China's luxury market

Luxury is recession-proof, says CLSA

Even a slowdown in economic growth will not dent China's appetite for luxury goods, according to CLSA's Aaron Fischer.
<div style="text-align: left;">
Prada was among the first high-profile foreign companies to list in Hong Kong (AFP)
<div style="text-align: left;"> Prada was among the first high-profile foreign companies to list in Hong Kong (AFP) </div>

CLSA Asia Pacific Markets expects that the global luxury goods market will grow by 8% during 2012, largely driven by robust demand in Greater China, which is expected to grow by 25% during the year.

“We think that the demand for luxury goods in China and Asia is driven by the rise of the middle class, and that is a structural story,” Aaron Fischer, Asia-Pacific head of consumer and gaming research at CLSA, told FinanceAsia in a telephone interview last week.

This powerful driver for demand will likely continue for another five to 10 years, he added.

“We don’t really believe that luxury goods are a cyclical story. If there’s a mild slowdown in economic activity in China, we don’t think that will have a negative impact on demand for luxury goods,” Fischer said.

His team’s conclusions are based on their analysis of how the market has developed in Japan. China will probably follow a similar path, they predict, though it has even more room for growth than was the case in Japan.

Greater China accounted for 21% of the €198 billion ($263 billion) global luxury goods market in 2011. By 2020, demand from the region will account for 52% of the world market, Fischer wrote in a report in late December.

“The key element is the really huge increase in the level of Chinese outbound tourists,” Fischer said during the interview. “That’s driving a lot of demand for stores and places like London, Paris and Milan.”

Meanwhile, Hong Kong last year attracted a host of initial public offerings from well-known foreign luxury brands, drawn by the booming demand for their products in China. Some also say that investors in Asia, or those who focus on Asian stocks, have a better understanding of the China growth story and how it will affect their businesses.

Prada and luggage specialist Samsonite were among the high-profile foreign companies to list in Hong Kong, raising $2.1 billion and $1.25 billion, respectively. The pipeline for this year includes the London-based diamond retailer Graff Diamonds, which is reportedly seeking about $1 billion from a listing that is expected in the first half of this year. It already has stores in cities such as Tokyo, Hong Kong, Shanghai, Beijing and Taipei.

Fischer said listings by foreign brands in Hong Kong are the right idea and the trend will likely continue.

“We believe that by listing in Asia it results in an increased level of brand awareness,” he said. “If you are a luxury goods company and looking to list globally, the best place to do that will be in Hong Kong.”

Hong Kong was the world’s top destination for new listings in 2011 for the third year in a row, although volumes dropped more than 40% in non-Japan Asia’s equity capital markets last year.

While the rapid growth of China’s economy has led to the emergence of a burgeoning middle class and boosted discretionary spending, it has also become apparent that the gap between the rich and the poor has widened considerably.

Chinese premier Wen Jiabao said last year that ensuring fairer income distribution would be an important task for the government during the coming five years as inequality has a direct bearing on social justice and stability, according to a report by the official Xinhua news agency.

Beijing has also moved to control luxury advertising in the capital, asking companies to remove words such as “luxury” and “royal”, according to media reports.

Still, Fischer said that China is still the strongest market in terms of demand for luxury goods, though he noted that there is potential in any country with a growing middle class.

“I don’t want to rule out Latin America and the Middle East. They are attractive markets as well,” he said. “And over time there’ll be more opportunity in India and Indonesia, and some other Southeast Asian countries like Vietnam.”

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media