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Portfolio > Economy & Markets

China’s Own Luxury Brands Can’t Keep Up With Foreign Competition

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The rise of the high-net-worth consumer in China has been a boon for luxury firms all over the world. But at home, perhaps not so much. Domestic Chinese luxury brands find it tough going to win Chinese HNW customers, although that may be poised for change.

Luxury brands from Europe and the U.S. have been expanding into China, with mixed results—occasional failures to understand the Chinese HNW consumer have resulted in some faux pas, such as one by Swiss watchmaker Longines detailed in a McKinsey report.

When the company first sought business in China, it launched a brasher product line specifically aimed at the Chinese HNW shopper that was unique to China. However, the fact that the specially designed product line was so different from Longines products sold elsewhere in the world aroused Chinese HNW consumer suspicion instead of desire, and the products failed. Once Longines changed its approach and instead focused on marketing classic elegance, its products became popular.

Chinese HNW consumers do much of their shopping while traveling. A recent KPMG report, Global Reach of China Luxury, reported that 71% of mainland Chinese respondents engaged in overseas travel in 2012; in 2008 only 53% did so. And 72% of those said they used overseas trips to purchase luxury items such as watches, handbags, and cosmetics. They also browse the Internet to research luxury brands; armed with specifics, they hit the shops when abroad, and bring home all sorts of luxury goods.

The traveling shopper has become so iconic, and the slowdown in Chinese luxury spending so marked, that many foreign luxury companies that built up a presence on the mainland have resorted to casino-style junkets for wealthy shoppers, organizing trips to Hong Kong to tempt buyers unmoved by the higher prices in mainland shops.

High-end brands host private events for their wealthy clients in Shanghai or Beijing, much as casinos do for their high rollers; the HNW shopping clients use the event to put down a deposit on goods that they then pick up, at a lower price than on the mainland, after they’ve been flown to Hong Kong by the brand. Swiss luxury watch brand Piaget has hosted two such all-inclusive trips per year for a group of 50 well-heeled clients, but this year plans to do more.

That doesn’t mean the brands are abandoning their presence on the mainland; they keep them as a way to woo purchasers to consider their wares.

Meanwhile, Chinese luxury brands have had slow going at home. The HNW on the mainland have more respect for old European brands, for their traditions and quality, and have not been enamored of companies at home. According to David Friedman, president of WealthX. “The Chinese luxury palate and appetite is on an evolutionary growth spectrum. They are learning about luxury, and so their tastes are evolving based on education around brands and quality,” he said.

 “If you put two diamonds, [for example,] in front of the Asian buyer that are the exact same clarity, size, and color, but one is three times as much and [carries the] Harry Winston brand, they will buy that one [despite the price difference],” Friedman said.

That said, Chinese luxury consumers are “increasing their confidence in what they like, versus being told what to like by a luxury brand,” said Friedman. “The window of opportunity for luxury brands now is to take advantage of this educational cycle for the luxury buyer based on their brand equity. I’ve heard some jewelry and fashion executives say that the Chinese luxury buyer is where the Russian [luxury] buyer was 10-15 years ago. So [eventually] it will be more about what they like, and quality vs. brand, but right now it’s heavily weighted on the brand to tell them what luxury is.”

The expansion of luxury European firms into China has resulted in some interesting outcomes. Hermès, for example, engaged a Chinese creative director some three years ago and developed an independent luxury company, Shang Xia, in Shanghai. Estée Lauder launched a skin care line, Osiao, made with Chinese ingredients such as ginseng. And Chinese luxury jeweler Qeelin was bought by Kering, formerly PPR, at the end of last year. More such collaborations are likely, particularly since an acquired Chinese company will have insights into the Chinese luxury consumer’s behavior that cannot be matched by Western firms.

And the reverse has even happened, with Chinese companies going abroad to open manufacturing facilities in the countries where craftsmanship is respected—such as Italy, which has seen inroads made into its own fashion industry (see Squeezing Italy). Thousands of Chinese-run companies have set up shop in Tuscany’s Prato, where they use Chinese-manufactured textiles to make clothing that they then export to those looking for Italian-made garments at a bargain price.

All may not be lost, however, for mainland Chinese luxury brands. China’s First Lady Peng Liyuan, who was the country’s most famous singer before ascending to her present position, caused a stir in April when she accompanied her husband, President Xi Jinping, on his first official trip to Russia. The reason? Liyuan wore elegant clothing designed, not by a French or Italian fashion house, but by mainland China designers. The handbag she carried was not Prada or Louis Vuitton, but Guangzhou-based brand Exception de Mixmind. The handbag sold out, and the coat, another creation from the same designer, experienced a bump in popularity.

 “The luxury buyer sees something made in China [but isn’t buying it, in favor of something] made in Italy, in Europe. It doesn’t mean there aren’t luxury products in China, but they don’t have the brand legacy,” Friedman said. “[European] luxury providers have decades and decades of experience and family members [in the business] going back [generations]. Paris, Italy … it’s challenging to match that mystique. But there are brands popping up in China that are creating their own heritage.”


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