Why China drives luxury

The future for luxury good brands is very much a Chinese one.

A former Soviet era building may not seem the ideal venue to house a conference on luxury goods, but its location - Shanghai - says a great deal about where the world's luxury brands see the future.

The event brought together the heads of many of the world's top luxury brands and the message was as precise as a Vacheron Constantin watch: the future of the luxury good industry is China. For while the luxury market has long been driven by Japanese consumption (38% of the luxury segment), the evidence suggests that Japan's poll position will wane and it is China that is set to displace it as the biggest buyer of luxury goods in the world.

Indeed, Galerie Lafayette on Paris's exclusive Boulevard Haussmann has already seen the number of Chinese consumers top Japanese.

The conference's keynote speaker was Patrizio Bertelli, the chairman and CEO of the Prada Group. He said the biggest conundrum facing the luxury world was how to use Chinese labour without sacrificing quality.

He said the "Made in Italy" concept was a touchy subject in his homeland. For hundreds of years, Italy has relied on its artisans and craftsmen to guarantee goods are produced with a reputation for the highest quality. However, labour costs in Italy are exorbitant and Bertelli said his strategy was to move from marketing Prada based on labels that trumpeted their "Made in Italy" marque to one that just said "Made by Prada".

Among Italian luxury CEOs he is at the vanguard of this trend and admitted it was controversial. But he pointed out that with so much outsourcing now possible it was a reality. "If my product is made in 10 different countries, the label should instead say Made by Prada. But I recognize this is a major political issue."

The other issue that China raises for the luxury world is obviously that of counterfeiting. There were mixed views on this topic but said Jacques-Franck Dossin, who heads luxury research for Goldman Sachs: "It is ultimately a dangerous thing to the industry, but in the short term it may help raise awareness of some of the luxury brands, especially the new ones. People buy counterfeit products because they can't afford the real ones, but they do aspire to the genuine products and when they have money, they will trade up. Interestingly, Chinese consumers are very particular about buying the genuine products. People fly to Hong Kong, for example, to make sure they get the real stuff."

Understanding the evolving Chinese consumer will be key for the tycoons of the luxury world. A survey that was published during the two day Shanghai conference – which was organized by the FT – noted that Chinese luxury consumers are currently less sophisticated than their Russian brethren and have a preference for the showiest brands, with the most easily recognized labels. The most established luxury marques are therefore doing the best in China since it is more about showing your friends you have money than a reflection of taste.

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