Redefining Luxury
AS THE RANKS OF CHINA'S MONEYED CLASS SWELL TO 200 MILLION AND TASTES ARE INFLUENCED BY THE RELATIVE YOUTH OF THE NOUVEAU RICH, CHINA'S EUR9 -BILLION LUXURY INDUSTRY IS CONSTANTLY EVOLVING. READ ON FOR HIGHLIGHTS FROM CEIBS' 1ST ANNUAL LUXURY BRANDS FORUM, WHICH TOOK A CLOSE LOOK INTO THIS DYNAMIC & INFLUENTIAL INDUSTRY.
By Charmaine N. Clarke
Champagne and caviar, diamonds, furs, and fast cars. Those items used to be - and in some circles still are - the quintessential symbols of luxury. Increasingly, however, the business of luxury has expanded to include unique, adventure-spiced experiences, exotic travel destinations, high culture and the arts. Today's luxury lovers do not just drink fine champagne, a growing number of them can also tell you the history of the drink and likely have visited centuries-old wineries where it is made.
Although a relative newcomer to the world of luxury products and services, China is now experiencing the same expansion of the industry. This change is driven by 195 million upper-middle class, wealthy and affluent consumers who can afford a luxurious lifestyle.
While the term "luxury" in Chinese had an extremely negative meaning just one generation ago - associated with the bourgeois ideals that China's Communist Party was stamping out - mindsets have changed radically in recent decades. According to luxury industry consultant and author Pierre Xiao Lu, a full 64 percent of the country's population now thinks the lap of luxury is not so bad after all.
The ongoing evolution of the luxury brand market - and its consumers - was among the key issues covered during the First Annual Luxury Brands Forum hosted by CEIBS on April 18 and 19. Co-organised by IESE and Fondazione Italia Cina, the day-and-a-half long event featured 17 top luxury industry executives, influential government officials and academic leaders sharing their expertise in "Winning Consumers with Luxury as a Value Added Service."
STAYING RELEVANT
CEIBS Executive President Pedro Nueno opened the forum by explaining why the school - which organizes annual fora on other industries including automobile, banking, media, and healthcare - decided to tackle the luxury brand industry this year. "We must keep our feet on the ground and stay relevant," he said during his welcome address. "The luxury brand sector is remarkable because it is one of the most creative and innovative industries, and because it has experienced such tremendous globalization. For every Euro of sales in this business, there is much more money spent on innovation and globalization than in other industries. This makes it well worthwhile to spend a day-and-a-half studying this industry."
The worldwide luxury market was valued at EUR190 billion in 2006, with the Chinese market estimated to be worth EUR9 billion. It is expected that China will soon edge out Japan as the world's largest consumer of luxury goods, a point made by Fondazione Italia Cina President Cesare Romiti in his welcome address. It comes as no surprise, therefore, that the Fondazione - a marketing umbrella for many high-end Italian brands - is eyeing China. "We hope to serve as a bridge between Italian brands and Chinese consumers," Mr. Romiti said.
With its strong economy, China is seen as a market flush with possibilities. Setting the stage before the forum's first session, which looked at "Winning Chinese Consumers," Vice Chairman of China's Economic System Reform Research Association and Chief of the Shanghai Economic Forecast Institute Mr. Wang Depei pointed out that China's GDP will surge past Germany's in 2008 and bypass the U.S. gross domestic product within a decade. China, Wang predicted, will soon be "the most important market for luxury brands worldwide." For example, while the luxury brand industry is growing by 9 percent annually in Germany, he stressed that Chinese domestic sales of German brand-name luxury goods are increasing by 40 percent annually.
CULTURES TASTES AND PREFERENCES FROM ZEGNA, TOUS & TORRES
As the forum's first featured luxury brand representative, Ermenegildo Zegna Holditalia SpA President Mr. Paolo Zegna spoke on "Winning Chinese Consumers." Zegna stressed that Asia, and China in particular, is an increasingly hot market. Today, Asia accounts for 33 percent of Ermenegildo Zegna's sales while 12 percent flows from China. The company president stressed that emerging markets are now the key "drivers" in the company's growth, with 25 percent of global growth for the brand coming from the combined markets of China, India, Russia, Latin America, Middle East and Southeast Asia. By 2010, that percentage should reach 33 percent.
The Luxury Brands Forum next featured the sectors of jewellery and wines & spirits, which together accounted for EUR110 billion of the EUR190 billion global luxury market in 2006. Tous Co-President Mrs. Rosa Tous spoke on "Entrepreneurship in the Jewellery Sector" while Torres President Mr. Miguel Torres addressed "Tradition and Business" in the wine industry.
Tous' sales target for 2008 is EUR405 million, generated from 5 million product units. The secret to the company's success, she said, is simple: working hard to make clients happy. "For the beautiful, independent, fast-changing, white-collar ladies, they need good quality jewellery, not [just] high-priced ones. Young people like things that show their special personality. Our ability to surprise our customers is the unique quality we have."
During his address on the tradition and business side of high-end wines, Torres' President outlined the 138 year-old family business' history and its current mission to become a market leader "by marketing products with clearly defined character, constantly improving quality and design, and communicating the culture of wine." In 2006, during which the China market for spirits and wines reached EUR3 billion, Torres was the most heavily distributed Spanish wine in China and the second biggest wine importer in Shanghai. The company now has offices in Shanghai, Beijing, Canton, and more growth is planned for 2008. Miguel Torres says: "This year, we plan to expand by 20 distribution routes in China."
LUXURY BEGINS WITH CREATIVITY
Session Three, "Creativity and Luxury Brands," began even before the speakers said a word. The signature bright red lips and fashionable black suit of Chairwoman of the House of Yue-Sai, Ms. Yue-Sai Kan, contrasted sharply with the playfully vivid orange, pink and purple hues favoured by designer Ms. Agatha Ruiz de la Prada. Both women had chosen to express their famous creativity in distinctly different ways.
Taking to the podium first to speak on the transition "From Media to Business," Kan told the audience how she leveraged her popularity as a TV personality into the building of a solid fashion brand. To onlookers, her success may have seemed effortless but Kan candidly spoke of the challenges she faced during her journey from the world of media to becoming a businesswoman. "CCTV made me well-known in China... but it didn't mean the brand was well-known by itself. That's very different. Being famous doesn't mean you have a brand," she said. Kan had also been lucky, she added, because she had been "at the right place at the right time," ready to fill the changing needs of Chinese consumers. "China is open to the world now," she said.
"Art, Design and Fashion" was the topic discussed by Agatha Ruiz de la Prada, chief designer of the company that bears her name, and the firm's General Manager Mr. Fernando Aguirre. For Mr. Aguirre, art, design and fashion are inextricably intertwined. "Fashion is the expression of culture [and the] notion of art is very heavily influenced by fashion," he said, adding that these traits are visible in the Spanish company's designs.
Though her company is a fierce competitor in a niche market where price is often equated with quality, Ruiz de la Prada believes luxury should focus on beauty, and need not be expensive. "You can only sell your product [if it has a] good price," she said. She believes in "democracy in fashion", meaning that fashion should not be priced so highly that it is only accessible to an elite few. For example, one of her favourite companies to co-brand with is Swatch, which creates watches that are affordable and fashionable for large populations of diverse consumers worldwide.
Shifting her focus to the China market, Ruiz de la Prada said she hopes that more domestic brands will break into the luxury market. "I'm looking forward to seeing Chinese style from Chinese works in the future," she said.
THE ACADEMICS OF LUXURY
The penultimate session of the forum's first day brought an academic perspective to the discussions, with presentations from Professor Michel Chevalier, the co-author of
Luxury Brand Management, and Assistant Professor Pierre Xiao Lu, author of
Elite China, Chinese Luxury Consumers. Their discussion of "Luxury Brand Management" provided insight into the size of the Chinese luxury market; today's successful brands; and current attitudes of Chinese consumers towards luxury goods. Mr. Chevalier, Visiting Professor at Paris Dauphine University, is also a consultant with EIM's Paris and Shanghai locations. Mr. Lu is Assistant Professor at both Fudan University in Shanghai and Essec in Paris.
Prof. Chevalier told the audience that, while China may only account for 5 percent of the global luxury market, it is not a market that can be ignored. On par with France in the number (345,000) of consumers with disposable income above US$1 million, and having the distinction of being the country with the world's youngest millionaires, China offers huge growth potential for high-end products. Prof. Chevalier explained that, coupled with Japan, China accounts for half the global fashion sales volume. Even more noteworthy: because of China's steadily increasing growth and Japan's slowdown, China's fashion sales volumes will surpass Japan's by 2015 at the latest.
That growth is driven by what Prof. Lu described as four categories of Chinese consumers: the status-seeking luxury lovers (15%); those who see luxury items as a way to belong to a social group, the luxury followers (22%); the luxury intellectuals (35%) whose purchases are based on a search for knowledge, heritage and value; and the luxury laggards (28%) who simply follow others' lead. Overall, their data provided good news for the suppliers of high-end products about the general attitude of Chinese consumers. "We can say that 64% of Chinese people think consuming luxury goods is something that can give you a successful image; it's quite positive. And only 1 percent think that [luxury goods] are only very superficial things," explained Prof. Lu.
This wider embracing of luxury goods items has translated into big bucks for some middle-class international brands that have seized the opportunity to reposition themselves while entering the China market. This strategy has worked because many Chinese consumers equate high-priced foreign made products with quality. According to Prof. Lu, China's consumers are not the only ones who have a lot to learn about the luxury industry. "For example, the owners of shopping malls classify the brands by using retailing price. So if your merchandise is very expensive, you can stay on the [heavily trafficked] ground floor. In fact, that is not the original luxury concept. It is also not the trend in the world, and so we [in China] need a lot of education about the market," he said.
LESSONS FROM MILAN
Milan, one of the fashion capitals of the world, should have many lessons to offer China's nascent luxury brands industry. In fact some of that valuable advice came, at the end of the forum's first day, from President of Camera Nazionale della Moda Italiana (CNMI) Mr. Mario Boselli. A non-profit organization that represents more than 200 Italian fashion companies, CNMI's objective is to "safeguard, coordinate, manage, spread and strengthen the excellence and the image of fashion both in Italy and throughout the world."
Italian fashion companies had a total turnover of EUR69.26 million in 2007 with the figure expected to reach EUR69.96 million this year. Mr. Boselli stressed that one important component of this triumph had resulted from turning out "beautiful and well made" products.
THE VIEW FROM HERE
While the forum's first day ended with much-valued insight from Italy, Day Two began with an opportunity for audience members to hear the views of companies that have an established track record in China's luxury market. LVMH Group Director for China Mr. Andrew Wu was the first to take to the podium with a presentation examining the issue of "Benefiting from China's Generational Transformation." In a speech entitled "From the Great Wall to the Great Mall," Wu traced China's consumer evolution and probed the implications of these changes for both the domestic and global luxury markets. "From Cultural Revolution to the consumer revolution; from when we had nothing, to a lot of billionaires. From closed door to not just open door but to open mind, that's the era we are in," he said. "We are actually witnessing a very important change."
Wu anticipates that the Chinese retail market will double in less than six years, largely because of the buying power of the younger generation. "That generation is already showing its impact on consumption, influencing the luxury goods market a bit. The challenge for marketers, industries and the government is how to ride this generational change," Mr. Wu urged.
That evolution can also be seen from the experiences of China's independent brands, such as EVE Enterprises Group. In her address on "The Development Road of Independent Brands in China" company president Ms. Xia Hua shared with the audience her company's stages of development over the last 14 years.
President of Shanshan Group Mr. Zheng Yonggang then offered his thoughts on the luxury industry from the perspective of "A Multi-Brand Chinese Company." People, he said, are willing to spend a lot of money on luxury items (even though production costs are sometimes only 10 percent of their sale price) because these purchases add a level of prestige to their lives. However in China's rapidly changing environment, it may be difficult to know - let alone influence - what consumers want.
GETTING THE WORD OUT
The topic for the next session was "Creating Brand Awareness in the Chinese Market" and the panellists were representatives from Publicis, a global leader in communications and marketing solutions. Chief Strategy Officer for Publicis Greater China George Singleton urged the audience, comprised of representatives from some of the luxury industry's big names, to understand the global changes taking place and how these changes will impact the way they interact with consumers. With a dramatic increase in Asia's middle class population, and their inclination to spend money on high-end goods and unique experiences, producers and marketers of luxury goods must keep up with all the changes, he said. According to Mr. Singleton, even the mere definition of luxury is evolving. "It's less about what you carry in your hand and more about what you carry in your head. It's no longer about showing people you can afford something, it's the knowledge about the product, why it is good, its origin, what makes it different from others," he said.
Changes are also evident in specific sectors, like health care. In response to a question from the audience, Publicis China CEO Ms. Sheena Jeng spoke of future trends in China's high-end health care market. While pharmaceutical companies now contribute 15% of China's advertising revenue, she said, the premium health care industry - such as spas and cosmetic surgery - still has some growing to do. "We don't have a successful premium health care market, but it's developing," she said.
ONGONING DIALOGUE
After two days of talks, it was evident that there was a lot of room for even more discussion about "Winning Consumers with Luxury as a Value Added Service. "I think these discussions have given us an in-depth perspective; but there are still questions left unanswered," said CEIBS Executive President Pedro Nueno during his closing address. Word is still out, for example, on when Chinese brands will make a significant impact on the global luxury industry, and there are still a range of opinions about how to define luxury. One thing that is clear, however, is that the definition, like the industry, is constantly evolving.
