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Luxuriating
on: March 01, 2010 In: Business, ConsumerTags: No Comments
In Western markets, France's position as the preeminent producer of fine wine, elegant clothing and generally refined lifestyle has eroded significantly due to competition from other countries. Californian vintages have beaten their French competitors at blind tastings twice in a row. French cuisine is now frequently criticized as hidebound and stagnant, while strange new cooking schools from Spain that blow up tomatoes with bicycle pumps have seized headlines. Perfume, clothing, handbags: Across the product lines, France is under attack by foreign arrivistes.
But someone forgot to tell the Chinese. Thanks to the continued dominance of "Brand France" in China, French luxury brands have managed to weather the downturn in Western markets better than most. In the first half of 2009, the world's largest luxury firm, France-based LVMH, saw revenues drop by 5% in Europe, 13% in the US, and 20% in Japan. Revenues in Asia, led by China, grew 4%. During the same period, French luxury cosmetics firm L'Oréal's sales increased 1.4% globally, but grew by a ripping 13.9% in China.
Top of the polls
The Hurun Report, a magazine that publishes China's "Rich List," carries out an annual survey of Chinese people with assets over RMB10 million (US$1.46 million) to discover their preferred luxury brands. The 2010 rankings were again dominated by France. Louis Vuitton ranked as the best overall luxury brand. In individual sectors, Cartier won for jewelry, Louis XIII for imported alcohol, Mot & Chandon for wine, Hermès for fashion accessories and Chanel for cosmetics.
Some were surprised by these results. "At the beginning of the financial crisis in early 2008, everybody in the luxury market went into a bit of a shock," said Darryl Andrew, CEO of market research consultancy Synovate. "There was concern early on that there would be a movement away from luxury goods in Asia, but instead it has boomed. A lot of luxury brands have moved away from more mature markets to catch the growth in China. It's basic economic theory: Invest where you are going to get better returns."
According to the China Association of Branding Strategy, approximately 250 million people in China can now afford to buy luxury goods. The breakneck growth in the market has seen the country surpass America as the world's second-largest luxury market after Japan. In 2009, Chinese consumers bought US$8.6 billion in luxury goods, accounting for about 25% of the world's luxury consumption.
Youth prevails
While China's current dominance is due in part to what is presumably a temporary decline in Western demand, it is likely to endure even after the West recovers, thanks to simple demographics. Japan is the world's largest luxury market but also the world's most rapidly aging society – this means its prime luxury consumer age group is shrinking. China's luxury consumers, on the other hand, are young and multiplying.
"Mainland Chinese customers, who can afford top-of-the-market luxury items, tend to be younger than elsewhere," said Robert Polet, CEO of Gucci Group, which operates about 200 luxury stores in China directly or through franchises, including French brands Yves Saint Laurent and Boucheron. "Typically, a Chinese individual worth US$150 million or more is 50 years old – about 15 years younger than someone in that category in America or Europe."
Polet added that over the last five years, Gucci has allocated more than 60% of its expansion budget to China and plans to maintain both the ratio and pace of investment.
Even so, French firms cannot rest on their gilded laurels yet: Companies from other countries have also noticed China's performance.
While some new entrants like Italian luxury motorcycle firm Ducati, which opened its first China store last year, won't likely affect French brands, others are aiming straight for them. American luxury brand Coach plans to open 15 new China stores in 2010; British brand Burberry proposes to double its stores in China to 100 by 2012, and Italian fashion house Versace has announced plans to invest US$56 million into China. Armani Cosmetics opened in Shanghai in July, and smaller firms, like German luxury fashion brand Escada, are also ready to compete here. France will therefore likely lose more ground in certain areas as competition picks up.
Even Louis Vuitton is vulnerable. For example, while the company still makes the most coveted fashion watch in China, a significantly smaller Swiss brand, Patek Phillippe, was ranked most popular general luxury watch in the 2010 Hurun Report rankings for the first time.
Fickle consumers
French luxury companies are clearly bullish on China, but the likes of LVMH and Pernod Ricard declined interview requests on the subject of competition in the market. What may worry them is the relatively short history of luxury in China. The uppermost strata of consumers here have at most been buying luxury brands for 20 years, but most new consumers have been in the market for luxury products for 10 years or less. Marketers worry they are fickle.
"Chinese have not yet developed a strong brand loyalty, which is different from more mature markets such as Europe, the US and Japan," said Gucci's Polet. "This will give companies greater opportunities to win customers."
Another worry is that France could lose market share because of bilateral political tensions. Responding to protests during the Olympic torch relay in Paris, some Chinese consumers launched a fleeting boycott against French goods. The action flamed out quickly, but the episode remains fresh in the minds of both Chinese consumers and French retailers. However, most analysts believe that a more sustained boycott is unlikely.
"Political tensions won't change the image of France in the minds of Chinese, but what might happen is that the willingness to support brands associated with France weakens temporarily," said Synovate's Andrew. "Japanese brands have suffered from political tensions in a more consistent fashion over the years than France, but they tend to be short-lived."
Perhaps most worrisome for French luxury firms is the rise of homegrown brands. Although China has yet to produce any major international luxury brands, some have gotten close in recent years, driven mostly by their uniquely Chinese sense of aesthetics.
Gucci offers some limited edition merchandise to appeal specifically to Chinese tastes, but generally sells the same Western-designed goods worldwide, like most other luxury firms. The balance is delicate. Adapting a foreign luxury brand too much to Chinese tastes will erode its imported cachet. But failing to adapt at all leaves the door open to local competitors.
"The culture of luxury in China is very different from North America or Europe. So, I think there is a strong potential of homegrown luxury brands, like Shanghai Tang or Vivienne Tam, to grow very quickly," said Synovate's Andrew. "In addition, China wants to establish its own luxury brands as a statement to the world that it can create viable brands."
Even so, while French firms need to continue to defend their share, there is little call for panic just yet. Developing a viable and profitable luxury brand in China takes years, and France has an enormous head start. Louis Vuitton entered China in 1992, Hermès in 1998, and Cartier in 1990, and all three have hundreds of years of history in the West.
Chinese upstart brands can compete on price and quality, but they will never say "old money" like a French brand – many of which date back to the 1800s. Vivienne Tam's "founded in 1994" just doesn't have the same ring.
Tourism will only serve to reinforce the French advantage. Synovate did a study last year asking Chinese consumers where they would like to take a romantic holiday. Paris won an astonishing 76% of the vote. And when Chinese travelers go to Paris, they go to shop. Chinese tourists in France already spend more than people arriving from the US or other European countries, according to the French Tourist Board.
Back in China, thanks to their head start in the coastal cities, French brands also have an advantage when it comes to grabbing share in second- and third-tier cities – the fastest-growing part of the market. New entrants, however, will likely have to spend years developing in Shanghai, Beijing and Guangzhou – all relatively mature markets with tighter margins – before opening widely elsewhere.
"The number of French luxury sales outlets in China has tripled in four years," said Elisabeth Ponsolle des Portes, president and CEO of the Comité Colbert, an association of 70 French luxury brands, whose mission is to promote French luxury abroad. "French luxury is present in 69 cities and almost every Chinese province, with more than 1,600 sales outlets, not including wine and spirits. Even with a slow world economy, 45 new free-standing stores opened in 15 cities in 2009 and 2010."
Some French brands are even using e-commerce to reach consumers in third- and fourth-tier cities. L'Oréal's luxury cosmetics brand Lanc?me has begun pushing its products through an online site and now sells to customers in three times as many Chinese cities as it has retail stores in, according to China Market Research Group (CMR).
In addition, French firms tend to run a tighter ship than their rivals. "Many luxury firms do not do well in China, because they have not invested in big stores and nice layouts," said Jessica Lo, managing director at CMR. "Louis Vuitton especially has done an excellent job. They have enormous stores with all the latest collections and really have great service."
Down-market
To hedge against the risk of fickle Chinese consumers abandoning their flagship brands, most of the big firms have diversified their portfolios to cover all the bases, including purchasing Asian brands. For example, LVMH snapped up Kenzo while L'Oréal bought Shu Uemura.
"As Chinese consumers become more knowledgeable and wealthier, they will evolve in their tastes. We are well-positioned, as we have a portfolio of brands that are all different, well-segmented and able to respond to different consumer desires as they develop over time," said Gucci's Polet.
If Polet is correct, 2010 will be a good year for French luxury firms in China. If French managers play their cards right, so will 2050.
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