All that glitters is not sold

Posted by Yuka as Hot Cities

Profits are hard to come by in China’s luxury market – but that’s hardly a deterrent to companies selling everything from watches to wine. The fancy brands that are flooding the market are honing a long-term strategy

It’s late Saturday morning at Beijing’s newest exclusive shopping mall, Shin Kong Place. Near the China World Trade Center in what is known as the “Central Business District,” the mall has seven floors of stores seductively displaying designer clothes and jewelry while classical music discreetly plays in the background. The place oozes class and sophistication, and its stores are no different: famous brands such as Chanel, Chloé and Rolex are already open for business. There’s only one problem – where are all the customers?
Bottega Veneta’s first store in Beijing is in Shin Kong Place, and the exclusive Italian leather goods company present their elegant handbags, luggage and leather wallets, all spot-lit in display cabinets. The designer-clad staff are keen to help anyone who wanders in, but so far, few have. When a shop assistant is asked how many people she has served since the store opened a few weeks ago, she whispers, “Very few. We spend most of the day tidying and re-positioning the stock.”
Of course, it is a new store, and the more discreet goods that don’t sport famous logos may not yet appeal to the taste of many of China’s luxury shoppers, who are more inclined towards flaunting what they’ve got. But even some world-renowned luxury brands that have invested heavily in China for a couple of decades are still not turning a tidy profit. The Chinese mainland luxury market is proving harder to crack than many overseas companies anticipated. Meanwhile, competition for the companies seeking a slice has never been so intense. In the first quarter of this year, four upmarket retail developments opened, as well as Shin Kong Place in May. The mammoth multi-storied Four Seasons Shopping Center on Beijing’s Financial Street is set to open its doors next month.
But is there money to be made? Cartier’s managing director in China, Nigel Luk, says that the jewelry and watch seller is barely breaking even after 15 years in the Chinese mainland, even though it is the country’s top-selling luxury jewelry brand.
“If you are looking for quick profits, don’t go to China,” Luk said, in a Bloomberg News article in January. “It takes a long time to be profitable.”
Cartier has 14 boutiques on the Chinese mainland and Luk says they will likely need another 15 years to meet its profit targets. Few other retailers are prepared to disclose their profit or revenue figures.
So if it is going to take Cartier 30 years before their balance sheet in China is black, why are so many brands vying to enter the market?
“Most brand names are looking at the opportunities that are available in the longer term,” says Nick Debnam, KPMG’s Partner in charge of Consumer Markets for Asia Pacific and author of a recent report into luxury brands in China.
Mickey Chak, Group Planning Partner for PR agency Ogilvy China, agrees that the brands know what they are doing.
“As expert brand builders, all the luxury houses know that brand values are not built overnight,” he says. “And taking the time to create a reputation that connects with people’s aspirations allows them to maximize the tremendous opportunity in China.”
For luxury brands, the normal rules of profitability seem to go out the window when it comes to China, with decades-long waits to achieve a healthy profit par for the course. While mid-level fashion retailers like Spain’s Zara, H&M or sports retailer Nike have tapped into China’s lucrative market, top-end luxury fashion brands are having a difficult time squeezing profits out of China’s still relatively small pool of customers - the average income in Beijing is still under RMB 2,000 (USD 260.78) a month. But it doesn’t stop them from coming: Hong Kong’s Pedder Group has already brought Christian Louboutin, Prada, Yves Saint Laurent and Marc Jacobs to China. Later this year, they are planning to open flagship stores in Beijing and Shanghai for international footwear and accessories brands Jimmy Choo, Anya Hindmarch, Giuseppe Zanotti and Stuart Weitzman.
This desperate bid to expand in China has seen some fashion houses decide to go public in order to bring in the cash to fund their growth strategies. The investment needed first to get a retail license and then to develop products and cover rent and marketing is huge, and income generated from going public helps relieve some of that burden.
“The biggest challenge for a new entrant is to build sufficient brand awareness in what is a highly competitive market place,” says Debnam. “This takes time and investment and normally profitability will only come to a business which has already built the brand to a sufficient level to generate the right level of sales to cover the investment.”
Cartier says that it spends about USD 9 million a year on advertising in the Chinese mainland to raise brand awareness, a significant percentage of the company’s annual advertising budget.
Most of the firms that dominate the luxury-goods industry, such as mega-companies Mo?t Hennessy Louis Vuitton (LVMH) (which controls over 50 luxury brands including Krug champagne, Guerlain and Givenchy), and PPR (which owns Bottega Veneta and Gucci, among others) are publicly-listed. Still, some firms are only now deciding to float on the stock market. Prada, one of Italy’s biggest luxury clothing companies, says it may list its shares next year, and two other brands keen to expand in China, Ferragamo and Versace, both plan to do the same in the near future. Versace is also reportedly considering branching out from fashion and entering the hotel industry, with the opening of a boutique hotel in a new shopping and entertainment complex in Beijing’s Sanlitun area.
Another reason that the numbers of brands entering the market is on the rise is that now it is infinitely easier for them to do so. In 2006, China’s retail sector was totally opened, fulfilling the commitments made when joining the World Trade Organization in 2001. Foreign retailers no longer have to form joint ventures or find a local partner, which has led to a surge in applications and approvals.
That swell in applications is, of course, due to the perception of China as the Promised Land for luxury, which is based on some astonishing numbers. Despite low average incomes, China is now the third-biggest consumer of luxury goods, with 12 percent of worldwide sales, up from one percent just five years ago, according to a recent report from investment bank Goldman Sachs. If this trajectory continues, China will leapfrog Japan and become the world’s second-largest purchaser of luxury goods by 2015 – this in spite of relatively heavy taxes and duties the government imposes. “Many brands share the view that the growth in market size in the coming years will make China one of the most important luxury markets in the world, in the future, so brands are willing to make the investment now,” says Debnam.