While researching for my blog, I have found some interesting and detailed information about some issues that luxury brand companies should take note of:
1. Intellectual Property Rights Regulations
As some of you might know, the problem of counterfeit goods in China is severe. According to the U.S. Embassy in Beijing, the piracy rate in China is one of the highest in the world, with an average of 20% counterfeit goods in consumer products. According to the U.S. government, China's counterfeit goods industry cost overseas companies an estimated $60 billion a year. Of $138 million in counterfeit goods confiscated by the U.S. Customs in 2004, 63 percent came from China.
Some data indicated that although the middle class group in China is more willing to purchase luxury goods now, a larger population of mainland people is spending money on counterfeits. China’s pirated goods markets (eg. XiangYang Market) have attracted thousands of both foreign and local visitors daily.
In an effort to protect their sales in China, Louis Vuitton, Burberry Group and many other luxury companies have urged the Chinese government to crack down on rampant piracy in the country. The Chinese government has also set up stricter regulations to combat this problem, but the main issue lies in the enforcement and penalty of these laws at the local level because jurisdiction is diffused throughout many government agencies and offices.
Unless the Chinese government enforces the laws strictly and effectively, and consumers are being educated about counterfeit products, the knockouts will continue to erode the profits and put a toil on the luxury goods industry.
2. Issues that lead to slow turnover rate
In a study done by KPMG last year, the average time that it takes for the luxury brands to turn profitable is around 5 to 10 years. This may come as a surprise to some of you since we know luxury sales have been growing by double digits. This slow rate of return is thought to be the result of high setup costs, training costs, marketing costs, and tariffs.
Luxury goods companies expanding their stores have experienced high rental costs and also costs associated with training and overcoming communication and cultural differences. Many of the luxury brand companies often vie for top locations to set up their stores, hence driving up rental costs. Companies also often find themselves having to spend huge amount of money to train staffs. Even though there are large pools of cheap labor in China, there is a shortage of local management talent and staffs who have experiences in luxury goods service positions. Companies need to spend relatively large amount of money to train staffs at all levels, especially the management level or find qualified people from elsewhere so as to empower them to become ambassadors of their brands.
High tariffs on luxury brand goods in China has also made luxury goods 20-30% more expensive than in Hong Kong or even European countries. One of the beliefs is that Chinese prefers to shop overseas or in Hong Kong due to the difference in prices and also because the varieties of products in China stores are often limited compared to these places. Over the past few years, there has been a mounting number of Chinese tourists who travel abroad to purchase luxury brand items. This explains the dilution of some of the earnings that luxury companies could earn.
Building brand equity is expensive in China because of the ineffective media and advertising, resulting in many of the luxury brands having to place numerous advertisements or find other ways to promote their products. Luxury brands often find their ads ineffective amidst clutters of ads on Chinese newsstands. Advertising is also difficult in this huge country; marketing in one city may have no impact elsewhere. Thus, luxury companies often have to come up with creative ways to promote their products which can be expensive. Media costs are expensive particularly in cities such as Beijing, Shanghai, Guangzhou and Shenzhen.
Because of all this high costs, only a handful of top-tier luxury brands, including LVMH and Prada, have reported significant returns in China thus far.
3. Chinese consumers
The current luxury market in China is in its growing stage. With much of the nation still living in relative poverty, many Chinese consumers still have not embrace the idea of luxury. While there is a growing number of rich consumers, most of the people have yet to fully understand and appreciate “luxury lifestyle.” The average Chinese consumes luxury items without much research and view the purchase as a symbol of their high social status and financial success. As opposed to the European people, who tend to search for real value before making their find purchase.
Besides that, many of them still encompass the idea from the earlier days of saving up for the rainy day. China’s aggregate savings ratio is around 50% compared to 30% in Japan, 39% in Hong Kong and less than 14% in America.
While there have been sharp increases in wealth and luxury buying, luxury companies in China should not just focus on expanding and selling their products. These luxury brand companies should find ways to establish and cultivate a luxury culture in the Chinese market, so as to create a sustainable, healthy development of the luxury market in the long run.
As seen from the mentioned points, China’s luxury goods market has yet to mature. Companies wanting to expand their business certainly need to take into considerations different aspects of the market environment and play them into their strategies. It is critical to take note that success in the Chinese market requires far more than opening many retail outlets. A very important strategy that luxury brand companies should have is to build their brand images in the Chinese even before they enter the market. LV, which is the most successful brand in China, is a good example. They spend 5 years doing market research and establishing their image before expanding into China. This is a very important step especially when the Chinese market is starting to learn about luxury brand items.
Fact Site
- China's GDP increased 10.9% from 2005 to 2006
- Total retail sales of consumer goods also increased 13.3%, reaching RMB 3.644 trillion in 2006
- According to report by Ernst & Young, by 2010, quarter-billion consumers can afford luxury products, which is around 17 times the present value
- By 2015, Chinese consumers could be as influential as the Japanese, and will surpass the United States to account for 29% of all global luxury goods purchases
Money Talks – Interesting article about China’s luxury market
Sunday, April 1, 2007
Luxury Goods Market in China
I read an article written Jan this year about Cartier being barely able to break even after 15 years in China. The article talks about China having too many luxury stores because many luxury brand houses are flocking to China, and it takes some time for these stores to begin realizing gains (Seattle Times - High-end brands stumbling in China's crowded luxury market). I was surprised when I saw this and doubted the credibility of this report since all the other facts and studies pointed to the opposite. However, it did give me an idea that maybe we have ignored other factors while always placing emphasis on China's huge growing market opportunities.
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3 comments:
Just a thought from a psychology POV, what is the difference between fake luxury goods and real luxury goods, when even the retailers can't tell them apart?
Of course it is a different story for perfumes or other cosmedic counterfeits, since they can cause skin irritation or other side effects.
However, I know that there are couple "tiers" of fake luxury goods. People rate them as AA, A, B and so forth (very similar to bonds, actually). People say that when you buy an AA counterfeit, only the person who made it knows that it is not real (this is when it is new... you can quickly tell the difference between the quality of materials between counterfeit and real after a while). Also, fake luxury goods can cost up in the hundreds of dollars mark.
Finally, just a personal story...
Last time I went to Korea, I bought a fake LV wallet. Surprisingly, the fake LV wallet came in a real LV box with the real LV wrapping. The person selling me the wallet told me that this was very frequent, for the people who work at the LV factory just bring out leftover boxes and wrappings and sell them to counterfeit companies.
Also, I've heard that the luxury brand companies are putting minute details on insignificant places (such as back of zipper, pattern of sewing)to part themselves from the counterfeits. I think this is very smart, since I believe that it is pretty much impossible to regulate the counterfeit companies. Rather, luxury brand should use complicating design to part themselves; by doing this, if counterfeit companies want to imitate, it would either take a lot of labor, which drives the cost up which defeats the purpose of a counterfeit,to exactly imitate or be noticeably different from the real.
Wow, I didn't know that luxury goods in China are 20-30% more expensive. No wonder I see so many people from China shop crazily in the LV stores in Hong Kong. My friend was working in LV Hong Kong last Christmas. He told me those Chinese were buying LV bags like shopping in a supermarket (in fact, LV bags in Hong Kong do cost a lot too). Also, there's a funny incident that I have to tell you, which should be interesting.
A Chinese woman was bringing in a Grade A or Grade AA counterfeit LV bag to the LV store, and she asked my friend to get her one exactly the same. I couldn't stop laughing after hearing that. I mean why is she bringing in a fake product instead of a catalog? Would it be too easy (and perhaps very cheap too) for her to buy a counterfeit product to show as sample? Also, I'm amazed how up-to-date these counterfeit products are. I mean they are NEW ITEMS. Furthermore, I would not show my fake product in a real LV store. I will feel ashame of myself, but to that woman, it seems something common or not-a-big-deal to her at all. I seriously think this is because of the culture and education level difference in China. They don't seem to have a sense of intellectual property rights.
Pointing out the purchasing preference of Chinese, you're absolutely right. People in China (or may some Hong Kong'ers too) tend to buy luxury brands, particularly LV, for vanity sake. The whole concept behind luxury goods is twisted in the Chinese culture. In Europe countries, people know how to value the designs and quality, but in China, they're more like, "Yes, I own this limited edition of LV bag, so I am rich, and my social status is higher than yours..." I sometimes feel bad about that, eps. when I realize many young kids plead their parents to get them a LV/Gucci bag for school. I mean they are only junior high school kids, why aren't they using a Jansport or Adidas schoolbag instead? They don't care about the quality and design as long as they know it's a LV/Gucci. Maybe Chinese culture values hierarchy and social status so much, and luxury goods give them a way to show it off. Sad. Perhaps we need to brainwash these vanity-perceptions through education, as well as teaching them how to value intellectual property rights.
P.S. I do realize the LV stores in Hong Kong are always packed with Mainland China people, while Guicci or D&G stores are comparatively empty.
The Chinese economy, as we know it, is getting stronger by the years and it will inevitably catch United States in the near future.
It is very interesting and unexpected that luxury good companies are having such a hard time in a booming country like China.
Luxury goods, I think, are all about brand names and qualities. Companies recognize that capitalizing solely based on these terms will only capture the so called upper class of the society.
Those belonging in the middle class or lower, who may not be familiar with luxury items, are not going to recognize these goods. In my opinion, this is the nature of the entire luxury item industry.
Especially in a growing market like China, the people will be extra careful due to the issues pointed out in your blog. Consumer behaviors, piracy, and significantly higher prices will slow down sales in the short term. Proper due dilligence and strategy planning are needed to prosper in the Chinese market.
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