Luxary Market in China
Several high-end retailers are planning to open new department stores in China over the next three years, on the expectation that urban incomes will rise and local consumers will grow more conscious of luxury labels.
The latest move is by Shin Kong Mitsukoshi, Taiwan's leading upscale department store, which recently unveiled plans to open its first store in mainland China, a Rmb750m ($94m) joint investment in Beijing with domestic retail giant Beijing Hualian Group.
The store, which will cater for the capital's nouveaux riche and free-spending tourists when it opens in early 2007, is one of several luxury department store projects being developed in fashion-conscious Chinese cities.
Such plans reflect a consensus among leading department stores, even those that rarely venture beyond their home market, that they must have a presence in China. But while China's urbanites have considerable purchasing power, questions remain over whether there will be sustained demand for expensive clothing and other luxuries.
Many top department stores see China as an experiment where they open a store or two in modern cities before considering further expansion.
Shin Kong Mitsukoshi's store, a 50-50 joint venture, will be its first outside Taiwan, where the company has 13 outlets. Another is scheduled to open in 2008 in Chongqing, a vibrant inland metropolis.
New York's Saks Fifth Avenue, under an arrangement with private fund Roosevelt China Investments Corp (RCIC), is planning to open its first Asian store in the historic Bund district in Shanghai, also in 2008.
The 300,000 sq ft store, which will be operated by RCIC, will be Saks' second-largest behind its Fifth Avenue flagship, which is more than 80 years old. A Macau store is also being planned.
Saks' foray into Shanghai underscores the importance of China's upper-end retail market, especially since American department stores generally have very little non-US business.
"For Saks, it opens the market for the rapidly-expanding high-end customer base in east Asia currently untapped by premier US retailers," says Tweed Roosevelt, RCIC chairman and great-grandson of Theodore Roosevelt, the former American president.
There are nonetheless doubts as to whether there will be enough steady demand for luxury from China's elite, who have in recent years earned a reputation for splurging on clothing, accessories and jewellery from Hong Kong to Paris, often paying cash.
As an example, the Chinese have already become the largest customer base for Swiss watches (including purchases at home and overseas), accounting for a tenth of Switzerland's worldwide watch exports, according to a Swiss Watch Federation summary to Goldman Sachs.
Unlike their counterparts in Japan, Taiwan or Hong Kong a decade or two ago, rich mainlanders are in many ways still adjusting to their new-found social status. They represent the first generation of wealth since the nation emerged from the Cultural Revolution.
Some industry insiders doubt China is ready for an excess amount of luxury. Dickson Poon, owner of Harvey Nichols, says there are no plans for a China store in the near future. Harvey Nichols opened its first Asian store in Hong Kong this past autumn. Brand awareness is still low in China. Mr Poon believes mainland shoppers are still not "sophisticated enough" to have a full understanding of high fashion.
Even if China is not yet ready for the ultra-savvy Harvey Nichols, Mr Poon's Hong Kong-listed Dickson Concepts already has three new Seibu department stores in the mainland - two in Shenzhen and a new store in Chengdu in Sichuan province. The company is considering adding a fourth store, possibly in the north-east city of Shenyang.
While China's elite display a propensity to spend large sums on luxury, those in the mid-income bracket are unlikely to spend much on such products since many items remain too expensive or impractical for them. "Most urban Chinese households today still lack the discretionary spending power to spend money at high-end retailers," says Diana Farrell, director of McKinsey Global Institute, the consultancy's economics think-tank.
Ms Farrell's research on the country's emerging middle class found that, compared with other Asian countries, Chinese spend disproportionately on homes, education and electronic goods such as mobile phones. Compared with several spending categories, projected annual growth for apparel purchases was the lowest, her study found.
Still, many experts argue that China can become the world's largest luxury market with a comparatively low purchasing rate because of its 1.3bn population. Goldman Sachs forecasts China may become the world's largest luxury market within a decade, surpassing the US and Japan.
Another recent survey by market researchers AC-Nielsen discovered only 7 per cent of Chinese have purchased designer brands, well behind their Indian counterparts at 31 per cent and the Asian average of 20 per cent.
China indeed has huge potential as a luxury market, given its massive urban population and the younger generation's affinity for designer goods. The country's big spenders are often only aware of the most popular luxury labels but this is expected to change over time as more travel abroad.
Source: Reported from Financial Times
Date: 13 June, 2006
