China to become biggest luxury consumer market

Affluent Chinese are keen to look rich and are ready to pay a premium, making the country a good market to sell in, says CLSA.

For Chinese people, it’s not enough to be rich. They have to look rich, and buying luxury goods is the best way to show off their wealth.

Supported by this mentality and with incomes on the rise, consumers in Greater China are expected to account for 44% of global luxury brand sales by 2020. Luxury goods companies have and will continue to expand rapidly in China, where the prices of expensive items such as fine wines jumped 40% during 2010 on strong demand, CLSA has found in a study.

Greater China consumers currently account for 15% of global luxury goods sales.   

The brokerage also found that Hong Kong is the most preferred destination for cross-border affluent shoppers, making the city an ideal place for luxury brands to sell both their physical products and their shares.  

Global brand owners that are listed in the US and Europe only generate about 10% to 30% of sales to Chinese customers due to their lack of presence in Asia, but CLSA reckons that they can obtain 100% pure-play exposure to Chinese luxury demand via a listing in Asia.

Although publicly traded shares in luxury brands have rerated by 57% in 2010, CLSA said it believes valuations are still attractive at an average price-to-earnnings ratio of 22 times. CLSA is one of the bookrunners of Italian fashion designer Prada’s upcoming Hong Kong IPO.

Last year, L’Occitane International, the French producer and retailer of cosmetics and skincare products, chose Hong Kong over Paris and raised $787 million in a popular IPO in the city, making the most of the its products’ popularity in the region. It was the first French company to list in Hong Kong.

CLSA surveyed 340 consumers and 31 luxury store managers in China’s tier-1 to tier-3 cities, and found that 75% of consumers are interested in luxury goods and are willing to pay a premium, with watches and jewellery at the top of the must-have list. About 24% of the respondents earning an average of Rmb41,976 ($6,332) per year said they would spend more than Rmb50,000 on a watch.

Aaron Fischer, regional head of consumer and gaming research at CLSA, believes rising inflation could be positive for the sector as “Chinese shoppers try to buy more before prices become even higher”.

Although the Chinese have a reputation for being ardent savers, saving face and displaying success is highly regarded. It is important that the luxury goods they buy convey the message that they are sophisticated and have good taste. For instance, to dress well and enjoy a luxurious life in public are considered a good way to gain respect.

According to Hurun Research, Chinese millionaires on the mainland have an average age of 39 -- 15 years younger than their overseas peers. The vast majority of them live in the coastal regions and top-tier cities. Beijing, Shanghai and Guangdong are home to 48% of China’s millionaires.

One Chinese businessman who responded to the CLSA survey, said: “A price tag of more than Rmb1 million for a bottle [of wine] does more than show off your wealth, it shows that you have good taste.” This sum up the mentality and proves that the current generation of young Chinese have failed to inherit the thrifty lifestyle of their parents and grandparents.

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