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Until very recently, the world of luxury remained the exclusive bastion of wealthy consumers from Western Europe, America, and Japan, who not only desired the best, but also possessed the cash to afford it. However, this well-heeled club now has some new members: millions of consumers from emerging markets. These freshly minted shoppers in Asia, Latin America, Russia, and the Middle East have greater levels of disposable income than ever before, making them a significant force in the global luxury market as they snap up iconic cars, haute couture, watches, leather goods, jewelry, fragrances, cosmetics, wines, spirits, and even specialized hotel services as a way to show off their wealth among their peers. As a result of this geographical shift in demand, large luxury conglomerates have begun to expand their brands’ footprints, setting up shop in such places as Singapore and Mumbai, as well as lesser-known Chinese cities like Chengdu, in order to cater to the luxury segment’s newest and fastest growing consumer groups. T. Rowe Price has an integrated team of research analysts who actively follow the global luxury market, two of whom recently spoke about how the luxury landscape is changing, what these changes may portend, and where they see potential opportunities.
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Thanks to the political reforms, social shifts, and economic progress that have occurred in many emerging market countries over the last 15 to 25 years, the Chinese, Russians, Latin Americans, Indians, and Middle Easterners have become important players in the luxury goods market. By far the most important of these new luxury consumers are the Chinese.
It wasn’t that long ago that everybody in China wore the same clothes and had the same status. It was a nation living under Communist rule for more than 60 years. But China transitioned from a homogeneous society into a more capitalist economy during the 1990s and early 2000s, and as economic success became important for the first time, it motivated the Chinese people to differentiate themselves from one another. That’s what has made status-driven consumption such a social phenomenon in China.
The Chinese have rapidly become more sophisticated consumers. Three years ago, many brands had just opened their first stores in China, and the Chinese had very little familiarity with them. Today, they probably know more about the brands and the products than most European consumers who have lived with them for 50 years. In part this is because the Chinese are interested to learn about the origins of products and hear their stories. They have quickly and thoroughly educated themselves, and it shows. You see it in their consumption of fine wine—the largest market in the world for high-end French Burgundy is now in Hong Kong, and no longer New York.
You also see it in the cars they buy. China already controls almost half the global sales in the luxury auto market, and the luxury auto manufacturers have responded pretty well to consumer interest in China. Distribution has taken a two-pronged approach: They build cars at the lower end of the luxury spectrum (such as a BMW 1 Series, a Mercedes C-Class, or an Audi A1) on the mainland via 50:50 joint ventures. But at the higher end they build the vehicles in Germany and then export to the mainland via a very active dealer network.
Many consumers in China actually prefer vehicles that are imported and are willing to pay a premium for them. As a result of that, I think that having the appropriate dealer network becomes paramount. There are hundreds of dealerships being opened up every year in China, with mature networks in the tier-1 cities like Beijing, Shanghai, Guangzhou, and the eastern seaboard being supplemented by growth in tier-2 and tier-3 cities.
Exclusivity is what makes a luxury brand so attractive to consumers. Many of these products are often produced in small numbers, with some sort of special design or material and very selective distribution, and then, of course, the consumer’s ability to afford exclusive luxury products is a clear marker of their status. It’s what makes them willing to pay $10,000 for a Rolex watch when they can buy a Timex that’s just as accurate for $20.
One major development that continues to affect the global luxury market is tourists from emerging markets coming to Europe and buying products here. Despite last year’s Euro crisis, Europe was the fastest growing region globally for luxury goods. It grew faster than both Asia and the U.S., all because of Chinese tourism. For some of the brands, sales to overseas tourists now account for more than half of their total sales in Europe.
Increasingly, the important names in luxury are concentrated within big groups. LVMH (Moët Hennessy-Louis Vuitton S.A.) is by far the largest and most diversified global company in the sector, representing about 10 percent of the luxury market. It’s a Paris-based multinational luxury goods conglomerate with over 60 brands, of which Louis Vuitton is the biggest – it represents more than half their profits, and is also the biggest brand globally. Another big company is Richemont, a Switzerland-based conglomerate with about 20 brands. Its largest brand, Cartier, is the global leader in high-end jewelry, and also a very prominent watch brand. The third largest conglomerate is France’s PPR (now called Kering), with 19 smaller brands in addition to its largest brand, Italy’s Gucci, which represents around 60 percent of their profits.
As you can see, the luxury landscape is quite fragmented, even though these large conglomerates increasingly acquire individual smaller brands. The most important names consumers pay attention to remain these established European heritage brands. When they buy a luxury product made by one of these Old World European companies, they aren’t just buying a product—they are also buying a piece of Europe that they can wear at home.
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