Future For Luxury Goods Looks A Little Brighter

 Growing Demand In China’s Interior, Other Asian Countries Should Counterbalance Tepid Consumption Elsewhere

Although Chinese consumers have shown a taste for foreign luxury brands, domestic labels will present stiff competition in coming years

Although Chinese consumers have shown a taste for foreign luxury brands, domestic labels will present stiff competition in coming years

As a result of the fast-paced development of China’s eastern coastline and special administrative regions, only recently have major luxury brands made it to the country’s vast interior region, where a number of second- and third-tier cities remain relative blank slates. Since so many companies are only reaching these areas now, the spread of luxury brands in China has become a regular news story.

This has only intensified over the last year, as formerly free-spending Japanese and American customers have thought twice about luxury goods while emerging customers in places like the BRIC countries and relatively fast-growing economies like Vietnam become more regular (and brand-loyal) buyers. Nonetheless, the luxury sector is still experiencing only modest growth one year on from the onset of the global economic slowdown despite their best efforts at wooing new customers.

If many recent articles are correct, though, what we’ve seen over the last year — severe as it has been — should only prove to be a blip in the grand scheme of luxury revenues. From Financier Worldwide:

Sales of designer shoes, handbags, and beauty products have weathered the financial storm particularly well. At the end of August, French cosmetics company L’Oréal reported higher than expected profits of €1.37bn for H1 2009. In June, Hermès revealed it was farming crocodiles in Australia to feed demand for its coveted £4000 Birkin bag. Around the same time, Mulberry announced that its handbag sales had recovered, climbing 21 percent in the first 10 weeks of the new financial year. Shoe supplier Kurt Geiger, which operates in upmarket department stores across the UK, also reported double-digit growth in profits for the first five months of the year.

Bain & Company predicts that trading in the developed markets will remain tough for the rest of the year, with growth of around 1 percent in 2010 before a slow recovery. However, despite the recession slowing the pace of development in emerging markets, Bain believes that, as a consequence of increasing personal wealth, growth in global GDP, and rising tourism in Russia, China, India and Brazil, spending will surge between 20 percent and 35 percent over the next five years. This is expected to aid the recovery of the luxury goods sector.

Although this article calls out the BRIC countries as the saviors of the global luxury sector, several other recent articles have put the growing Chinese middle class front in center as the group that will do most of the heavy lifting. From a recent article in Harvard Business:

In a Wall Street Journal op-ed last year, Zachary Karabell argued that “the rise of the Chinese consumer is the only thing standing between them [global companies] and a decline in their business.”

And Chinese consumers are ready to spend. Ruder Finn Asia recently partnered with Albatross Global Solutions in developing the 2009 China Luxury Forecast, which found that, in Greater China as a whole, more than half (50.3%) of respondents claim they will not let the global economic downturn affect their purchase of luxury goods. Additionally, the Forecast found the Chinese buyer to be remarkably loyal, with nearly nine out of ten (89.3%) respondents saying they would stick to their preferred luxury brand despite the crisis.

The idea of a decent proportion of the Chinese middle class — not to mention the Chinese “upper class”, which should be the world’s fourth-largest by 2015 — buying luxury goods on a regular basis is definitely what luxury brands like to hear. But as we’ve written before, this is no reason for foreign luxury brands, even automotive brands, to rest on their laurels.

Domestic Chinese luxury brands are already here, they know their market inside and out, and they are rapidly gaining a reputation for quality that could eventually rival even European brands with impressive pedigrees. Far from being a static, Euro-centric market, the luxury sector has shown that it is always in flux depending on the global economy, emerging consumer groups, and the unpredictability of buyers in developed markets.