same coveted
customers, financial success is more elusive. For now, says
Bluebell's Douilhet, the company is willing to lose money on
brands such as Paul Smith and Moschino as long as it can keep
learning about the Chinese market.
``If the time comes that we realize the money we spend is
more than what we learn, then obviously we will reconsider our
presence,'' Douilhet says.
--With reporting by Samuel Shen in Shanghai. Editor: Jahncke (wsm)
