“The younger generation [in China] has a relatively higher education level, better knowledge of brands and increasing personal earnings,” says Bruno Lannes, a partner with global consulting firm Bain. “Some of them purchase luxury goods not only with their own money, but also with that from their parents or grandparents.”
Lannes’ words should be music to the world’s ears. As debt-laden consumers in Europe and the US scale back, Chinese consumers have become one of the most important sources of growth for the global economy. Many multinationals are banking that China will soon be their biggest market.
In some cases it’s already happened. Take luxury brand Montblanc, which told the China Daily that China overtook the US as its largest market in 2008. The German company has now opened 95 stores in more than 40 cities, compared with only 34 stores in the US. It expects store numbers to hit 130 over the next five years, targeting mainly second and third-tier cities. Annual average incomes in these cities is about half that of their top tier peers.
Or take the ambitions of another iconic German brand, Adidas. The sporting-goods firm announced in November that it plans to add 2,500 stores in China by 2015, including 500 by the end of next year, up from 112 now. The company expects China to overtake the US in the next five years as its largest market, says Herbert Hainer, its chief executive.
Other examples? For the first time in the carmaker’s 102-year-old history, General Motors will see more cars sold in China this year than at home, says Michael Albano, a Shanghai-based spokesman.
Even Jeeves could soon be aware of it. Rolls-Royce is forecasting an eightfold rise in its China sales in 2011 (versus two years ago) and this year sold more cars to Chinese than Britons (a first in its 106 year history). “The Chinese market in general is showing only one direction,” Paul Harris, the car firm’s regional boss told the China Daily. “That’s exceptional growth, and it’s going to be ongoing for quite a while.”
But don’t expect all of that growth to come from the bigger cities like Beijing and Shanghai. In fact, many say the commercial battleground is going to shift to the less developed cities of central China, like Wuhan and Chengdu. Even though they trail their big-city cousins in terms of average income, enough of the population is spending as much on clothes, food and entertainment to keep companies interested, according to a recent survey by Synovate, a market research firm.
Global brands are tracking some of the spreading wealth effect inland. Always a good gauge of “luxury readiness”, Louis Vuitton now boasts 17 stores in tier-two-and-three cities. Swarovski crystal can be also found in 200 shops spanning tier-one through to tier-four (see WiC78).
This new frontier has proved to be especially bountiful for Yum Brands. After starting out in the country’s coastal rim 23 years ago with the KFC fast food chain, the company has pushed into the hinterlands over the last decade (see WiC53). Yum, which also owns Pizza Hut and Taco Bell, now calls China its most crucial growth market. With more than 3,500 locations in 500 cities, China delivered about 40% of Yum’s annual profits last year. And with KFC’s American sales falling 6% in the third quarter, it looks likely that Yum will announce sometime next year that China has surpassed Kentucky and the other 49 US states as its top profit generator. Perhaps Colonel Sanders will be getting a makeover…
China’s growing consumer pull has captured the attention of more than the foreign multinationals. Domestic firms are also realising that they can grow by more than exports alone. WiC reckons that the next wave of M&A initiatives will see mainland companies diversifying away from mines, oilfields and into famous global brands.
Already, Chinese firms have snapped up stakes in French skin-care firm L’Occitane for $50 million and Swedish carmaker Volvo.
Shanghai-based conglomerate Fosun also made headlines for buying a 7.1% stake in Club Med, for an undisclosed amount in June. The French holiday-resort operator plans to make China its second-largest market within five years.
Keeping track: in WiC88 we reported on Rolls-Royce’s bullish forecasts for its China car sales. They have proven correct. Sales of the luxury vehicles soared 60% in 2011, making it the British-based car firm’s top market worldwide, pipping the US. Speaking to the South China Morning Post, CEO Torsten Muller-Otvos said: “It was a close race between the US and China. If you asked me in the beginning of last year which would be first, I wouldn’t have bet on China. But they made it, and it’s really astonishing.” China now accounts for 30% of Rolls-Royce sales (it sold a record 3,538 cars worldwide in 2011), with the preferred colour for interiors being ‘consort red’ (selected by 80% of buyers, who consider it lucky). (Jan 13, 2011)
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