Across Asia, an engine of growth for luxury firms

The region accounts for 45 per cent of sales for some foreign brands, drawing IPOs

Companies like Burberry, Hugo Boss and Prada have continued to strike an upbeat tone on Asia in recent weeks, despite the havoc that debt woes in the euro zone have wreaked on investor sentiment.

The Italian luxury retailer Prada, for example, which had an initial public offering in Hong Kong in June, reported last week that sales in Asia excluding Japan climbed 45 per cent in the quarter ended October 31 from the year earlier. Even in Japan, where an already feeble economy was weakened by the earthquake and tsunami in March, Prada’s sales rose nearly 20 per cent.

Based on orders, the company said, the next couple of months, which span the crucial shopping seasons of Christmas and the Lunar New Year, are expected to be as dynamic as ever.

With Western economies languishing, emerging countries in Asia have become a primary engine of global growth generally – and the luxury market in particular – in recent years. As a result, what happens in the region has important implications for Western luxury companies.

The Asia-Pacific region, including Japan, now accounts for about 45 per cent of sales at Prada and Richemont, the Swiss luxury goods group, for example. The fundamental drivers of this growth, analysts say, are unlikely to be derailed even if the economic troubles of Europe and the United States were to worsen.

If the Chinese economy were to grow only 7 per cent a year in the long term, compared with more than 9 percent this year, consumption could still be expected to swell as wages rise and more people move from rural areas to the country’s rapidly expanding cities, said Pradeep Rao, head of Asia-Pacific consumer and health care investment banking in Hong Kong for Citigroup.

“People will have more and more cash to spend on discretionary items, including luxury goods,” he said. The sheer size of some emerging Asian economies also comes into play.
To be sure, growth is not as strong in some markets today as it was earlier this year. Slumping stock markets, slowing exports and shrinking bank lending have taken some of the shine off the market for high-end goods in Asia in recent weeks.

Buyers at a Christie’s auction in Hong Kong last month paid nearly 46.6 million Hong Kong dollars, or nearly $6 million, for a rare blue and copper meiping vase, and a set of paintings of lotus flowers by the contemporary artist Cui Ruzhou sold for 124 million dollars. But other items fetched less than expected, and others still went unsold.

“High-end consumers here read the papers, and they see that the world is in a difficult situation – so they might delay the purchase of, say, a new watch,” said Erwan Rambourg, head of consumer and retail equity research in Hong Kong for HSBC.

But in Asia, it is a moderation, not a collapse. And analysts say the region’s love affair with luxury goods still has a long way to run.“We have been seeing sales increases of 35 or 40 per cent in the luxury goods market in Asia ex-Japan,” Rambourg said. “That is just not sustainable.”

Mass luxury market
Over the next year, he estimated, growth will be closer to 20 per cent, but even that would exceed expansion rates in other parts of the world. Industry executives concur and are racing to position themselves accordingly. Chow Tai Fook Jewellery Group, which is almost exclusively focused on mainland China, Hong Kong and Taiwan, is set to raise up to $2.8 billion in a stock market listing in Hong Kong this month.

Little known in the West, the family-owned Chow Tai Fook is a major player in what it calls the mass luxury market, which focuses on items that are within the reach not just of the superrich, but also of the swelling ranks of the Chinese middle-class. The company has more than 1,500 points of sale and plans to add about 500 more by 2016.

Meanwhile, Graff, which sells ultraexclusive jewels and watches and is based in London, is considering a listing next year in Hong Kong rather than in London, further underscoring the growing importance of Asia to the luxury sector. “Hong Kong and Asia is a very important centre for the diamond and jewelry business, especially today,” Francois Graff, managing director of the company, said during a recent interview in Hong Kong.

“Hong Kong is at the doorstep of China; it would be a natural location for us.” Asia accounts for about a third of the company’s business, Graff said, but the region is poised to overtake Europe and the United States to become the company’s most important market. This is no surprise given that the luxury market in mainland China alone is expected to swell to 12.9 billion renminbi, or $17.3 billion, this year, according to a recent study by Bain. That is still less than 15 per cent of the total value of luxury goods worldwide, and demand continues to come primarily from the United States, Europe and Japan.

But the 35 per cent growth that Bain forecasts for China this year far outstrips the growth rate in traditional, mature markets.

For the greater China region, which also includes Hong Kong, Macao and Taiwan, sales are expected to increase 29 per cent in 2011, to about 23.5 billion renminb.

If one adds the amount that Chinese shoppers spend annually while traveling abroad – an estimated 12 billion renminb to 15 billion renminb, according to Bain – Chinese consumers account for more than one-fifth of global consumption of luxury goods. Much of that overseas spending happens in Europe and contributes to sales growth there.
Looking further out, the value of the Chinese luxury market could reach about 180 billion renminbi, or $28 billion, in 2015 – roughly double the 2009 figure, McKinsey estimated in a report released in March.

Large swaths of the population in fast-growing countries like China, India or Indonesia will never be able to afford a pair of Jimmy Choo shoes or a Gucci handbag. But at the upper end of the wealth pyramid, the number of millionaires in the Asia-Pacific region has already reached critical mass.

Capgemini and Merrill Lynch Wealth Management estimated this year that there were 3.3 million millionaires in the Asia-Pacific region in 2010, more than in Europe and not far short of the 3.4 million millionaires in North America. Cultural and social factors also play a role in Asians’ willingness to splurge on high-end goods.

The tradition of giving expensive gifts at weddings, births and traditional festivals is more deeply ingrained in the region than in many Western cultures. Gold bangles are a must-give item at Chinese weddings, for example. Moreover, the upwardly mobile, newly affluent Chinese are often eager to display their wealth. In modern Chinese society, an individual’s place on the social ladder may depend on how much money he or she earns, and luxury goods help to advertise that, said Rambourg, the HSBC analyst.

All this is likely to help cushion the luxury sector in Asia from the impact of any renewed global financial crisis.