The roll-call of fashion designers raising their profiles in China over the past few years reads like a Who’s Who of contemporary couture greats, from veteran designer Karl Lagerfeld of Chanel to Miuccia Prada of the fashion house that bears her name to Burberry’s creative wunderkind Christopher Bailey. The visits are confirmation that the world’s top luxury fashion brands see China as one of the most important growing markets.
But looking past the publicity and ribbon-cutting at the ever sleeker, flashier boutiques opening across the country, there’s a debate about how much hope the high-end fashion chieftains should be pinning on the economic juggernaut. China currently makes up less than 10% of the global US$206 billion luxury-goods industry, and even if its share grows in step with the buying power of Chinese consumers, it could take several years before it has a chance of surpassing the sector’s more mature markets in the U.S., Europe and Japan.
That’s not to say China isn’t highly enticing. Of China’s 100 largest cities — which include Beijing, Yantai and Zhanjiang — consumption is expected to double between 2008 and 2015, says a report published last autumn by McKinsey & Company. The consultancy expects consumption in other cities, including Shanghai, to jump more than 50% over the same period. Filling the fashion houses with optimism is that many of those consumers will soon be able to splurge on designer clothes and accessories as McKinsey’s predicts that the number of wealthy households in China — that is, urban households with annual income of some RMB 250,000 -– will increase from 1.6 million in 2008 to more than four million by 2015.
How times have changed. Even in the country’s largest urban centers, there was not much in the way of high-end fashion labels until the economic reforms began taking effect in the early 1990s. “Over the years, we have noticed that Chinese consumers have become more discerning about the clothes they wear, the food they eat, the cars they drive, the cosmetics they use, the houses they live in and the furniture they have inside those houses,” says Franz Kraatz, senior vice-president of sales and operations at Lane Crawford, a Hong Kong-based department store chain, which opened a 7,000-square-meter shop in Beijing in 2007, which stocks around 600 of the top high-end brands from Europe and the U.S.
It didn’t take long for the likes of Chanel, Dior, Gucci and Armani, among others, to open opulent stores in major cities with the same look and feel — and merchandise — as their stores in Paris, Milan, London and New York. Today, Paris-based LVMH, the world’s largest luxury group, has 29 boutiques in 25 Chinese cities, having opened its first store in the country nearly 20 years ago in Beijing’s Palace Hotel. Gucci of the PPR group, meanwhile, has stores in 23 cities, with five in Beijing and four in Shanghai.
Yet as with other consumer-goods sectors, the learning curve has been steep. “The market is so complex and big, but for a long time, people made the mistake of thinking that China was one place, applying only one strategy [across the country] and selling the same product whether it was in Shenzhen in the south or Chengdu in the west,” says Melvin Chua, founder of Ink Pak, a public relations and events business in Shanghai specializing fashion industry. “You would not do that if you were in America.”
Location, Location, Location
One of the biggest lessons for foreign companies operating in China is the need to “prioritize” on which cities to focus, according to the McKinsey report. As it notes, China has 815 cities, 200 of which with a population of at least one million, compared with 35 in all of Europe. Experts say that much of China’s wealth is concentrated along the eastern seaboard, particularly in Beijing, Shanghai and Shenzhen. But that is changing rapidly, as so-called tier-two cities, such as Dalian, Chengdu, Xian and Tianjin, become wealthier.
“China is filled with different cultures and consumer patterns vary from city to city,” says Raphael le Manse de Chermont, executive chairman of Shanghai Tang, a luxury-goods chain with 39 stores world-wide, which started out in Hong Kong in 1994 and expanded to both mainland China and fashion centers of world such as New York and Paris. “‘Tier-one’ cities are now entering the experimental luxury phase, putting more emphasis on style, ‘experience’ and personal enjoyment. ‘Tier-two’ cities are still in the status-driven phase, paying more attention to brand prominence as well as the brand’s price perception.”
Even among the tier-one cities, there are discernible differences, he says. “Shanghai and Beijing are cities where creativity, innovation and courage converge and this is reflected in consumer’s social life. Their social circle welcomes new ideas with an international sense. They are thrilled by buzz and want to be proud of their knowledge and sophistication in front of peers,” he observes. “Guangzhou, on the other hand, looks for cues on style from Hong Kong. Hangzhou consumers enjoy uniqueness and freshness. Where new ideas fail in other cities, they might succeed in Hangzhou because of [a willingness to experiment].”
Understanding where to sell their luxury goods is one thing; understanding who will buy those luxury goods is another. In particular, the changing spending power of China’s female shoppers is being scrutinized as never before. “Chinese women … follow trends just as closely as women in New York or Tokyo,” says Cao Weiming, managing director of Conde Nast China, which began publishing Vogue China five years ago. “At Vogue, we target both the successful career women and new socialites, who can buy designer brand clothes every month or week and for whom money is not a problem, and the young women, who have just started working and are interested in fashion, and by working hard, can acquire more and more spending power.”
Getting a handle on how the spending power of those two groups translates into sales on shop floors can bring surprises. A recent Forbes.com article cites research from U.S. based consultancy Pao Principle, which found that the average female Chinese luxury consumer spends roughly 11% of her income on luxury handbags alone. The consultancy collected data from 356 of mainland China’s elite consumers, who had purchased a luxury handbag, watch or piece of fine jewelry in the previous 12 months. With 311 participants buying handbags, Pao Principle found that the average shopper has an annual income is RMB 125,000 (US$18,380) — more than three times the average RMB 39,000 (US$5,700) salary earned in Shanghai — and bought two US$1,000 handbags. In contrast, female shoppers in the United States making US$150,000 or more annually spend about US$3,000 a year on handbags.
Like anywhere else in the world, brands are important for China’s luxury shoppers, male or female. According to Bain, five brands account for more than 50% of each product category, such as womenswear, handbags and other leather goods, jewelry, and watches. When it polled some 1,400 mainland Chinese consumers in July last year about which “three brands you desire the most,” Louis Vuitton was ranked the highest among 43% of respondents, followed by Chanel (25%) and Gucci (20%).
But there are signs that tastes are shifting away from the fashion mainstays. “A new group of consumers are also interested in more niche brands, such as Marni, Balenciaga, Lanvin and Stella McCartney,” says Cao of Conde Nast.
For its part, Marni, an Italian label, has managed to become popular in China despite a company policy of relying on word-of-mouth marketing rather than conventional adverting to attract consumers to its three stores in Beijing and others in Shanghai, Shenzhen and Hangzhou.
Jimin Lee, the company’s China managing director, reckons that the tastes and spending patterns of Chinese consumers are not much different from their counterparts in the West or other parts of Asia, but they need more guidance in terms of understanding a particular look. Another difference is that the luxury customer base is younger in China -– women in their early 20s to early 40s, rather than in mature markets where the age range of customers is between 30 and 60 years old.
“China is dominated by the big European luxury brands. In five to 10 years, there will be a greater presence of niche designer brands plus other lifestyle, multi-label concepts — in other words, more choice for consumers,” says Marni’s China managing director. “There is lots of room for evolution in the market.”
East Meets West and Vice Versa
One relatively niche designer taking the plunge into the China market is Phillip Lim. A recent visit to China made by the American-Chinese designer was to fit supermodel Du Juan when she launched her cosmetics range last year. Joined by Vera Wang, Jason Wu (who designed Michelle Obama’s inauguration gown), Derek Lam, Alexander Wang and Vivienne Wu, Lim is one of a number of ethnic Chinese designers whose name resonates with Chinese consumers.
“The focus this year is in China,” says Wen Zhou, New York-based CEO and president of 3.1 Phillip Lim, the designer’s New York label, which she helped launch in 2004, when they were both 31 years old (and thus the name 3.1). “His recent trip to Beijing really inspired him in terms of the energy and creativity in the city. He has a desire to develop a richer understanding of his heritage… The timing is right for Phillip to do something very personal and memorable there.
“Our initial approach was to be patient and work exclusively on only a few high-profile accounts, such as Lane Crawford and Joyce,” she says. “We did not want to oversupply [the market], as we wanted to build a customer base starting with the early adopters and tastemakers. This gave us time to build our image and get to know our customer better.” Time will tell whether that strategy will pay off, but in the meantime, it can expect stiff competition from homegrown designers, such as Shanghai Tang.
Though Compagnie Financière Richemont — a Swiss luxury-goods company — bought a majority stake from founder David Tang in 1998, Shanghai Tang continues to bill itself as China’s first luxury brand and recently took over its mainland China distribution after operating through a partner. It also continues to wrap its designs around traditional Chinese garb, melding both traditional and modern fashion so that shoppers will find cheong sams in shocking pink and silk Mao suits in electric blue. “Shanghai Tang is proud to be the first luxury brand originating and made in China, and many other luxury brands now use China as a manufacturing base,” says le Manse “This shows that brands anticipate strong demand.”
But there are also homegrown challenges. For one thing, while China’s consumers might be getting wealthier, it doesn’t mean they want to do their luxury shopping at home, especially if mainland China’s import duties continue drive up prices. It’s no surprise then that Bain says higher income households in mainland China — what it defines as earning RMB 50,000 or more a year — make 60% of their luxury purchases overseas (compared with 40% of lower income households, earning between RMB 5,000 and RMB 14,900).
The top fashion labels also need to brace themselves for the stress and strain of being part of ongoing global trade tensions. In March, for example, China’s state media reported that Chinese inspectors in the southeastern province of Zhejiang claimed to have found quality-control issues with designer clothes, such as poor color fastness, from the likes of Dolce & Gabbana, Versace and Hermes that had been made outside of China. The reports said samples were collected from department stores and designer boutiques in the cities of Hangzhou, Ningbo and Taizhou, three of the country’s wealthiest cities.
Somehow it all seems fitting, then, that Paris-based Hermes announced in December that it will launch a luxury brand in the spring that will be designed and manufactured in China, with its first store opening in Shanghai. Its name? Shang Xia, or “Topsy Turvy” to Mandarin speakers.