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A rapidly expanding middle and upper class in China seeks to enhance its identity and quality of life with luxury goods. Top growth categories for luxury goods in China include liquor, fashion accessories/clothes, automobiles, jewelery, and cosmetics. Counterfeit luxury goods do offer some competition and luxury taxes somewhat dampen demand, but not much.
China is a hot market for luxury goods. For luxury goods manufacturers who can survive counterfeit products, luxury taxes, and consumer education, great rewards await. Investment plays include not only luxury goods houses like LVMH, Prada, and Armani, but also advertisers to the affluent and retailers focused on up-market clientele.
Despite a populace dominated by peasants on a subsistence income, China is now the third largest luxury goods market in the world, accounting for 12 percent of sales worldwide in 2006. Analysts predict that, as China’s average per capita income grows, it will become the world's second-largest purchaser of luxury goods by 2015, surpassing Japan's vaunted luxury demand and accounting for the sale of 29 percent of all luxury good sales worldwide. The China Daily reports that the market is forecasted to grow 20 percent annually until 2008 and then 10 percent per year until 2015.
Some Chinese spending is driven by people’s desire to enhance their own social status and visibility by an association with famous brand names. Not many years ago, it was not an uncommon sight to see owners of a new suit or that conspicuously “forget” to remove the brand name and price tag that revealed the maker and high price of their new apparel. The China Brand Association recently said about that 13 percent of Chinese, about 170 million people, regularly buy top-tier brands. Meanwhile AC Nielsen believes that, “to succeed, luxury-goods companies must woo the top segment of the Chinese consumer market — the 15 million people who earn 250,000 yuan ($32,000) or more a year.”
According to news reports from China Finance Information, a December 2005 report from Goldman Sachs measured China's luxury goods market, excluding private aircraft and yachts, at $6 billion. However over 80% of China’s luxury purchases occur outside of China, from Chinese tourists' purchases abroad. The growth in Chinese tourists is likely to further promote the growth of China’s luxury market because Chinese traveling abroad will increase their brand name recognition. Also, recently the Chinese government doubled the amount of funds Chinese tourists are allowed to bring abroad. As more countries like France and Italy become favorite destinations of Chinese tourists, they will learn about even more luxury goods.
Right now, China’s largest group of luxury goods consumers are between 20 and 30 years old, which means they have many traveling years still ahead of them. A recent survey of young China urbanites showed that over 60% believe that one should "enjoy life now" and thus it is appropriate to spend more on high quality items.
The car industry in China highlights this trend. Despite an average per capita income on less than $4000, Bentley has sold more Mulliner 728 limousines – the most expensive car in the world, retailing at $1.2 million - in Beijing than anywhere else in the world. Likewise, BMW, not exactly a provider of “generic” transportation, sold over 23,600 BMWs in China in 2005. Automobile industry analysts predict that China will soon become the world's largest market for luxury automobiles.
One event where high-end car manufacturers have flocked is the “Millionaire’s Fair” in Shanghai, a recurring event at the Shanghai Exhibition Center where attendees are charged 350 yuan ($44) for an entrance ticket. At the 2006 Fair, Porsche launched its Cayenne Turbo 2 in China, retailing for 1.68 million yuan ($210,000), Ford Motor's Range Rover launched its 2006 Super Charger, retailing for 1.75 million yuan ($220,000), and Ford Motor's Jaguar introduced its XK, retailing for 1.4 million yuan ($175,000). At the 2006 “Millionaire’s Fair” in Shanghai, organizers expected to sell 500 million yuan ($62.5 million) of products overall, representing a 100% increase from the prior year’s sales of 250 million yuan.
Ultra-high end purchases, such as the Bentley limousines, are being consumed by China’s rapidly growing, but still tiny, share of millionaires – whom Merrill Lynch and Cap Gemini estimate to be about 300,000 people.  However many far less wealthy Chinese still have disposable income and are consuming “affordable luxuries.”
LVMH, one of the leading luxury goods manufacturers in the world (known for its Veuve Cliquot Champagne, Christian Dior fashions, and Tag Heuer watches), is already branching into less well-known Chinese cities, such as Shenyang, Wenzhou, and Chengdu. It plans to enter two new cities per year in China. Such expansion, however, is not necessarily a loss-leader for some players – LVMH reports that every single store has been profitable every year since it entered China in 1992. LVMH reports that its China and Hong Kong operations, when combined, already exceed its sales in Japan. By contrast, Paul Smith and Moschino have reported losses at the beginning of their China expansion.
Bulgari add two stores in Hong Kong and Beijing in 2005, increasing the jeweler's total number of outlets in the greater China region to 17. Rather than limits itself to the coastal regions, Bulgari’s Chief Executive Officer stated that "there are 14 cities that can be of interest" in China. Meanwhile Prada, with 22 outlets, has built a flagship store in Shanghai and plans continued growth.
The Hurun Report, a socialite magazine in Shanghai, interviewed 600 Chinese millionaires to identify their preferred brands. Among their selections were Christie's as the best auction house; Vacheron Constantin as the best watch; Davidoff as the best cigar, Giorgio Armani as the best designer; Hennessy, Chivas Regal, and Dom Perignon as the best liquors; Princess as the best yacht; and Ferrari as the best sports car.
It is not just luxury good manufacturers who are profiting. Luxury retailers are also growing rapidly. Fancy boutiques featuring Italian suits are springing up even in less prestigious cities, like Shenyang and Wuhan. The Cartier jewelry chain, which said its revenues in China nearly doubled in 2005, recently created a massive ice replica of its flagship Paris store at the famous winter festival in northern Harbin city. Ultimately they expect to open thirty stores in China, making it their second largest market after the United States.
Likewise, advertising firms are profiting from the incessant promotion of fashion and luxury goods. While most luxury goods have a high gross margin, the sales and marketing required to sell the goods is often extensive. This translates into hundreds of pages of chic advertisements in all the leading magazines, combined with billboards, television spots, and product placement. According to the China Advertising Industry Development Forum, advertising sales in China in 2006 totaled 157.3 billion yuan ($20.5 billion).  Nielsen Media Research offers a higher estimate, claiming that China's advertising expenditure via television, newspapers and magazines reached 386.6 billion yuan - US$ 49.5 billion- in 2006.
All agree that China ranks now the third in the global advertising market, tied with the UK and behind the US and Japan, however China’s market is growing at a much faster rate and its growth potential remains huge because advertising spending accounted for only 1.4% of GDP versus 3% in the US. As the 2008 Olympic Games approach, this number is expected to grow further. Three of the five largest industry spenders on advertising are food, cosmetics, and automobiles – all industries where luxury goods abound. In 2006, nearly half of this advertising was focused on Shanghai, Beijing and Guangdong, the largest regional economies in China.
Focus Media has developed a novel attempt to benefit from advertising directed at China’s most affluent consumers. China’s television networks lack long-running dramas and comedy shows like Friends or Cheers. Instead, new shows are filmed and episodes are screened every day for a month or so. Thus, advertisers have no advance knowledge of which shows will be successful or attract a certain viewing demographic. FocusMedia averts this challenge by channeling advertising to its own screens, rather than to unpredictable television. Focus Media has deployed thousands of LCD monitors in office buildings, retail stores, and apartment complexes. While people queue for elevators or wait on appointments they are provided with advertisements on these screens. Focus Media offers targeting to marketers by locating their screen in locations where more affluent Chinese consumers are likely to be located. During the second quarter of 2006, Focus Media earned total revenue of $50.6 million USD and net income reached $16.7 million, a 283.4% increase over the second quarter of the previous year.
Traditional advertising firms like WPP Group (owner of Ogilvy & Mather and others), and Saatchi and Saatchi are also active in China. As of 2005, WPP was the largest buyer of ad space on Chinese television (CCTV) and generated $350 million of revenue.
Luxury rely in large part upon their prestigious brand name. This is a particularly large problem in China, where it is reported that 20% of all consumer goods may be counterfeit. At a recent luxury goods industry conference in Hong Kong, companies said China's lack of a system of intellectual property rights is the biggest problem they face in the country.
In addition to direct counterfeits, luxury goods in China also face "bang mingpai," which literally translates as "relative of a famous brand.” Illegal variants of famous Italian brand Valentino, for example, can be found in Chinese street stalls with names like Valentino Vani, Auotis Valentino, Valenteno Guci and Valentian Coupeau. These goods are typically sold for less than the price of the original brand. There are more than 200 different Valentino" brands in China, said Valeria Azario, an executive with V.S. Ltd., which manages the original Italian Valentino brand.
In April 2006, the Chinese government announced an increase in taxes on certain luxury goods, including watches, golf clubs, cars with large engines, and yachts. Further tax increases on high-end luxury items are expected in 2007. This luxury tax hike has not affected lower-price luxuries, such as shampoo and skincare products, as taxes on those items actually decreased in 2006.