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Luxury's Chinese Puzzle: Overcoming Challenges To Tap Growing Demand

Luxury brands may be eager to capitalize on China's expected boom in demand for upscale products; all they have to do is figure out how.

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However, Patrizio Bertelli, chief executive officer of Prada Group, predicted that by 2010, Chinese consumers would have a total of $500 billion to spend on luxury goods. He added that China could overtake the U.S. in importance as a market for luxury goods by 2020.

While wealth levels in China overall lag far behind those in America — according to EU Business, China's per-capita annual income last year was equal to about $5,300, compared with $38,000 in the U.S. — they are rising rapidly. Credit Suisse First Boston estimates that Mainland urban incomes have doubled since 1995 and predicted they would rise another 46 percent by 2015.

Much of today's spending power in China remains in the hands of government officials, both national and local, and their children, Chinese observers said. It is these consumers that luxury brands are now chasing, and they are finding that Chinese taste levels are already far advanced when it comes to luxury goods.

Umberto Angeloni, ceo of Brioni, found China's evolving understanding of luxury fashion to be "the same as in Russia, where eight or now nine years ago, all the rich would just go to Armani, but now Brioni has four stores in Moscow."

Angeloni described Brioni's China core customer as "the tycoon, the new rich and the establishment, the government officials, but eventually they will get more sophisticated, and appreciate well-made suits and customization ... In China, there is actually an advantage over Russia in that they understand the culture of custom tailoring."

In addition, "there is a huge group of aspirational clients who will buy just one piece. This is different from Russia, where it is just the rich. They do not have the same spending attitude."

The company is only a few steps ahead of A&G in establishing a foothold in Mainland China: It opened a counter, licensed to a local partner, in Shanghai's Plaza 66 only six months ago, although it has outlets in several multibrand stores in Hong Kong, said Angeloni.

The Hong Kong-based Shanghai Tang brought an entirely different perspective, as its current business and upcoming expansions focus on Asia in general and Mainland China in particular. Shanghai Tang, part of Compagnie Financiere Richemont, has five stores in Hong Kong and three on the Mainland, and a fourth is opening in Shanghai's Pudong in early July. Overall, the company operates 16 stores worldwide. Additional stores in Zurich, Tokyo's Ginza, and a third outlet in Bangkok are slated to open this year, and Milan and Beijing are on Shanghai Tang's calendar for 2006.
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