Q&A with Radha Chadha & Paul Husband

And other people news in Greater China

By Published on .

With the growing number of rich Chinese eager to gain status by showing off their wealth, the mainland is quickly gaining prominence among the producers of luxury goods.

As usual, scale works in the country’s favor. While the percentage of its 1.2 billion population with real wealth remains small, there are now 320,000 millionaires in China, the world’s fourth-largest economy after the U.S., Japan and Germany, according to Deutsche Bank. On average, luxury goods consumption accounts for 4% of a consumer's assets worldwide, but in China, the proportion is as much as 40%.

Hong Kong-based Radha Chadha and Paul Husband look at the rising popularity of luxury brands in their book, The Cult of the Luxury Brand: Inside Asia's Love Affair with Luxury, published this month by Nicholas Brealey International.

Ms. Chadha is managing director of Chadha Strategy Consulting, specializing in consumer insights and brand strategy. Mr. Husband, one of Asia's leading retail center marketing consultants, is founder and managing director of Husband Retail Consulting. They recently spoke with AdAgeChina Editor Normandy Madden about the country’s path from Mao suits to Armani.

AdAgeChina: How has China’s luxury market evolved over the past few years?

Radha Chadha: The starting point in China is all about new money, because there is no other kind of money in China, it’s all been made quite recently. Chinese consumers, more so than in other Asian markets, use luxury brands to define who they are. You are what you wear. The logic behind that is that the old ways of defining who you are, by family, or birth or your profession, have gone. In its place, you have how much money you make as a way to classify people. Luxury brands help new rich translate their bank balance into social esteem. That’s why there’s a craze about luxury brands in China.

AdAgeChina: The act of defining class and status was missing during the last few decades because of Mao Zedong and the Cultural Revolution. Is China returning to a practice that existed traditionally, having a strong social hierarchy based on income and status?

Ms. Chadha: Totally, before there were no distinctions allowed, you were bad if you stood out. But it’s human nature. Every society has this.

AdAgeChina: Are luxury brands gaining ground beyond the richest “tier one” cities like Beijing, Shanghai and Guangzhou?

Paul Husband: They are. I would say the major luxury brands like Louis Vuitton, Gucci, Cartier, Salvatore Ferragamo, are now in between 14 and 20 cities. For example, Vuitton just opened its 14th store in China and Ermenegildo Zegna has around 60 stores in China and would probably be in upwards of 30 cities. They are definitely reaching out. The most recent cities where luxury brands are looking to establish stores are Wenzhou on the east coast, generally considered to be the wealthiest city in China.

AdAgeChina: Dunhill is an interesting example, as they have had a strong presence in China for quite a while. How did it get established so early in the market?

Mr. Husband: Until very recently, China has been almost exclusively male, the men had the money. Consequently, brands like Dunhill, Hugo Boss and Zegna have been in the market since the late 80s and early 90s and have the biggest store networks of all the luxury brands.

Ms. Chadha: The reality of the China market is that a lot of the men’s goods are gifted. That’s a huge driver of the luxury brand market. Initially it was something like 80% were gifted, maybe a decade ago. Today, it would still be about 50%. The recipients are men, so Dunhill is the pefect gift in the perfect gift market. It gives face to the person who’s giving the gift and its value is appreciated by the recipient.

AdAgeChina: They aren’t giving gifts to women, since China also has a strong tradition of married men having mistresses?

Ms. Chadha: Oh yes, that’s the second driver!

Mr. Husband: Dunhill has created quite a cross-section of accessories as well as clothes, the clutch bags, pens, lighters, cuff links as well as being good at clothes like golf shirts and belts, which are also popular gifts. China has turned out to be an incredible success story for them.

AdAgeChina: I’ve heard one reason Hugo Boss has been successful in China is because rich entrepreneurs like the name “boss.”

Ms. Chadha: It was mentioned in some of my research interviews. [Laughter] I don’t know if it’s been a key driver for the brand’s success but having a name like “boss” in China certainly helped.

AdAgeChina: Is the pace of expansion for luxury marketers different across the various provinces?

Ms. Chadha: I think they have been surprised by the popularity of luxury goods in the northeast where there is a lot of manufacturing. [Mr. Husband: Cities like Shenyang, Harbin, and Dalian.] They are quite dusty, industrial towns, no one would have thought luxury brands would be in great demand there, but they are.

In that way, it’s interesting to compare China with India, another growing Asian market for luxury brands, and the way the wealth is made. It’s made out of manufacturing and property in China. In India, the new money is being made out of IT and the knowledge and industries, so the way they spend their money is quite interesting. The “showing off” factor is much higher in China, where there’s no sense of proportion sometimes.

Mr. Husband: In China, you have people who have two Bentleys in the garage in different colors that will never go out on the road. The owners will sit in them, maybe drive them around the driveway and then put them back inside again, and only show them off at dinner parties. It’s too risky at this point in time to be driving around the city in them. It draws too much attention from the government, and the tax collector.

AdAgeChina: How much do Chinese consumers get the heritage of luxury brands at this point?

Ms. Chadha
: To begin with, the main reason for buying luxury brands was does it do a good job of marketing my status. But in the long run, brands realize that heritage is the nicotine of luxury brands. You might enter it to show off but the heritage and quality is what hooks you.

So it’s important to let people know what the heritage is and the brand story is one of the most important ways. Magazines in China like Elle will run advertorials about the history of the brand, the key landmarks right down to the latest stuff. You can even buy books in China that are like crib sheets about how to recognize brands such as Chanel by the chain, by the quilted crisscross stitching. They are really training consumers using media.

AdAgeChina: Are there luxury marketers that have established their brand particularly well in China, that have moved beyond the point of being bought for their heritage more than their price tag?

Mr. Husband: I would say Vuitton are really the preeminent marketeers. In emerging markets, the brands that get in first write the rule book. When you look at what Vuitton do, they started to educate consumers about the heritage of their brand early on with things like the Beijing-to-Paris rally, with the idea of travel and grand touring, They brought the Louis Vuitton Cup, a warm-up to the America’s Cup, into China. They’ve encouraged the Chinese team to enter the Vuitton Cup and America’s Cup.

Ms. Chadha: They even bring their heritage right into the store. Every one will display some of their older pieces like trunks so they are part of the store decor.

Mr. Husband: And the monogram you see on the logo of a handbag today is fundamentally the same as the one you see on those trunks from 100 years ago. That exudes the heritage of the brand and tells Chinese consumers it has a history.

AdAgeChina: Based on your knowledge of Chinese consumers, are there things luxury marketers could be doing better in that market to grow their brands?

Ms. Chadha: We see an emerging trend, a segment of the market that is moving from nouveau riche to nouveau chic. This segment is small but it sets a lot of store by style and aesthetics. Not to say they aren’t using luxury brands, they are, but along with that, they present themselves in a very stylish way and might include a lesser-known brand or more discreet products from a well-known brand in their outfits. So one thing luxury marketers could do is to encourage this trend. While the market right now is about displaying your money in China, down the road, a decade from now it will be about what the market is about everywhere else in the world, style and fashion. They should encourage that part of it.

Another trend we see is China’s first generation of consumers who grew up in a branded world, teenagers who are hyper-stimulated. They are maybe a notch lower, at the level of brands like Nike but they are already tuned in. So it’s a question of how you address this younger consumer who will enter the work force over the next five or ten years, and who has a completely different mindset than the noveau riche guy who buys the Zegna and Dunhill stuff.

AdAgeChina: You said China is slowly becoming a luxury market based on style and fashion like more developed markets. Will China eventually surpass its luxury-obsessed neighbor, Japan?

Mr. Husband: Let’s talk about the facts first. Japan has been the biggest luxury market in the world for quite some time. Among women in Tokyo in their 20s, the secretary brigade, about 94% have a Louis Vuitton piece of some kind. Gucci is 57%, and Prada is 51%. Luxury brands are everywhere.

But all Asian markets have moved through a five-stage model. The first is subjugation, the stage of authoritarian rule, poverty and deprivation. Stage two, where India is at now, is the start of money and economic growth, in which masses start buying white goods and elites start buying luxe products. China is at stage three, the “show off” stage at which consumers start to acquire symbols of wealth to display their economic status. At stage four, consumers use brands to fit in, with large-scale adoption of luxury goods fueled by a need to confirm, and at stage five, luxury goods are a way of life. Locked into the luxe habit, consumers are confident, discerning buyers.

The only country in the region in which luxury has become a way of life, Japan, is in between stage four and five. Everybody there has luxury brands, whether it’s school girls making money, in all kinds of ways, trying to make money to buy that one luxury good, or secretaries or tai tais (rich, married women).

AdAgeChina: Japan’s culture is all about fitting in generally, while China is more about showing off. Do these cultural distinctions change the way marketers should approach these markets, or do they follow the same path?

Ms. Chadha: There is an issue of collectivism vs. individualism. By and large Asian societies tend to be very collectivist, compared to the western societies, which tend to be more individualistic. But within the collectivism lot in Asia, Japan is the most extreme. Sticking out means really being a bad girl, so that’s why 94% have a Louis Vuitton bag, you can fit in that way. But China is not as individualist as the U.S. but it’s not as collectivist as Japan. Pretty soon, when large numbers of people have designer goods, there will be lots of women in the category who will all carry the same thing. The need to fit in is still very strong.

But the fact that Chinese are more flamboyant than Japanese will drive luxury brand per head consumption even higher in the future. We see the possibility of haute couture reviving ina big way globally because of the Chinese need to stand out. Consumption spending and behavior in China will be driven by the very rich entrepreneurs and professionals, whereas in Japan the market is driven more by secretaries.

AdAgeChina: When will China overtake Japan as the world’s biggest luxury market?

Mr. Husband: We firmly believe China will become the world’s largest luxury market by 2014. Today, Chinese account for about 10% of the global market, now worth $80 billion, including spending by Chinese outside the mainland in Hong Kong or Europe. The Japanese account for about 30% of luxury spending today. Japan’s growth has slowed dramatically; it’s almost stagnant, with just 1% growth in the luxury market. Year-on-year spending by Chinese is growing 40-60%, albeit from a small base now.

Other people news in Greater China

[beijing] Quinn Taw has resigned as chief strategy officer at GroupM, which manages WPP Group’s media agencies, such as MindShare, Mediaedge:CIA, MediaCom, Maxus and Motivator as well as specialist units Portland Outdoor and Interaction, for personal reasons. Before he took over the GroupM role last year, he was managing partner, China, for MindShare. He will remain based in Beijing and plans to pursue other opportunities in China's media market.

[hong kong] Rosemary Tan has been appointed director, mobile entertainment, Asia/Pacific at Sony Pictures Television International. Previously, she was regional new media director, Asia/Pacific at BMG Entertainment. She will remain based in Hong Kong.
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