When the world's luxury brand Gucci opened its first store in Beijing in 1996, it was little more than an exhibit window.
Ten years later, Chinese are showing unprecedented purchasing power directed toward luxury brands such LV, Channel and Hermes. Francois-Henri Pinault, chairman and CEO of the French retail and luxury goods conglomerate Pinault Printemps Redoute (PPR), Gucci's owner, thinks it is time to expand its luxury business in China.
"In the 1990s, 60 per cent of Gucci's revenue in Hong Kong came from Japanese travellers," says Pinault, "But last year half of Gucci's revenue in the city was contributed by travellers from the Chinese mainland."
In 2005, Gucci's revenue in the Asia Pacific region (excluding Japan, which Gucci counts as a separate market) jumped 28.5 per cent to 373.8 million euro (US$482.2 million), accounting for 20.7 per cent of Gucci's revenue worldwide.
'Fastest growing market'
In the Asia Pacific region, Hong Kong is still the largest market for Gucci. "The Chinese mainland stands at third place after South Korea," says Pinault, "but it is our fastest growing market where we will invest the most."
Pinault says Gucci plans to open 10 more stores on the Chinese mainland by the end of next year, doubling the number it company opened in the past decade.
Among Gucci's 10 stores on the mainland, three are in Beijing, two in Shanghai, and the rest are in Chengdu, Hangzhou, Qingdao, Xi'an and Shenyang. Even including the stores to be opened next year, the number is relatively small compared with other major markets in the Asia Pacific region.
Japanese market
According to Mark Lee, CEO of the Gucci Group (owner of Gucci and nine other luxury brands), Gucci currently has 15 stores in South Korea, 10 in Hong Kong and nine in Taiwan. Gucci has 55 stores in Japan, the brand's largest single country market, accounting for 22.7 per cent of its 2005 revenue. "China will become a market that carries the same weight as Japan," says Pinault, "It is only a matter of time."
In fact, China's economic growth, averaging an annual rate of 9.7 per cent since 1978, has created an estimated 300,000 millionaires. Last year, China was already the third biggest luxury market in the world with US$2 billion turnover, accounting for an 11 per cent share in the world's luxury market.
Billions for luxuries
According to a recent survey by the consulting firm KPMG, Australia's Monash University and market research firm TNS, the growth rate of China's luxury market is expected to increase 20 per cent annually until 2008. After that, it is expected to grow by 10 per cent annually until 2015, when sales will exceed US$11.5 billion. By then, the survey estimates, China will consume nearly one-third of the world's luxury goods.
"I would not be surprised if that happens," says Pinault, "In fact, I think it may not take that long."
Pinault says that Gucci's revenue on the mainland experienced "triple-digit growth" last year, much higher than the company's 18.5 per cent global rate.
9/11 and SARS
According to a study by consultant Bain & Company, the world's luxury sales were badly hit following the World Trade Centre attacks in 2001, when people significantly reduced their travel and spending. SARS and bird flu in Asia in the following years further dampened the market for luxury goods.
"After some years of adjustment, the market recovered in 2005," the study finds. The booming Chinese market is one of the most important factors.
LVMH Moet Hennessy-Louis Vuitton, the world's largest luxury goods maker, plans to open two to three stores a year in China's mainland, where sales are rising 50 per cent annually. Financiere Richemont, the world's second-biggest luxury group, expects to quadruple sales in China within five years by selling more Cartier jewellery and Piaget watches, according to Bloomberg.
"China is a market that has a huge potential if you consider the country's huge population and its dynamic economic growth rate in the past 20 years," says Pinault.
Fighting counterfeits
Part of the challenge of establishing an international brand in China is dealing with the ensuing flood of counterfeit products.
Over the past several years, Gucci has co-operated with the Chinese authorities to identify and track down the sources of pirated goods. The company has also collaborated with other major international luxury brands on forming an international anti-piracy alliance.
"China is making progress against counterfeits, slowly but surely", says Pinault, noting that cultivating customers, rather than fighting counterfeits, is Gucci's biggest challenge in China.
"To establish a brand in a market needs at least one generation," Pinault says. "In America and Europe, we have a long tradition of luxury brands. But on China's mainland, where luxury brands all swamped each other at the same time, we have to do a lot of work to make our brand stand out."
Last year, Gucci increased its world marketing and promotion budget 20 per cent. Gucci will maintain that level in the coming years. According to Pinault, a significant part of the budget will go to the Chinese mainland.
Asked about Gucci's target customers in China, Pinault says it is not a matter of income but sensitivity to the brand or the "sense of luxury." Pinault says, "In China, we need to cultivate people, to explain the brand, to tell them what fashion is."
US$800 handbag
Presumably, sensitivity is linked to income, since in 2005 the top five Gucci handbags each sold for an average price of US$800 (6,284 yuan), more than three times the average monthly income of 1,800 yuan (US$228) in Beijing and Shanghai, China's two richest cities, according to China's National Bureau of Statistics.
Pinault says Gucci faces the same competitors in the Chinese market as it does internationally. He believing the key to success is delivering a high standard products and services to China's consumers.
"To maintain quality, we will not make our products outside Italy and we have invested a lot in training our staff in China to offer the best service," Pinault says.
In addition to Gucci, other PPR luxury brands include Bottega Veneta, Yves Saint Laurent, YSL Beaute, Balenciaga, Boucheron and Sergio Rossi, all of which were acquired after the Gucci Group was taken over by PPR in 1999. Pinault says it is not appropriate for all these brands to come to China at the present moment.
Immature market
"Some of our brands still need time to break even as we acquired them only a short time ago", says Pinault. He makes the point that the mainland market still needs time to become more mature, like Hong Kong and Taiwan, where consumers are ready to accept a wider range of products such as watches, jewellery and shoes.
"But I believe that one day all our luxury brands will open stores on the Chinese mainland," Pinault adds. Currently, only Boucheron and Sergio Rossi have stores here.
In fact, luxury is not PPR's biggest business. In 2005, about 83 per cent of its 17.8 billion euro (US$23 billion) revenue came from retail stores such as Fnac, Redcats, Conforma and CFAO.
Pinault says he does not have any plans to introduce PPR's retail business to China. "We have 500 people in Shanghai and Hong Kong purchasing goods for our retail stores in Europe," Pinault says, "but our retail brands must become strong enough before they can go global."
