Luxury Brands Look To Shoppers In China For Cushion In Crisis

Gucci and Ferragamo Join Burberry In Opening New China Locations In ’09

Ferragamo in Shanghai: The Luxury brand hopes to add 7-8 locations in China this year. Photo © Time

The Mercury News reports today on hopes by luxury retailers that well-heeled Chinese shoppers, who have cut back less than their Western and Japanese counterparts, can buoy the luxury goods market enough to get them through the economic downturn. While China itself has been hit hard by the global economic downturn — particularly in its manufacturing and export sectors — a series of domestic stimulus packages and efforts to bolster consumer confidence have begun in earnest to take effect (as we have written before). Although a broader recovery, especially in the more rural or far-flung areas, will take some time, in China’s metropolitan centers like Beijing and Shanghai, the wealthy and upper-middle-class have continued to shop. And for that, luxury brands from around the world are looking at this consumer class as one of their few bright spots in the global economy.

As the Mercury News writes,

High-end designers and luxury retailers that thrive on such extravagance hope China’s growing luxury-seeking population will cushion them against the collapse in demand in other countries.

China’s 6 billion euro ($8 billion) luxury market accounts for just 3 percent of global sales, compared with 38 percent in Europe, 33 percent in South and North America and 12 percent in Japan, according to Bain & Co. But China and Brazil are projected to be the two fastest-growing luxury markets through 2012, according to consulting firm Bain & Co.

And sales of designer clothing, jewelry and other luxury goods in China will climb 7 percent this year, while worldwide luxury revenue could fall 10 percent, Bain & Co. forecast. Last year, luxury sales surged 25 percent in China while they were flat worldwide.

Just as more mainstream brands like Starbucks Corp. and Yum Brands Inc.’s KFC are expanding fast in China, higher-end brands such as Salvatore Ferragamo and Gucci are adding stores here — while many retailers have postponed or limited expansion in listless U.S., European and Japanese markets.

“The China market is growing fast. Beside the global downturn, which affects every country, China is quite stable,” Michele Norsa, chief executive of Salvatore Ferragamo SpA, said in an e-mail response to questions. “Definitively, we are optimistic.”

Ferragamo plans to add seven to eight China stores this year, with further expansion in 2010, according to Norsa.

Gucci Group, part of France’s PPR SA, plans to open a flagship store in Shanghai in May after adding three new locations in January. It says its sales in China soared 42 percent last year compared with 2007, 10 times its global growth rate of 4.2 percent. Gucci said China currently represents one of its most dynamic areas of retail growth. Greater China including Hong Kong and Macau accounted for 14.3 percent of Gucci’s sales last year.

France’s Domaines Barons de Rothschild, producer of Chateau Lafite wine, is developing a vineyard in the eastern province of Shandong to serve growing local demand.

China’s luxury shoppers are strikingly young, many of them self-employed or part of a growing professional class. According to consulting firm McKinsey & Co., 80 percent are under 45, compared with 30 percent of luxury shoppers in the United States and 19 percent in Japan.

The article indicates that the recent economic stimuli are helping to shore up confidence, as factories that had been shuttered for months come back to life, driven by more demand for white goods in the domestic market:

Fueled by a three-decade-old economic boom that created a still-growing urban elite, China’s appetite for luxury goods is surviving the sharpest global economic slump since the 1930s. And Beijing’s multibillion-dollar stimulus plan appears to be reviving the economy. Recent reports show gains in factory output, retail sales and capital investment.

By 2015, China will have more than 4 million households with annual income above 250,000 yuan ($37,000), McKinsey predicted in a recent report. That will make it the world’s fourth-largest country in terms of its number of households with substantial purchasing power after the United States, Japan and the United Kingdom. McKinsey said the benchmark was adjusted for purchasing power parity for each country.

And most of that money likely will be spent in China. McKinsey said its research found wealthy Chinese do 70 percent of their luxury spending at home, contrary to the industry wisdom that Chinese people make at least half their purchases abroad.

“We know Chinese consumers will continue to spend on luxury items,” said Ferragamo’s Norsa. “After all, it is a very big pond and in it there is space for many.”

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