Takeaways from the Walpole China Luxury Conference -
Continued lofty predictions for luxury growth in China come just in time as Japan most likely wont be a source of growth any time soon and in the US investors can’t help wonder how will high-end retailers pull off an encore of last year?
Names including Tiffany , Coach and Fossil are placing big bets on the next big source of growth that could be instrumental in keeping rich stock multiples afloat. While some investors might be worried about luxury returning to earth we are not seeing much evidence of a return to reality in the market. Hey, a recent visit to Christian Dior in London revealed the brand is feeling so good they just raised prices 15-20% this past Monday. A few phone calls around the globe confirmed US consumers and beyond will take the same hit.
Talk about trying to create a sense of urgency.
This week we attended the Walpole China Luxury Summit in London and heard from retailers (many that learned the China market the hard way by trial and error), consultants and real estate advisors. For most retailers China is still a learning process. But with estimates for 18%+ growth per year in the luxury market for 2011-2015 versus high singles in the US, retailers are not wasting anytime. According to McKinsey, China should represent 20% of the market by 2015. The race to get inside the mind of the Chinese consumer is not only important inside China. With growing Chinese tourism around the globe retailers have to learn how to cater to this new and distinct customer. According to a panelist representing Harrod’s, the Chinese represent 4x the business from the US at the London behemoth (a few years back China was 1/3 of the US business) and have now surpassed sales from Middle East consumers.
While many perceive the Chinese consumer to be all about the “bling” and showing status through labels, retailers also need to keep up with evolving behavior. The Chinese consumer is increasingly focusing on quality, not just labels. According to a McKinsey survey 52% are willing to buy an understated luxury product versus only 30% of consumer just a few years back. The success of Bottega Veneta (a brand known for quality and not logos) is a perfect example of this evolving trend. The company now has 17 stores in China.
Another welcome Chinese shopping trait, one that retailers welcome with open arms, is paying full price. Yes, when the American shopper is all about discounts and outlet malls, 28% of Chinese consumers surveyed by McKinsey were willing to pay full price (versus 9% of US consumers). As a result prices in Asia are typically listed at a 30%+ premium. Fossil, recently reported blow-out earnings and suggested premium pricing in Asia is a 600 basis point help to gross margin. The company is looking for Asia to grow to 1/3 of total business from 14% today. At a time when everyone is worried about rising labor costs in China a healthy price premium and higher operating margins in the region should cushion part of the blow. On the flip side, healthier wages in China will only help boost spending power.
Probably the biggest surprise when it comes to Chinese luxury shopping habits is the male consumer 25-40 years old drives as much as 50% of spend versus 25% for the rest of Asia and 15% for the rest of the world. No wonder Coach is sounding so optimistic these days. In addition to the recovery in the US handbag and accessories business, the company is having early success with men’s stand alone stores in the US. Think of all the man bag opportunities in China? Coach has set a goal of 10% market share in just 3 years versus the current 5%. I would not be surprised to see China surpass Japan sales in 3-5 years.
Tiffany should certainly be included as an early China play. With 18% of sales coming from Asia-Pacific (half of that is from China) and only 14 stores on the mainland the company is investing with significant marketing dollars to build brand awareness in the region. While Tiffany is expecting US to continue a strong trajectory with high single digit comps, the Asia Pacific region could be double that growth rate this year. We should hear more about prospects in the region when the company reports on 5/26.
Stacey Widlitz is an independent retail analyst and consultant. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years