PARIS — Is the recent slowdown in Chinese consumption of luxury goods a worrisome omen, or simply a tiny fissure in a great wall of future opportunity?
HSBC equity analyst Erwan Rambourg is definitely of the latter school of thought, arguing that currency swings and shifting travel patterns may be behind recent trends. He’s also adamant that many observers have exaggerated the impact of the anticorruption campaign initiated by the Xi-Li administration in China back in 2012. He does allow, though, that corporate gifting has taken a hit, dampening consumption of high-end watches and spirits.
“But the fundamentals of growth — middle-class expansion, greater access to travel, lack of local substitutes, greater female participation in luxury goods purchasing — are intact,” said Rambourg, who elaborates on his confidence in China in a new book, “The Bling Dynasty,” published by Wiley and due out later this month in Asia and the following month in Europe.
Related Galleries
While organized like a textbook, and thoroughly researched, Rambourg adopts an engaging, conversational tone to explain the complexities of the market and the consumer mind-set.
A Frenchman who relocated to Hong Kong in 2011 as managing director and co-head of HSBC’s global consumer and retail equity research, Rambourg has witnessed the emergence of a new luxury Eldorado from close proximity. According to his estimates, Chinese consumers will drive 35 percent of global luxury sales in 2015 and will account for more than half of purchases by 2025.
In a wide-ranging conversation with WWD, Rambourg shared his insights:
WWD: Your book seems to be targeted at doubters about China’s long-term potential. Are there still a lot out there?
Erwan Rambourg: Some brand managers have taken the view that future growth will come with other nationalities than the Chinese. Part of this could be wishful thinking as it will be reassuring for them to have the impression they are having eggs in many baskets rather than risking Chinese overdependence.
WWD: Is the anticorruption crackdown still a factor, or old news?
E.R.: There was a steep slowdown in 2013, notably on high-end watch sales and the bigger brands. Today, it’s fair to consider that the bulk of the cleanout is behind us and there are currently signs of a slight pick-up in watch demand in China. Now growth has become the reflection of true underlying sales driven by personal gifting and self-purchasing.
WWD: Did luxury pioneers in China win a clear competitive advantage?
E.R.: Omega created the Chinese high-end watch segment. Similarly, Louis Vuitton created the handbags and accessories market. These companies have thus benefited from the better locations, the better rent terms — having an anchor-tenant status — and great recruitment potential with the up-and-coming middle class.
The issue now with more-traveled, knowledgeable Chinese consumers is that pioneers are the victims of a sort of “first-mover disadvantage.” Chinese still want to fit in and display social status, but have moved away from the more ubiquitous, obvious brands that initially shaped the market.
WWD: Is it too late for brands to enter China now?
E.R.: It’s not too late. If your brand is legitimate in your home market and you stay true to your values, Chinese could well have an interest to purchase your goods. Chinese do not want to buy brands they see as being developed for them — some brands may have penetrated the Chinese market too quickly or aggressively and will be seen as being “Chinese” brands. Chinese consumers tend to not want to purchase Chinese brands if given an alternative.
WWD: What other windows of opportunity do you spy?
E.R.: Via travel, Chinese are discovering a broader array of brands and in soft luxury — handbags, apparel, accessories — they are realizing that there are cheaper alternatives to the traditional French and Italian brands, whether American or Korean.
In my view, imported jewelry is the up-and-coming category from the West as Chinese consumption becomes more female driven and self-purchasing habits develop on top of the traditional consumption for the big life events — weddings, births, etc. — for which the well-established Hong Kong and China jewelers selling gold and jade should remain dominant.
WWD: Are there brands that are already at risk of ubiquity in China? And what exactly are the risks of ubiquity?
E.R.: Louis Vuitton or Gucci have been seen as too ubiquitous, with consumers commenting along the lines of “you’re my mother’s brand; you’re a brand for secretaries; I’ve seen you too much.” The issue of weariness weighs on the brand appeal and its pricing power. It’s what I call the French paradox in the book: Wanting to sell what is supposed to be exclusive is a fundamental puzzle. There are ways to re-create the illusion (or even the reality) of scarcity to regain those weary consumers but it’s a long and painful journey on which both Louis Vuitton and Gucci have embarked.
WWD: In what ways are there similarities with Japan’s development?
E.R.: Chinese have adopted the same brands that are successful in Japan. Cognac was big in Japan, it then became big in China. Louis Vuitton’s sales just 10 years ago were dominated by Japanese consumption, they are now driven by the Chinese.
WWD: Any fundamental differences with Japan?
E.R.: Yes. Chinese look at luxury purchases as a way to stand out of the crowd. Japanese looked at the space as a way to fit in. Also, Chinese consumption was initially male-driven while Japanese consumption still remains predominantly driven by the so-called “office lady” or “pink-collar worker.” Finally, Japanese purchases are incrementally local, Chinese purchases tend to take place more and more abroad
WWD: Everyone talks about how sophisticated the Chinese consumer is becoming. How do you account for that?
E.R.: The Chinese are learning fast with travel, blogs and forums and their level of awareness and knowledge are soaring. I think you don’t hear much about the other BRIC countries, as they are less relevant for many reasons.
WWD: What are some of those reasons?
E.R.: Russia is an extreme market in the sense that elites are very wealthy, but it involves very few people. Brazil’s middle class may have triggered consumers to trade up from cachaça to imported vodka or whisky, but Swiss-made high-end watches or fancy Italian leather handbags are still largely out of reach. The way Indian nationals view brands and Western luxury is unique as there are homegrown substitutes. Raw material quality can be seen as a more important attribute than branding or fancy designs.
WWD: Are European brands still king with Chinese luxury consumers?
E.R.: Obviously French and Italian brands have often a history, a cachet and a storytelling power that set them apart. The preferences are changing quickly though, and the market is crowded. British-ness is associated with music, a rebel attitude, a certain coolness associated to London, which has undoubtedly helped a brand like Burberry gain traction. Speaking of cool, I am a great believer in the rosy future of both American and Korean brands in China. In the book, I mention the example of Starbucks as being a surprising success especially as there seems to be strong, quasi-scientific evidence that Chinese do not like coffee. Being an American brand helps. Outside of the classic definition of luxury, Korean brands are probably the ones that trigger the most excitement from Chinese consumers and the so-called Korean wave is not at all a fad in my view. Whether in cosmetics, smartphones, autos, leather goods, food, sportswear and more, the Koreans should exert a greater influence on Chinese consumption. With the exception of Swiss-made watches, the importance of the “made in” is waning.
WWD: Do personal luxury goods in China compete for consumer dollars with other discretionary categories — travel, home furnishings, technology — as they do in more-mature markets?
E.R.: The first time I went to Korea, I asked a luxury brand manager who his biggest competitor was and he answered “cosmetic surgery.” I initially thought it was a joke, but I very quickly realized that budget competition is a reality and thinking in silos — Vuitton is my competitor if I’m Gucci — is far from the consumer’s reality. So yes, Apple, travel, Zara, cosmetic surgery and more are competing with luxury. Discretionary spending is a small part of the consumer’s wallet and luxury brands don’t get all of it.
WWD: Do you have any predictions about which countries or cities are best positioned long-term to benefit from Chinese tourist flows?
E.R.: Wealthy Chinese will have been to Europe and Hong Kong. The destinations that can benefit most from the incremental Chinese outbound travel could be farther destinations, more exotic ones, those where regulation has been easing lately and those presenting cultural interests. These include the U.S., Korea, Taiwan and Macau, with Dubai, Australia and Thailand among possible new, exotic discoveries.
WWD: Do Chinese luxury consumers most resemble European consumers, Americans, Russian or any other nationality?
E.R.: Where Chinese consumers are different — apart from the fact that they are increasingly female now, as apposed to being male-dominated initially — is in their age. They will be 10 years younger than their European counterparts and 15-plus years younger than luxury consumers in the U.S.
Chinese are becoming closer to the American luxury consumers, looking for value for money, starting to embrace outlets in a small way, and cognizant of what price they should be paying for any given product. At the same time, American consumers are becoming more like the Chinese, and letting go of the idea of quiet money. They’re moving from a culture of value-for-money to a culture where it’s more acceptable to reward yourself, and to trade up to premium brands and products.
WWD: Is it a real misnomer to talk about China as one market?
E.R.: Indeed, there is not one China market either as pockets of wealth emerge in different areas. Who would have thought it made sense to open stores in Ürümqi, whereas some cities are over-retailed, like Chengdu and Shenyang.
WWD: Which statistics did you uncover about China that made you look twice?
E.R.: Only 4 percent of Chinese citizens hold a passport. That means Chinese outbound travel is in its infancy. People complaining about long queues outside luxury shops in Milan or Paris better get used to it. The future of luxury will be about service, customization and being nimble.
WWD: How soon do you think homegrown brands can be a challenge to foreign brands?
E.R.: Brands of Chinese origin suffer from Chinese citizens having a negative perception of products made in China and feeling that purchasing imported products is a status enhancer. Chinese brands can be successful, but there will need to be time and patience and dedicated management teams to overcome hurdles.
One of the insights uncovered while interviewing Chinese consumers is the threat that Korean-origin brands may eventually pose to the traditional Western brands. There is a lot to say about the origins and the future of this phenomenon…but that would probably take another book.