Luxury brands follow the money to Asian countries

Neither of the two men professed much interest in investing in the Italian luxury fashion house Prada, whose shares began trading amid much fanfare on the Hong Kong stock exchange recently. But both were out shopping on the luxury-store-studded Canton Road in Hong Kong a few days ago. “My favorite brands are Prada and Gucci,” said Lin, who comes from Fujian Province, on the southeastern coast of China, and was visiting Hong Kong. “Today, I bought a pair of shoes and a bag for myself from Gucci.”

His friend Chen was carrying a Gucci shopping bag containing a light brown leather purse that he had bought for his girlfriend for about 9,000 Hong Kong dollars, or $1,155.
Consumers like these have been flocking to shops all over Asia.

Their spending power and tastes, and their willingness to show off their increasing wealth, are behind a sea change that has taken place in the global luxury industry over the past few years.

With the West struggling with weak economies, Paris, Milan, London and New York are no longer the dominant centers of global luxury spending. Increasingly, that centre is shifting eastward, to booming cities like Seoul, Shanghai, Mumbai and Hong Kong, whose glitzy malls now easily rival Bond Street, the Champs Elysees or Fifth Avenue in terms of high-end shopping opportunities.

“We are positive that the Greater China region is going to be one of the most interesting markets for the future of the luxury industry,” Prada chief executive Patrizio Bertelli said amid a blizzard of camera flashes and jostling journalists and bankers at a ceremony for the listing of the company in Hong Kong on Friday. “This is a very important moment for our company, and it’s an accomplishment after many years.”

Prada’s decision to list in Hong Kong, rather than in Milan, where it has been based for nearly 100 years, is in part the result of a desire to tap into a deep-pocketed group of Asian investors — funds and wealthy individuals — who feel more comfortable putting their money in stocks listed here, and not in faraway Europe.

But it also reflects a desire to be closer to an area that is fast gaining significance for the luxury industry as a whole. For some luxury and consumer goods companies, the region now contributes a third or even half of global sales and earnings, a sharp increase from just a decade or two ago. Many brands have responded with a rapid expansion of their store networks, turning what were once economic and fashion backwaters in China and South-East Asia into high-end shopping havens.

Take LVMH Moet Hennessy Louis Vuitton, the biggest luxury group in the world. Last year it generated about €6.9 billion, or $9.7 billion, in revenue in Asia, where it operates more than 800 stores. That compares with €4.6 billion and 570 stores in the United States.

Ermenegildo Zegna, the Italian menswear company, which opened its first shop in Beijing in 1991, has more than 70 stores in Greater China — mainland China, Hong Kong and Taiwan — now Zegna’s biggest international market.

Prada has lagged behind others somewhat in terms of expansion in mainland China in recent years. But about half the company’s 319 outlets around the world are in the Asia-Pacific region, more than a dozen of them in Hong Kong.

Prada, whose handbags and Miu Miu dresses can set shoppers back more than $1,000, plans to open dozens more, using some of the proceeds from its $2.1 billion stock market debut. Market nervousness about the protracted debt crisis in Greece and the world’s economic growth prospects meant that Prada’s debut, and that of the luggage maker Samsonite earlier this month, did not raise as much money as those companies had hoped for.

Prada shares edged up 0.3 per cent, closing at 39.6 Hong Kong dollars, or $5.08, on their first trading day Friday. The modest rise contrasts with the drastic jumps in share prices of Internet companies that recently have listed in New York.

Industry watchers believe that recent market nervousness is unlikely to deter other Western luxury and consumer goods companies from following in the footsteps of Prada, Samsonite and the French cosmetics maker L’Occitane, which made its debut in the region last year by seeking listings in Hong Kong.

It will be a handful, rather than a stampede, said Pradeep Rao, head of Asia-Pacific consumer and health care investment banking at Citigroup. “But long term, there is definitely an appetite from investors here for such companies.”

By far, the biggest driver of all this activity is the increasing affluence of emerging Asian economies, which has catapulted millions of people into the ranks of the wealthy. Traditional luxury markets like the United States, Japan and Europe remain important. But these regions are mature and, for the most part, still recovering only feebly from the blow dealt by the global financial crisis.

In Asia, by contrast, the number of people who can purchase top-of-the-range dresses, shoes or jewels continues to soar.

For example, a study by Merrill Lynch and Cap Gemini estimated that the population of dollar-millionaires in North America and Europe remained more or less unchanged in recent years, at 3.4 million and 3.1 million, respectively.

In the Asia-Pacific region, the number of millionaires grew from 2.8 million in 2007 to 3.3 million last year and has now overtaken that in Europe. With growth rates like these — and despite recent worries that China’s economic prospects are not as rosy as they once were — Asia’s population of millionaires is likely to top that in North America “very soon,” said Wilson So of the Merrill Lynch wealth management division.

The expansion in the €170-billion-a-year luxury goods market has mirrored this trend closely. In 2008, Europe accounted for 38 per cent of the global luxury market, according to Bain & Co. That figure slipped to about 37 per cent last year. During the same period, Asia, including Japan, rose from 25 percent in 2008 to 28 percent in 2010. The consulting firm McKinsey estimates that China alone could account for one-fifth of the global luxury market by 2015.

In addition, said Yuval Atsmon, a partner and expert on the luxury industry at McKinsey’s Shanghai office, shoppers in China, for example, have become more comfortable treating themselves to luxury goods.

They are on average significantly younger than their counterparts in the West, and they are more prone to make purchasing decisions based on word of mouth.

This means that expanding into Asia is more easily said than done: Western companies cannot simply take the approaches and products they have in their home markets and replicate them in Asia, industry experts caution.

“It’s very important for companies to get their stores and service right and not to rush headlong into expansion,” Atsmon said.

Still, he said, many Western brands may double the number of stores they have in China in the next few years, in a bid to tap into the country’s enormous growth potential.
And a stock market listing, for some, may be an additional way to raise their visibility and to get extra serious about the region.

“China is where the main battleground for the global luxury industry is,” Atsmon said. “The center of gravity is shifting.” Prada, for one, seems to be getting plenty of uptake already, judging by shoppers like Kevin Chen. Visiting Hong Kong last week, Chen bought a Prada handbag for a friend’s wedding. He said it was not the first time that he had bought a Prada bag as a wedding gift. “I’ve done this many, many times now. My friend in Shenzhen said they would like a Prada bag or maybe some shoes as a wedding gift, so I picked a bag for them.”