Ad Age China Series on Luxury Marketing

Luxury Goods Remain Fashionable in China--Despite 8% Drop in Global Sales

Marketers Like Fendi, Rémy Martin and Comite Colbert Seek Growth in the Mainland, Where Sales Are Up 12%

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Remy Martin organized the global debut of a rare cask of its Louis XIII cognac in Guilin's atmospheric caves
Remy Martin organized the global debut of a rare cask of its Louis XIII cognac in Guilin's atmospheric caves


SHANGHAI (AdAgeChina.com) -- Luxury marketers like Louis Vuitton, Channel and Gucci are trying to escape the recession that clobbered sales in developed markets by focusing on China.

"China is definitively the new frontier for luxury brands," said Richard Ho, a Shanghai-based partner in Bain & Co.'s Consumer Products and Retail Practice.

Globally, luxury sales will fall to $229 billion this year, an 8% drop, according to Bain. Sales in the Americas will decrease 16%, while European retailers will see an 8% drop. In Japan, sales are down 10%.

But revenue in China is on the rise. By the end of 2009, Chinese will have spent $9.9 billion on luxury goods, up 12% from last year. Sales reached $8.9 billion in 2008, a 30% increase from $6.8 billion the previous year.

Once limited to a handful of ultra-elite Chinese who frequented luxury malls like Plaza 66 in Shanghai and the China World Hotel lobby in Beijing, China's luxury segment is maturing into a vibrant market that represents strong sales today -- not just potential for growth down the road.

According to the Hurun 2009 Wealth Report, China now has 825,000 mainland Chinese, or one in 1,700, with personal wealth of at least $1 million. Of those wealthy Chinese, 82% have not made any lifestyle changes since the financial crisis hit.

Affluent Chinese are also younger than their western counterparts. The average age of China's millionaires is 39. The average Chinese with more than $10 million is 43 years old, and for those earning more than $100 million, the average age is 49 years.

Luxury equals status
"Luxury products in China are about selling a dream and providing status, especially in lower-tier cities," said Viveca Chan, Hong Kong-based chairman-CEO of WE Marketing Group, an independent agency in Greater China.

Plenty of companies want to sell that dream. Marketers of everything from luxury cars to pricey spirits to handbags and cosmetics are investing heavily in marketing, events, education, training, distribution and retail operations.

Fendi's new two-level flagship store in Shanghai is the Italian firm's largest retail site in Asia/Pacific
Fendi's new two-level flagship store in Shanghai is the Italian firm's largest retail site in Asia/Pacific
At the end of October, for example, Fendi CEO Michael Burke visited Shanghai to open a lavish two-story flagship store in Plaza 66 -- the Italian firm's largest store in Asia/Pacific at 53,819 square feet.

The House of Rémy Martin also took a bold step in China this fall. The French cognac maker held the global debut of a rare cask of its "Louis XIII" cognac in Guilin, a picturesque city in Guangxi province.

The cask, which sells for $15,000 per bottle, was unveiled dramatically in one of the city's mountain caves. Only 786 decanters are available worldwide and Chinese consumers have already pre-ordered about 100 of them.

China is already the No. 1 consumer of the Louis XIII cognac, but the decision to hold the event away from Shanghai or Beijing demonstrates an important trend in China's luxury market. Growth is coming from lower-tier markets, where incomes, curiosity about western products and desire for brands that provide status are rising quickly.

"Everyone is talking now about the potential of second-tier cities," said Thibault Villet in Hong Kong. Five months ago, he resigned as president of Coach's operation in Greater China to set up a luxury online retail company, Glamor Sales.

"Consumers in the first and second-tier cities remain slightly different," he said. In Shanghai, luxury stores "attract a wide range of consumers ranging from super-rich entrepreneurs to office ladies."

As marketers move to less developed cities, middle-class consumers who can afford designer goods as status symbol remain rare.

Colbert sites offers taste of France
French companies like Rémy Martin are especially interested in China -- and their status as vanguards of luxury is fitting. French monarch Louis XIV, well known as the "Sun King," promoted the idea of an affluent lifestyle filled with fine art.

Three hundred and fifty years later, the French still want to lead the way. This time, they're doing it in Chinese. Comite Colbert, an association representing about 70 French luxury goods firms, including Cartier, Hermes and Lanvin, recently launched a Mandarin-language web site, www.ccolbert.cn, hosted by Chinese portal Sina.com. French luxury good marketers now operate over 1,600 boutiques in China, and dozens more are expected to open next year.

Developed over the past two years at a cost of $370,000, the site, called cColbert, gives Chinese a look at what France has to offer. Content goes beyond scarves, handbags and perfume bottles. Viewers can watch a ballet performance, drool over trays of patisseries and, perhaps most importantly for marketers, learn about the heritage of luxury brands.

"Many affluent consumers today were not rich even just four or five years ago so having a continuous brand story and talking about heritage is important," Ms. Chan said.

Chinese are still learning about luxury brands
"Chinese do not understand good quality yet, or how to judge it. There's not only a lack of understanding about luxury but a lack of information about brands," said Tom Doctoroff, CEO, China at JWT in Shanghai.

"Because of the abstract benefits of luxury goods, which are very difficult for new consumers to understand, companies need web sites, road shows and diverse points of contact. They need to create a 3D media-neutral engagement platform that brings people into the franchise."

The Comite Colbert site, which will be up for at least six months, hopes to do just that for dozens of French companies, and for France itself. Using lavish 3-D photos, the site provides an interactive virtual journey into the French lifestyle and the brands that support it.

Companies like Fendi, Rémy Martin, Comite Colbert and Louis Vuitton, widely considered one of the most successful luxury marketers in China, know a lot is at stake.

By 2015, China will have 4.4 million families with household incomes of over $80,000, up from 1.6 million in 2008, according to a report recently published by McKinsey. The majority are likely to live in places like Chengdu, Guilin and other cities in China's interior, where luxury brands are not well understood. The race to reach them, and win them over, has already begun.

This article is the first in a series that will examine the trends in China's luxury goods sector, the challenges facing luxury marketers, information about expanding into lower-tier markets and a look at who is succeeding -- and failing -- in China today.

Comite Colbert's Mandarin-language web site offers Chinese consumers a taste of France alongside information about French luxury brands
Comite Colbert's Mandarin-language web site offers Chinese consumers a taste of France alongside information about French luxury brands



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