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China's Growth

Editorial

Mar 31, 2011 3:28 PM   By Avi Krawitz
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RAPAPORT... The growth of the Chinese luxury market is not a new phenomenon; however, its importance as the key driver of the global market has gathered steam in the past three years as mature markets in the West have stagnated. The weight of that responsibility has increased in the past month as analysts lowered their forecasts for Japan, following the tragic events that unfolded there, but noted that growth in China, and in India for that matter, should compensate for the decline.   

Even disregarding any potential decline in other markets, companies operating in the luxury space are focusing their expansion plans on China. This week, L Capital Asia, the private equity arm of LVMH Moët Hennessy Louis Vuitton, launched a $650 million fund to invest mainly in consumer brands in China and India.

Diamond jewelry houses are similarly riding the wave. Harry Winston said it is planning to open three salons this fiscal year, two of which will be in Shanghai, while eight of the 21 stores that Tiffany & Co. is planning to open will be in the Asia-Pacific region. De Beers chose to first roll out its Forevermark brand in China, Hong Kong and Japan and recently reported that expansion in China is progressing rapidly. 

There is clearly much more to assessing these strategies. Understanding the potential for luxury goods in the Chinese market has become essential for companies looking East for growth. In a recent report entitled 'Understanding China's Growing Love for Luxury,’ researchers at McKinsey & Company predicted that China would account for 20 percent of the global luxury market by 2015 with sales of about $27 billion (RMB 180 billion), up from an estimated $12 billion (RMB 80 billion) in 2010. McKinsey’s numbers indicate that the market grew by 25 percent last year.  

The research outlined three principle drivers of the Chinese luxury segment including the rapid increase in wealth; the substantial rise in sophistication among luxury consumers; and the growing wealth in several new areas outside the largest cities, providing an additional source of luxury consumers.

With a population of over 1.3 billion people, and GDP growth of around 10 percent in each of the past three years, the numbers are hardly surprising. But they are well worth repeating. McKinsey estimates that the number of households with annual income of more than $150,000 is growing at 20 percent per year and is likely to reach 1 million households by 2015, while some 5.6 million households will be earning between $45,000 and $150,000 by then. The penchant for high-end products has trickled down to other segments of society and the upper-middle class, with incomes of between $15,000 and $30,000, currently account for about 12 percent of the market and is expected to reach 22 percent in five years’ time.

Significantly, 73 percent of China’s luxury consumers are below age 45, compared to about half in the U.S. Approximately 45 percent are below age 35, the report also noted.

More important, however, are the trends in consumer taste that McKinsey expounded upon, shedding much of the conservative image traditionally associated with the country and painting a picture instead of far more trendy, savvy, and worldly purchasers than previously thought.

The research stressed that Chinese consumers have rapidly become more brand conscious and increasingly sensitive about the relationship between quality and price. “If in the past, a steep price automatically signaled quality, fewer luxury consumers make that assumption today as they get better at assessing what luxury goods are worth,” the researchers wrote.

In addition, they are looking for price transparency, using the internet to source additional information and to do price comparisons, and they have become more insistent about the authenticity of the product, thus raising their appreciation for well-known brands. When looking for jewelry, interviewees listed superior craftsmanship as their top buying criteria, followed by innovative design and international brand recognition. At the same time, they also want new designs and brands that reflect China’s heritage.

While many luxury groups are making inroads into the expanding Chinese retail landscape, tapping the mindset of the consumer may become an increasingly complicated task. The same should hold true for other sectors along the diamond pipeline.

It’s not that China is the only growth market out there; India is certainly competing, both in growth terms and in its market dynamics. Underdogs such as Brazil and other Asia Pacific countries also present great potential. And while mature markets such as the U.S., Europe and Japan should not be written off, their near-to-medium term outlook seems stagnant.

But when it comes to opportunities to boost sales and pick up global market share, China has emerged as the leader of the pack with the greatest expectations for growth in the luxury market. Given the numbers and evolving trends, the country seems up to the task.

The writer can be contacted at avi@diamonds.net.

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Tags: Avi Krawitz, China, diamond jewelry, diamonds, jewelry retail
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