After enjoying several boom years in Asia, the world’s top luxury brands have seen a sharp contraction in demand following the Chinese government’s crackdown on public officials’ extravagance and lavish gift-giving.
However, a new report from the Economist Intelligence Unit (EIU) suggests Beijing’s modesty drive will do little to cool the region’s passion for designer handbags, timepieces and other pricey goods in the long run.
“Driven by rapid growth in household incomes, there are strong prospects for a long-term recovery in Asia. The continent, which already accounts for around one-third of the global luxury goods market, will make up 50-60% of global luxury revenue in 10 years’ time,” the report forecast.
The report titled “Rich Pickings” said the fight against official extravagance coincided with a wider economic slowdown in China and had significant repercussions for the luxury goods market, not only in China, but in Hong Kong and cities such as New York, London and Paris, where wealthy Chinese tourists usually go shopping.
Moreover, the impact of the 2011 tsunami and a weak yen left the Japanese market muted. The Indian retail market, bogged down in contentious foreign direct investment reform, has also underperformed expectations.
Nevertheless, the EIU points to the longer-term projection that the number of households in Asia with annual income of more than US$150,000 (equivalent to 385,000 baht per month today) will rise from 2.5 million at present to nearly 27 million by 2030.
Given those figures, Asia will cement its position as the dominant region for luxury goods, and companies that can maintain a presence without diluting their brand value stand a high chance to reap rich rewards.
“Fears of a slowdown have been heightened recently by China’s crackdown on displays of wealth and Japan’s shifting exchange rate,” said Jon Copestake, chief retail and consumer goods analyst at the EIU.
“But even in this climate, some luxury firms have continued to deliver strong sales. With Europe stagnating and North America subdued, the focus is firmly on Asia’s potential.”
One of interesting findings is that unlike elsewhere, where women are the primary purchasers of luxury products, Asian luxury consumption is evenly split between men and women. This is largely explained by the gender disparity of incomes as well as corporate gift-giving, which accounts for up to 25% of China’s luxury goods market. A crackdown on ostentation and corruption and the rising wealth of women may balance buying power between men and women in the future, the report suggested.
The EIU also notes that a large number of the region’s most affluent consumers prefer to shop overseas. According to the consultancy Bain, overseas sales in 2012 accounted for around 60% of Chinese luxury goods spending and around 25% of spending by Indians.
McKinsey as well found, in a survey of Japanese consumers, that one-third of respondents had bought luxury goods in duty-free shops in the last 12 months, particularly in Hawaii, Singapore and Europe.
The World Tourism Organization reported that China overtook the United States last year to become the world’s biggest overseas spender. Chinese spending rose by 40% to US$102 billion, of which 65% was shopping-related.
“Fully aware of how much their revenue depends on Asian buyers both in Asia and abroad, luxury firms have [responded] by shifting prices upward elsewhere rather than lowering them in Asia,” the EIU said.
In Europe, some companies are tailoring their stores more to Chinese consumers. In London, the luxury department store Harrods installed 75 China UnionPay terminals and recruited 75 Mandarin-speaking staff; such initiatives have supported a 40% year-on-year increase in sales to Chinese tourists.
Among the many challenges luxury companies have to face is the battle to suppress cheap counterfeit goods and fake items in Asia, led by China. According to the UN, China accounted for 75% of all the fake goods seized globally between 2008 and 2010.
However, some progress has been made. China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) confiscated counterfeit goods worth US$850 million in 2011. As well, the online retailer Taobao has introduced measures to protect against fakes, in order to be removed from the US Trade Representative’s list of “notorious” websites.
However, the EIU maintains that fakes do not present a meaningful threat to sales of luxury goods. The simple reason, it says, is that consumers of counterfeits tend to be those who cannot afford the real thing, so Louis Vuitton and their ilk are not “losing” sales at anywhere near the rate the industry likes to claim. And as incomes rise, aspiring customers tend to turn to genuine products over fakes.
“While cash-strapped youngsters still love counterfeits, those over 30 with higher incomes tend to buy the genuine brands. People are starting to be ridiculed if they are spotted with a fake Gucci handbag,” said Chen Junsong of the China Europe International Business School.
Meanwhile, home-grown luxury brands are emerging to cater to local tastes in order to capture the money from Asia’s new rich. Yet, they remain relatively small-scale given that Asian consumers are distrustful of domestic brands in terms of quality.
Furthermore, many regional luxury brands appear face operational disadvantages, since most of the best locations give rent discounts and exemptions to foreign stores. However, some Asian names are starting to become well-accepted.
The Hong Kong jeweller Chow Tai Fook, founded in 1929, targets affluent and middle-class consumers, and has emerged as one of China’s best-known brands. It has tapped into the Chinese love of gold, both as a status symbol and an investment item. The company has grown rapidly, with more than 1,800 points of sale and more than double the revenue of US-based Tiffany & Co.
“Local Chinese apparel and accessory brands are emerging, including fashion brands such as Dorian Ho, Mary Ching and Omnialuo, the latter of which has more than 200 stores in China. Some Asian brands are now even looking to go global,” the report said.