Posted on 06/12/2006 1:18:34 PM PDT by nicollo
Potential and problems for luxury market in China and India
by Dominique SchroederSun Jun 11, 1:54 AM ET
New lands to conquer for luxury brands, China and India both represent markets with a strong potential but which will need tailor-made approaches to take account of the different brakes on their development.
China is now the world's third biggest market for luxury goods, the director general of the polling institute IPSOS-France, Stephane Trucchi, reminded an international seminar on the luxury industry organised in Paris. China now accounts for 12 percent of sales, after Japan (41 percent) and the United States (17 percent), the French economic daily Les Echos reported.
In 2010, 250 million Chinese consumers, that is 17 times more than today, will potentially buy luxury goods.
In contrast to the United States and Europe, luxury consumers in China are young, aged 20 to 40 (compared with 40 to 70). And the clientele is becoming increasingly feminine with the growing economic independence of women, accounting for only 25 percent of sales in 2001 but already 45 percent by 2005.
China boasts several advantages: not only are "the rich" more numerous, but they are growing in number in medium-size cities, which themselves are mushrooming with rampant urbanisation. Moreover, the policy of one-child-per-family and the ageing of the population is leaving "a disposable income for consumer goods," Trucchi said. The development of China as a tourist destination, which has been given a boost by Beijing's selection to host the 2008 Olympic Games and the Universal Exhibitioni Shanghai in 2010, is another "lever of growth" on the Chinese market, he said.
But this promising market nevertheless presents serious difficulties which must be taken into account before any luxury good brand attempts to set up shop on Chinese soil. A major drawback is counterfeiting, which is a big risk for luxury brands, the chief executive of Lancel, Marc Lelandais, told the seminar.
Another downside is legislation limiting the activities of foreign investors. Furthermore, the Chinese are traditionally savers and rarely seek credit to buy consumer goods.
To succeed, luxury brands must devise a long-term strategy to guard against the fickleness of Chinese consumers, Trucchi said. They need to set up shop in prestigious places, rely on competent local partners and recruit and train their personnel locally, he said.
Growth figures for India are less impressive, but with an increase in the Gross Domestic Product of 5 percent in the past five years and a purchasing power that doubled between 1999 and 2003, India possesses "real potential," Trucchi believes.
But the distribution of luxury goods remains limited. There are few shopping centres or points of sale for luxury goods outside India's top class hotels, noted Denis Morisset, the executive director of ESSEC, the Paris-based international business school, who deplored the lack of outlets.
Apart from strengthening the visibility of luxury brands, setting up in India would have to take account of national sentiment of belonging to a strong cultural tradition and would need to adapt to this local culture, Trucchi said.
I'm not surprised that Japan is the largest consumer of "luxury goods," at least according to French standards. And I'm not surprised that China is on the way up in that category. You see, now we know what they're doing with all those spare greenbacks. Glad it's going to some use, if not a very useful use.
Then again, seeing the Asians recycle our dollars spent on cheap Asian crap on expensive European crap is quite a lovely little irony.
This is interesting. I was talking to a friend of mine whose husband works for GM. They get cars through GM frequently. They are currently driving a Hummer H3 and when they are done with that it will be sold in China. I guess they are THE status symbol in China so they may be the one American auto that retains its value.
They can probably buy one in China, but after the taxes it'd be stupidly expensive. Buying a used US car of any make is simultaneously an act of status and economy for the third world.
A luxury goods firm selling high-end apparel or jewelry would be interested in knowing that there are 18.5 million households with annual income exceeding $100,000 and that 91% of those households are married couples. A brokerage and insurance firm trying to attract clients, however, would place more emphasis on assets and focus on the 9.1 million households with a net worth of $1 million plus. Private jet, yachting and wealth management purveyors might want to know more about the 64,000 households with a net worth of at least $30 millionI wonder what the numbers are compared to other countries. In both numbers and per capita it must blow-away the rest of the world. Anyone know where to find some comparable numbers?
(emphasis mine; from The Luxury Institute.)
You must also see the irony in both countries' ramping up of their respective military budgets...from the same dollars. Not all of it goes to buy crap, European or otherwise. And luxury goods are bought on "disposable" income. It, by definition, means money that doesn't hurt the buyer, when spent.
Potential and problems for luxury market in China and India
And luxury goods are bought on "disposable" income.Actually, everything is bought on "disposable" income. What's going on here is that Asian consumers seek status via European brands more adamantly than do American consumers. I find it amusing.
Perhaps that's why Asian/ Indian companies want to buy off those European brands...and then sell to Americans AND Asians/ Indians, and everyone else in between ;^)
French try to scuttle Mallya now
BANGALORE: The French are at it again. After going all-out to resist Indian steel tycoon Laxmi Mittal’s takeover bid for Luxemburg-based steel firm Arcelor, they are now trying to scuttle Indian liquor baron Vijay Mallya’s move to buy out French wine and champagne producer Taittinger SA from US firm Starwood Capital Group LLC.
Mallya’s spirits conglomerate - United Breweries Ltd - has emerged as one of the frontrunners for acquiring the French champagne and wine group, but local groups are putting spanner in the works in an attempt to throw him out of the race.
United Breweries Ltd president and chief financial officer Ravi Nedungadi said, “We are aware that other local groups have stepped in with new offers, but we are not going to raise our bid as it would not be viable.”
Another United Breweries official said the value of the new offers were 15-20% higher than that quoted by UB. “We do not think it is worthwhile to revise our bid,” said a company source.
These comments by India’s largest spirits company officials were made in response to reports in the European media, which said a Belgian financier, Albert Frere, was considering joining Taittinger family members in bidding more than the $525 million that Credit Agricole unit Credit Agricole du Nord Est and Pierre-Emmanuel Taittinger are jointly prepared to pay.
Sources say if that happens then Taittinger family’s bid would surpass Mallya’s bid.
Though Mallya has not confirmed it, his group is reported to have quoted $660 million for the Champagne-based (North France) wine and champagne company Taittinger, which is the world’s ninth largest producer of champagne that sells 4.5 million bottles per year. Out of this, 62.5% is sold outside France.
And even as the French are making tactical moves against the Indian conglomerate, Mallya remains unruffled.
In fact, sources said, Mallya is fiercely lobbying with the French government to swing the deal in his favour.
Considering the kind of stake (aviation and spirits) he has in the European market, especially in France, it may just be able to ward off some of the hostility, stemming out cultural racism.
Mallya’s Kingfisher Airlines had placed aircraft orders of over $6 billion from French aerospace companies and the European consortium Airbus Industrie.
“European politicians cannot undermine the economic prowess of emerging economies and large Asian conglomerates like UB groups. There has to be a two-way trade-off. UB Group has provided business of more than $12 billion over last one decade,” said an industry source.
From the very beginning, Mallya’s ambitious bid had met with hostile reaction in the European sections.
An Agence France Presse (AFP) report that appeared in a South African daily - The Mail & Guardian - on Sunday quoted Bruno Paillard of the Interprofessional Committee of Champagne Wines (CIVC) as saying that the Indian bid “has raised concerns” in the Champagne region.
The agency report further has Paillard saying, “The CIVC has reservations about the possible acquisition of a major player in the champagne market — Taittinger — by a firm from a country that does not respect the principle of controlled origins for wines.”
In the same report French winegrowers’ have also raised concerns over the Indian bid.
“India has wonderful commercial potential, but champagne is not always protected there. That bothers me,” head of a French general winegrowers union, Patrick Le Brun is quoted as saying.
A blog, written in Italian, thinks it unimaginable that a Taittinger bottle would be labelled in Hindi, if Mallya wins the bid.
"Furthermore, the Chinese are traditionally savers and rarely seek credit to buy consumer goods."
This frugality is a primary advantage of Chinese culture over contemporary Western culture; it bodes well for the long-term economic growth of China-- because investment in future production and enterprises will be much higher than in the West. It also means that Chinese consumers are less likely to purchase brand-name products just because of the brand names; they will need to be persuaded by objective quality indicators.
Frugality is what gets a people to economic prosperity; luxury is just a consequence of economic prosperity-- and even then one needs to pick one's luxuries wisely and frugally.
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Thanks for that article -- it's a trophy buy, and a corporate buy for the same reason as consumers buy those same products: status.
The sales volumes of the European "luxury brands" are pretty small when compared to U.S. consumer producers. Americans shy away from it because there's more money elsewhere.
But I'm also interested as to why Third and Old World consumers are so infatuated with the "luxury" brands. Visit any duty free around the world and you'll see what I mean. American consumers don't even know what duty free is. Markets with high taxes, severe income disparities, and ingrained Old World social classes -- or a new rich, especially via political-ties, that aspire to old rich status, these are the "luxury goods" markets.
This frugality is a primary advantage of Chinese culture over contemporary Western cultureEven if Chinese "frugality" is a real thing, that it will bring economic hegemony is wrong. Chinese frugality manifests itself in destructive political atrophy as much as in saving for a rainy day.
Besides, Chinese history is as full of boom/bust cycles as anywhere else. In fact, Chinese conservativism, which you might call "frugality," makes such cycles worse than other places because of the herd mentality of cultural conformism. Absent real cultural, economic, or political dissent, booms boom louder and busts burst worse.
People so obsessed with the "superiority" of certain Asian cultural traits easily forget what a disaster the place has wrought upon itself over just the last 100 years, not to mention the centuries before it.
That's funny, since Bentleys and Rolls-Royces sell aplenty in America.
That's funny, since Bentleys and Rolls-Royces sell aplenty in America.
Automobiles are not included in these figures. Nonetheless, you'd be amazed at the worldwide sales.
Here's a list from 2005 for Rolls-Royce's top four markets:
1) Beverly Hills
2) London
3) Tokyo
4) Dubai.
Total sales: 796 cars. Drop in the bucket.
China is the no. 2 market for BMW 7-series, with 3,620 cars sold over first 5 months of '06.
Here we go again. Another pro-China post. If the Chinese were frugal, I would like you to explain how bad the capital utilization index for China is. They are swimming in money and have no ideas on capital utilization. Greater than 50% of all capital invested in China gets under-utilized that explains the bad loans that Chinese banks have on their hands. You might claim that corporate mindset is different from consumer mindset. I don't see how very different it can be. There are more luxury cars in the big cities of China. A lot of beauty products sell more here than they do elsewhere. There are more outlets of luxury goods in any given Chinese big city than in cities of most other countries of the world.
High luxury goods consumption is often a mark of an unequal, static society. That Japan is far and away the largest consumer of "luxury goods" (again, as defined by this French polling group) indicates that Japanese have wealth, but also a yearning for distinction born of rigid social or economic structures.
My guess is that middle class values take more strongly in India than in China and that we'll see much more long term growth there. Do you see that there might develop an independent, strong middle class in China? Or will the economy mimic existing political structures?
The middle class in India has existed continuously for a longer period of time than that of China. Besides, culturally as well, I think the Indian middle class is better enriched than the Chinese. Post-cultural revolution, the Chinese idea of culture doesn't extend beyond such things as food and drama. A case in point is Chinese TV series. There are barely any Chinese drama/series that cover today's China, its social problems and personal problems. Most TV series are full of fancy-dress competition Chinese depicting fiction from 2000 years ago. Its amazing how many dramas they can produce about kings and concubines and the likes. Why am I talking about this? Its because I would like to talk about the cultural vacuum that exists in China's youth today. How does it affect them? Well western values fill in this void quite readily and the mixing of cultures isn't exactly working too well given that the government decides what goes and what does not go. I hope you understand what I mean. There are inconcistencies that the Chinese cannot explain.
This plays a big role when it comes to luxury brands and products. The nouveau riche chinese who drive BMWs and Mercedes Benzs have money but don't have the culture or the sophistication that comes with "inherited" wealth. Furthermore, the Han Chinese have a few hundred surnames that 1.3 billion people share. So the poorest beggar in the most backward village in China and the richest tycoon living in the swankest mansion in Shanghai could have the same surname. No Smythe and Rockerfeller kind of surnames that conjure up images of generations of purple and gold.
Hotels in far off places like Singapore and HK complain of Chinese guests who spit inside the hotel, smoke in bed and so on. Given that the rich can't differentiate themselves with their surnames or by being sophisticated, the only way to exhibit affluence is to sport designer-wear.
Even in this regard there are problems for China's tycoons. The fake Diesel, Louis Vuittons, Pradas, Guccis that are readily available for sale in China's fake markets like the erstwhile Silk Market in Beijing means that the nouveau riche and the wannabe rich end up wearing dresses that look identical. Only the 'smart' wannabe rich pay a tiny fraction of what the nouveau riche pay for the same dress.
So the future is bright for such brands in China I would say. Provided ofcourse that the government takes the fakes off the shelf.
Q: How do you tell a nouveau riche Chinese from a wannabe rich Chinese?
Ans: The stupid guy/girl who's wearing dark sunglasses in a really badly lit nightclub is the affluent one. :)
Now to answer your question about the emergence of the middle class in China. It is definitely evolving. But one difference is the definite lack of intellect when compared to the same strata of society in other countries. As long as there will be multinationals setting up operations in China, the middle class will continue to emerge in absolute terms. The question is should companies be banned from investing here, say in the event of aggression(I can see this happening), the middle class will disintegrate and disappear. This is why I think China will not try any misadventure in the Taiwan straits. If the USA bars American companies from investing in China, that is really the end of communist China. This can happen only in case of a direct war between the two countries.
Great post. Thanks for the insight, for it indeed answers many of my questions.
I'm always looking for explanations for the middle class -- anywhere. The middle class is dissed in social science, starting with the word, "bourgeoisie," which isn't middle class, anyway. The academic Left is inanely fixated on the so-called "working class" that they can't see their own image in the mirror, just some misshaped, guilt-torn non-rich rich radical wanna-be. "Effete" comes to mind. And since popular history finds no romance in the common middle America it wrenches and tears the middle class into a shop of horrors.
I see it as a product of politics: equal rights, equal justice, equal access to the law, and so on. From my experience in South America I know that legal and political institutions there inhibit the growth of a real middle class. So your explanation for what's happening in China rings familiar.
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