China Consumer

Glam rocks

Times are tough, but can China’s new rich do without their luxuries?

Glam rocks

For the select few: a $600,000 Wiesmann luxury speedster

Thirty years ago, Deng Xiaoping famously said, “to get rich is glorious.” The evidence suggest that China’s newly monied elite continues to agree. High-end Chinese consumers outspent their American counterparts in January this year, rendering the Chinese the second largest luxury buyer in the world, behind Japan. They account for 25% of the global market, says the World Luxury Foundation.

According to Bain & Company, the global consulting firm, China is also the world’s fastest growing luxury market, with an estimated $7.6 billion in sales last year. Although luxury sales only amount to a fraction of the country’s total retail receipts, luxury goods firms are bullish on China’s burgeoning appetite for their products. Hermes, the French label known for its sought-after Birkin handbag, has opened a third store in Beijing, which is also its tenth in the country. Louis Vuitton, the iconic French brand, is courting Chinese consumers in second-tier cities like Wuhan, where the company recently opened a store to much fanfare.

“Even though China is not our biggest market, we anticipate that it will be our biggest in the near future,” said Jean Christophe Babin, the global president of the watchmaker Tag Heuer, part of the LVMH group.

His optimism is shared by many judging from the rush of new store openings around the country. Industry experts reckon that China will become the world’s largest luxury consumer market by 2015, thanks to the growing number of millionaires, as well as increased spending power among the white-collars.

Nor are they just buying in China. Hong Kong remains a mecca for Chinese shoppers, thanks to savings in the sales tax. And with the depreciation of the euro, trips to Europe are also becoming increasingly popular.

A recent research report from Trendburo and CIMG shows that 3 out of 5 of China’s luxury shoppers are people in their thirties. Many in this generation are the first in their families to afford high-end goods. And unlike their parents, they are less inclined to save and more willing to spend.

But frequently, Chinese luxury shoppers are not even shopping for themselves. It has been an open secret that corruption is a key driver behind industry sales growth. The New York Times even speculates that 50% of the country’s luxury sales goes to gifts to government officials, as bribes or kickbacks.

Generally, it seems, government officials are reluctant to accept presents with large, noticeable logos, deeming them as too conspicuous. But jewellery and expensive watches are highly coveted, since they are more discreet and can quickly be traded for cash.

But even watches can backfire on the careless official, especially now that photos can be so easily posted on the internet. In December, Zhou Jiugeng, the director of the real estate bureau of Nanjing’s Jiangning District was fired for “causing negative social effects”, after provoking fierce debate from netizens. Zhou was photographed at a press conference wearing a $14,600 Vacheron Constantin watch. His salary? $584 a month.

Despite the overwhelming optimism in China’s luxury market, it is not completely immune to the global economic slump. Some stores across the country are reporting tough times; Rolls-Royce, the exclusive British-based car firm (owned by Germany’s BMW) claims that sales have “slowed significantly” in the once booming market. Analysts believe that luxury sales in China will shrink by 6% this year – mind you, that is still a lot less than the 15% fall in same-store sales forecast globally.

But the luxury goods industry may earn a vote of confidence from Chinese sovereign wealth fund, China Investment Corp. The fund is said to be interested in investment opportunities in the luxury goods market, reports the South China Morning Post. LVMH Moet Hennessy, PPR, and Richemont are rumoured to be on its investment radar.

This would appear to be a logical step, with China looking almost certain to become the world’s biggest luxury goods consumer. That being the case, the Chinese government might as well own a piece of the action.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.