As China's Luxury Market Evolves, Who's Winning And Who's Losing?

Aggressive Expansion In Recent Years May Cause Short-Term Pain, Long-Term Gain Though China's red-hot luxury market -- which has helped the global industry weather tougher times since 2008 -- has slowed from high growth-rate estimates in the range of 35 to 40 percent in 2011 to anywhere from 13 to 18 percent this year, the effect of this muted slowdown has been far from uniform for major brands. Owing to aggressive expansion efforts, increased overseas spending by tourist-shoppers, a decline in conspicuous consumption in major cities and other factors, some of the world's largest luxury brands have seen a marked decrease in profits in 2012 while newer entrants have recorded impressive sales growth. Still, the current fundamentals of the China market -- where cities like Beijing and Shanghai are beyond "bling" while smaller inland cities remain relative blank slates -- mean that brands that entered the market early on, among them Louis Vuitton (1982), Dunhill (1994), Rolex (1995) and Gucci (1996) might encounter tougher times this year even though their long-term prospects may remain largely positive. Considering the muted demand in traditional markets like Europe and North America, though, continued double-digit growth in China looks impressive by comparison. So while some of the world's largest luxury brands might not have as easy a time in China as they had in years past, don't expect a sharp dropoff in luxury demand in the country, nor among its consumers -- both at home and, increasingly, at stores abroad. Difficulties aside, the fact remains that some brands have fared better than others this year. That said, at the moment, who's winning and who's losing in the China luxury market? Who's Up - Dior : Currently readying its "Esprit Dior" exhibition at the National Museum of China in Beijing, Dior -- the largest fashion brand under the LVMH umbrella -- has seen little sign of dwindling demand among Chinese consumers this year, according to CEO and Chairman Sidney Toledano. Speaking to Reuters last week, Toledano noted that his brand's Chinese customers were becoming increasingly sophisticated, adding that Chinese shoppers have responded well to Dior's positioning at the "very high end of the luxury market," as well as the exotic leathers, haute couture shows and VIP rooms it has rolled out in top-tier cities. - Prada : According to financials released last week by Prada SpA, China and the broader Asia-Pacific region still remain a source of much-needed growth. In the first half of the year, Prada posted a nearly 60 percent surge in net profit, powered mostly by Asian shoppers. Unsurprisingly, considering Prada’s expansion in the region over the past half-decade, leading the pack was Greater China, which rose 50.2 percent to €334.6 million (US$432.2 million). Despite the ongoing public spending crackdown, which some observers expect to crimp luxury sales in mainland China this year, still-growing demand in inland regions — where Beijing’s scrutiny is less intense and newly wealthy shoppers are more likely to buy locally rather than abroad — should largely insulate Prada from any noticeable decrease in sales in top-tier cities like Beijing and Shanghai. - Hermès : Also unfazed by changing demand in China is French mainstay Hermès, which reported a 13.4 percent rise in Q2 2012 sales, led by a 26.9 percent rise in sales in the Asia-Pacific region (excluding Japan) led by strong China sales. As Hermès Chief Executive Patrick Thomas dryly told Reuters this summer, “We see no slowdown in China.” Echoing Dior's Toledano, Thomas added this week that his brand has actually benefited from China's evolving market, as "Chinese customers are becoming increasingly sophisticated very fast." Banking on that growing sophistication and interest in new and more understated brands, Hermès-backed Shanghai-based luxury brand Shang Xia is set to open its second boutique next week in Beijing, and the company also plans to open a third location in the near- to medium-term in Paris. - Lanvin : As the Paris-based brand made abundantly clear at its titular event in May, Lanvin Loves Beijing. Considering its growing popularity in the city -- which hosts two points of sale (as does Shanghai) -- it's no surprise why. As Lanvin creative director Alber Elbaz told Jing Daily columnist Divia Harilela at the event, his brand's method of approaching the China market is the opposite of the "attack and expand" strategy employed by other major luxury players in recent years. Said Elbaz, “People see China nowadays and they see branding, they see marketing, they see dollar signs. They just want to attack the Chinese market straight away. If there’s something I hate, it’s to attack the Chinese market.” This more understated approach to building his brand in the China market has apparently paid off in 2012, as Lanvin said this weekend that it has seen no slowdown in China sales. According to Lanvin CEO Thierry Andretta, Lanvin expects to continue to see "double-digit sales growth this year." - Multi-Brand Boutiques : From growing Hong Kong-based mini-empires like Lane Crawford, The Swank and JOYCE to independent shops like TIPS, Medium Rare, Le Lutin, Dong Liang and THE VILLA, the rising brand awareness and preference for emerging designers and smaller brands among a certain Chinese niche consumer is fueling the country's nascent multi-brand boutique industry. Following the head-start of Japan, where adventurous high-end consumers have long flocked to multi-brand stores like H30, American Rag CIE, Mahna Mahna and United Arrows, China's fashion-obsessed, highly brand-educated shopper demographic is starting to look towards hand-picked collections regardless of cost. Too Early to Tell - Armani : Despite plans to open 50 to 60 new stores in China over the next two years, and the growing importance of the East Asia region to his brand's global sales, Giorgio Armani's China push has yet to show dramatic results this year. This spring, following his previous whistle-stops in Shanghai in 2004 and 2006, Armani’s “One Night Only in Beijing” event took place at Beijing's 798 Art District in May, presenting the Emporio Armani and Giorgio Armani A/W 2012-2013 men’s and women’s collections, Giorgio Armani Privé S/S 2012 collection, and 15 Giorgio Armani Privé couture looks “created specifically as a tribute to China” to around 1,000 attendees. Coinciding with the large-scale event was the first installment of the #ArmaniTweetTalks series, a Twitter-led discussion featuring fashion luminaries like Vogue China's Angelica Cheung, Hong Huang, and Tommy Ton. However, good intentions aside, the fact that Twitter is blocked in China and that the discussion was held exclusively in English meant that relatively few China-based fashion fans were actually able to fully enjoy the series. - Gucci : Now with 54 boutiques in China, relative early-mover Gucci is hoping to stave off any potential slowdown in the country this year by raising prices and pushing higher-end collections and items, among them a US$4,100 python shoulder bag. Looking to stay in the public eye in top-tier cities, where luxury demand is shifting the most dramatically, this spring Gucci creative director Frida Giannini presented Chinese actress Li Bingbing as the luxury house’s new “it girl” at three events in Shanghai, hosting a lunchtime cocktail event to debut the new advertising campaign, as well as Giannini’s first-ever China fashion show at Wai Tan Yuan. Following the show, Gucci held an afterparty at the Rockbund Art Museum in a specially constructed “Gucci Club,” a three-floor pop-up space featuring 360-degree views of the Pudong skyline. Yet it's too early to tell if the brand's efforts have paid off this year, as CEO Patrizio Di Marco has yet to comment on the company’s performance. Who's Down - Louis Vuitton : One of the earliest of the early movers into the China market, Louis Vuitton -- which currently has around 40 locations in China and recently launched its first mainland China “Maison” at Shanghai’s Plaza 66 -- has felt the decline in conspicuous consumption seen in top-tier cities in China perhaps more than any other major brand. As Erwan Rambourg, an analyst at HSBC, told Bloomberg this week, some of the most visible early entrants to China's luxury market, among them "megabrands" like LV and Omega "may start to show signs of suffering brand weariness owing to their early entry into several markets." Added Rambourg, "We term this the ‘first-mover disadvantage’.” Though prospects in in the long term remain largely positive, as Louis Vuitton is now targeting blank-slate inland cities like Hefei -- where consumers are approaching the luxury market at a much earlier stage of brand awareness -- LV is likely to hit continued turbulence in Beijing, Shanghai and elsewhere as logo-lite luxury becomes the norm for regular high-end consumers. - Burberry : Burberry's massive push in the China market over the past two years -- which saw its locations swell to over 60 in the Mainland as the British giant invested heavily in digital marketing via Weibo and Jiepang -- is highlighting the limitations of a large-scale China expansion effort. Though the brand remains optimistic about its prospects in China through the remainder of this year, Beijing's much-publicized crackdown on officials funneling public funds into luxury spending and high-end gift giving, the brand's dwindling exclusivity, and -- again -- declining conspicuous consumption will likely bite into short- to medium-term profits in mainland China. Though Burberry is down at the moment, however, some analysts expect business to pick up after this fall's leadership transition and Burberry to further benefit from growing overseas travel among Chinese consumers. - Hugo Boss : Despite extensive (and expensive) efforts to woo Chinese consumers this year, among them a high-tech and much-hyped 3D runway show in Beijing and signing Hong Kong actor Chow Yun-Fat as its first-ever Asian brand ambassador, Hugo Boss has had a lackluster year in China. Also possibly suffering from overexposure in the market, where it currently has nearly 90 locations and plans to open a further 60 in the next three years, Hugo Boss said this July that sales growth in China slowed to just 1 percent in the second quarter, and predicted full-year profit short of analysts' expectations. As Chief Executive Claus-Dietrich Lahrs told analysts at the time, "All the major malls in China are seeing a loss of traffic. The consumer is quite insecure." Perhaps quixotically, the brand plans to motivate Chinese shoppers by investing in new store constructions over other efforts, with Lahrs saying recently that new and refurbished stores showed the best performance in mainland China. Who's Shooting Themselves in the Foot - Zadig + Voltaire : Whether he actually said it or was (as his company claims) misquoted, Thierry Gillier, founder of the Parisian fashion brand Zadig + Voltaire, was quoted last week in a WWD piece on his company's planned hotel as saying that the hotel "won’t be open to Chinese tourists." Though the quote was quickly amended to say Gillier did not want to welcome "busloads" of tourists, the racially charged quote has set Twitter and Weibo alight and -- though Zadig + Voltaire is a little-known brand in China -- has greatly damaged his brand's name among Chinese consumers, as this terrific Brandchannel article points out. Unlike Dolce & Gabbana's tepid apology in the wake of its own PR disaster in Hong Kong earlier this year -- which finally came after a three-day delay -- Gillier's failure to issue a statement days later indicates that his brand either doesn't care about -- or doesn't understand -- the importance of swift digital crisis management in the era of social media.

As China's Luxury Market Evolves, Who's Winning And Who's Losing?

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Published October 01, 2012

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As China's Luxury Market Evolves, Who's Winning And Who's Losing?