The Far East is trading on its lux

Eric Jackson
Editor at Global Trader
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Post date: Friday, 10th February 2012

From gold-plated high-performance cars to designer clothes, nowhere is as hungry for luxury goods as the Far East, writes Eric Jackson.

The British public didn’t need much encouragement before the recession to shop at Primark, with those familiar branded brown bags carried like badges of honour on the high street of every major city.

Now that bargain basement philosophy has become more of a financial imperative among the cash-strapped Brits, who paid no heed whatsoever to a House of Lords report a few years ago damning Primark, along with Matalan, for its throwaway culture. Over in the Far East, though, where growth and affluence are now as ubiquitous as noodles, the cult of Primark is viewed with a sense of curiosity.

Among the brand-conscious and fashionable new middle class, the buzz phrase is certainly not ‘cheap as chips.’ What they want instead is luxury, and the balance sheets of scores of companies who have ventured into the Asia-Pacific market are testament to that. Barely a week goes by without some UK, European or US company specialising in luxury goods from announcing that its profits have rocketed on the back of Far East trade. The region is obviously of the same mind set as legendary designer Coco Chanel who said that while some people thought luxury was the opposite of poverty, it was instead the opposite of vulgarity.

And in the Far East, they are lapping up luxury, from high-performance prestige cars to designer clothing and premium whisky to exclusive jewellery and watches.

"Young Chinese do not mind spending one month’s salary on a handbag or cosmetics. In contrast to their parents, who save a big part of their salary, notably for health, education and retirement,” said a report by asset management company Swiss & Global.

"And the Chinese no longer have to travel as far as in the past to buy a luxury handbag. Louis Vuitton and Gucci both have more than 30 stores in China. Omega has 75 shops and is sold by more than 100 local Chinese retailers."

Meanwhile in Seoul, the city has become the perfect testing ground for luxury good, especially those from France.

Luxury goods manufacturers are investing in flagship stores in Chungdham and Apgujeong-dong, affluent districts of the South Korean capital as part of the latest strategy of expansion across the entire Asia- Pacific region.

Louis Vuitton, Hermès and Christian Dior are stepping up their presence. These iconic brands are having a second look at Asia’s fourth-largest economy, which has become much more than a juicy market that gobbles $4.5bn of luxury items a year.

It is now a strategic place in which to invest in order to strengthen luxury brands across the region. “If your brand is understood in Korea, it will boost your sales all over the region,” says the representative of a famous Parisian brand in Seoul.

Louis Vuitton is already the most popular brand in the country and is continuing aggressively to raise its profile. In September it opened a spectacular 500 square metre shop in the heart of Incheon international airport, the gateway to Seoul.

In November, Aston Martin, the marque made famous by the James Bond movies and beloved of the world’s celebrities and super rich, credited the Far East market with boosting its coffers and talked of expanding even more into the market.

Within two years, it said, a quarter of all sales of the British luxury car would come from the Asia-Pacific region - double the current share.

China, which Aston Martin officially entered three years ago, has already become its largest and fastest growing market in Asia Pacific, said the company’s director for the region, Matthew Bennett.

In 2010, it delivered 110 cars in the country. By November 2011 it had doubled and was predicted to hit 500 units in 2012.

“China is not only the biggest but the fastest growing by a long, long way (in the region). In 18 months we will see China and Asia Pacific as a whole really on a par with the other big three markets,” said Mr Bennett. “We are still relatively new in China. We still see a very significant growth opportunity for us here.”

Astronomical

Other top marques, from Mercedes-Benz to Rolls-Royce, have recorded astronomical sales in China. As Swiss & Global confirmed: “The average Chinese millionaire owns three cars and 4.4 luxury watches. The Chinese tend to like status symbols. They like to reward themselves and to show the world their achievements. Therefore, the Chinese prefer recognisable brands and products with logos.”

Currently, Aston Martin has five outlets in China covering major cities and the surrounding areas. At least seven more will be added, bringing the total number to 12 outlets by the end of 2012. Mercedes-Benz and BMW have also announced investment and expansion schemes in China.

But probably the biggest hike in sales because of the growth of Asia-Pacific has been in the fashion world, where the likes of Prada and Paul Smith are not just brands but must-have iconic style statements.

The designer Sir Paul Smith himself is treated like a celebrity and when opening stores in places such as South Korea he is mobbed by autograph hunters. And even smaller designers – ones that are barely known here in the UK – are riding the Asia- Pacific wave. Century-old UK business wear company TM Lewin, for instance, has seen demand for tailored shirts and suits, and ties in the region boost sales. The privately owned shirtmaker, founded in 1898 in Jermyn Street, said that its international expansion into the Asia-Pacific region had driven full-year sales past the £100m mark for the first time.

It expanded into Malaysia following a successful launch in Singapore in 2009, and it now earns 13 per cent of its income from outside the UK.

This year Sir Paul Smith, already big in Japan, staged his first fashion show in the country – mostly as a show of gratitude and friendship following the devastating earthquake and tsunami.

He called it I Love Japan, on the strength of being established for three decades in the country, where he has more than 200 outlets, eclipsing the UK’s 15 stores. The designer said: “Despite recent events, business is really good in Japan. I think that’s because we’ve never over-expanded, the shops are interesting and the clothes are full of surprises but very wearable.”

His easterly focus goes beyond the boundaries of Japan, with plans to expand further across the Far East, including South Korea as well as Taiwan and Singapore. Following successes in Hong Kong, the company is also planning to launch in mainland China, with its first store opening in Shanghai. Meanwhile Italian fashion house Prada announced a whopping 75 per cent increase in profits, up to £234m from total revenue of £1.45bn, in the third quarter of 2011 on the back of greater sales in Asia Pacific’s booming economies, but especifically in the Chinese market.

“All geographical areas recorded growth rates in double figures, with Asia-Pacific reconfirming itself as the principle market,” said the company. “Once again during the quarter we achieved very strong results in terms of sales and profitability, which confirm the group’s ability to sustain high growth rates while improving operating margins,” said Patrizio Bertelli, the company’s chief executive. “We will continue to pursue our objective of long-tern growth through our strategy focused on the geographical expansion of directly managed shops.” Prada – who also own Miu Miu, Church’s and Car Shoe - said its sales in Asia-Pacific increased by 39% during the period to €580m.

At the same time celebrity jeweller Tiffany said that its profits were being buoyed by increased sales in the Far East against flatlining figures in Europe and the US, and exports in Swiss watches to China rose 68 per cent in October 2011. BMW announced quadrupled profits earlier in the year thanks to increased demand from China, and according to Barclays Capital, the country now buys 12% of the world’s luxury goods and this is set to grow by 20-30% a year. In five years’ time China could be buying a third of the global luxury goods ouput. Gucci, which has pushed hard in China, has some 40 outlets across a string of Chinese cities. Countries such as China and South Korea have also acquired a taste for expensive spirits, especially Scottish whisky.

Diageo Asia Pacific president Gilbert Ghostine said: "Our Asia Pacific business built momentum this year, particularly in fast growing emerging markets and in the high value super deluxe segment. The region was focused on accelerating net sales growth, enhancing our position as the number one international spirits company in the region and delivering double digit operating profit growth.” Another Diageo spokesman said: ‘’In terms of manufacturing exports, Scottish whisky is leading the way.

Diageo is certainly experiencing an increase in demand – we are seeing growth across a lot of emerging economies such as Asia.’’ Diageo recently purchased an equity stake in Vietnamese spirits manufacturer, Halico, and invested in China’s Shui Jing Fang. It also spent more money marketing Johnnie Walker whisky in Thailand, and the result was a net sales growth of 23%. Swiss & Global’s report said that the rise in the luxury goods market in the Far East and China owed a lot to the current economic mood.

“Young Chinese have much higher confidence in their financial future, which is a good precondition for buying luxury goods, as this always also includes an emotional aspect,” it said.

Luxury brands now allocate half of their investments to China. There is still a lot of potential for more stores. “We are convinced the emergence of a large and wealthier consumer class in China will be the key driver of growth for many Western luxury companies,” said Swiss & Global. “By investing in a luxury brand, fund investors can benefit from the growth of Chinese demand, gaining access to the companies with a strong exposure to Chinese, as well as other emerging markets.”

This article was first published in Global Trader Magazine, Issue 3. To read the entire publication, click the ebook.

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