The lure of China's new rich
Jasmine Yap Bloomberg News
Thursday, May 20, 2004
Despite proliferation of fakes, sales of luxury goods jump
Giorgio Armani was so impressed by a fake Armani watch he bought for $21 in Shanghai that he decided to make some watches in China at a lower cost. Now the Italian fashion designer plans to open 30 boutiques in the country by 2008.
"It was an identical copy" of a watch that sells for about five times the price he paid, Armani, 69, said last month in Hong Kong, where he ended a promotional tour of China. "This is an important reality and obviously a problem that everybody in this business is going to have to face."
Giorgio Armani, Prada Holding, Cartier and other luxury brands are expanding in China, betting that sales of their goods will rise in line with increasing affluence.
Imitators might not dent profits, according to analysts such as Eric Wong at UBS Securities Asia in Hong Kong.
"There may be a lot of demand for fakes, but there is a lot of demand for the real thing too," said Wong.
Armani's sales in China rose 17 percent in the first quarter, almost twice the overall gain, the closely held Milan-based company said. It did not disclose revenue. Total profit surged 14 percent to E134 million, or $161 million.
Sales by the Paris-based Cie Financiere Richemont, which owns Cartier, rose 10 percent in the first quarter on higher demand in Asia and the Americas, the company said. It did not give sales figures. Shares have risen 66 percent in the past year.
Gucci and Louis Vuitton get about 30 percent of their combined E4.3 billion in revenue from Asia, excluding Japan, according to data compiled by Bloomberg.
China's luxury goods market is worth about $2 billion, or 3 percent of the world's total, the state-run Xinhua news agency reported in February.
"China's consumption story is very strong, particularly for the luxury end," said Dong Tao, the Hong Kong-based chief regional economist at Credit Suisse First Boston. "This comes in line with an explosion in the middle-income class and the upper class."
The country's retail sales growth has outpaced that in the United States for at least four years, government data show. Retail sales surged 10.7 percent to 1.28 trillion yuan, or $155 billion, in the first quarter from the year-earlier period.
About 210,000 of China's 1.3 billion people are millionaires in U.S. dollar terms, according to the 2003 World Wealth Report compiled by Cap Gemini Ernst Young. City-dwellers had an average of 8,500 yuan in disposable income last year - a 36 percent rise from 1998 and a 24-fold increase from 1978, when China started opening its economy, government figures show.
It's impossible to estimate how much luxury-brand companies lose to Chinese imitators, said Maxime Elgue, managing director of Cartier Far East.
Half of the $100 million in counterfeit goods seized by U.S. Customs officials in 2002 were from China, according to the International Chamber of Commerce. Counterfeiting accounts for as much as 7 percent of global trade, or $450 billion a year.
"The fakes in China are, unfortunately, the better quality," said Elgue. "They are very good. They even have models that we don't have."
The government must do more to combat counterfeiting, he said. "They need to convince the country that fakes are bad for them." Elgue said. "We're spending millions every year to sue companies, to terminate workshops."
China's Ministry of Commerce, which has promised "zero-tolerance" on counterfeiters, declined to comment on its progress. It found 161,400 instances of counterfeiting last year - a 1 percent increase from 2002 - with goods worth a total of 1.89 billion yuan, according to its Web site.
Cartier, famed for diamond-encrusted watches, plans to add seven stores in China this year for a total of 10, Elgue said. The company wants 20 stores by 2006. "We know it'll be the market for the future," Elgue said, adding that China could overtake Japan as Cartier's biggest market in 15 years.
Cartier opened its first China boutique at the Peninsula Palace Beijing hotel in 1997. It will set up in some of China's richest cities this year, including Guangzhou, Shenzhen, Harbin, Hangzhou and Chengdu.
Armani plans to add two stores in Shanghai this year to bring its total to eight. The designer opened his first Chinese store in Beijing in 2002.
"If you look at our competitors, their share of the pie from Asia is significantly greater," said Robert Triefus, Armani's executive vice president. "We feel that there is great opportunity to expand that percentage."
Prada, a closely held Milan-based designer of shoes, clothing and handbags, said it planned to spend E35 million to open as many as 15 stores in China through next year after entering the mainland a decade ago.
"China is a fast-growing nation, so it's creating the opportunity to open new stores," said Giovanni del Vecchio, Prada's Asian director, last month. "We're quite keen to develop in China because we see a lot of potential growth there."
Import duties of as much as 35 percent may crimp luxury sales, Claire Kent, a Morgan Stanley analyst, wrote in February. "China is a long-term investment," she said. "We see payback as unlikely for at least five years."
Bloomberg
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