2

THE

LUXE
LIFE
Burberry, Bulgari and Bentley; as luxury brands
experience a slowdown in Asia, Seher Hussain
investigates what obstacles, regulatory and legal,
lie ahead for the Chinese and Indian markets.

he luxury brand market in general

has continued to defy the global economic downturn, posting sustained
growth especially in the East, with
China continuing to grow at a much faster rate
than the traditionally established markets of
Japan, Italy, Europe and the U.S. However,
Chinas recent slowdown has affected the
luxury industry, with a recent report by
Bain citing that global luxury goods sales
are expected to grow by 5 percent this year,
compared with 13 percent last year. Despite
that, the might of the Chinese consumer has
vaulted the country into the top echelon, with
the country becoming the worlds secondlargest luxury market this year, topped only by
the U.S. However, as the Chinese buyer grows
increasingly more sophisticated, international
brands face an evolving set of obstacles
Luxury companies also continue to eye
India; as one of the worlds fastest growing
economies with an increasingly number of
high net worth individuals, it is well placed
to capture a significant market share. Will
the newly released FDI regulations give this
sector the much needed boost it has been
waiting for?
Gucci and Givenchy; grappling with
China
According to the Bain report, Chinese luxury
goods sales are set to rise by 8 percent at
constant currencies and 20 percent at current currencies, while last year they climbed
to 30 percent on both measures. Burberry,
Hermes and other brands have reported
slowing revenue growth in Asia over the
past year; however they have still performed
well, with LVMH up 4.1 percent, Burberry up
17 percent and Hermes up 9.4 percent. Now,
Chinese buyers make up half of all the luxury
purchases in all of Asia. So what challenges
do these international brands face?
Its not about the new brands per se;
its not about entering China anymore,
says Helena Huang, partner at King & Wood
Mallesons, now, its about expansion within

the country. Luxury brands are expanding

from the first tier cities into the second, and
even the third. As these companies expand,
Huang points out several challenges that
arise, namely nailing down the correct legal
structure for the brand. Once you have
regional headquarters in China, how many
stores or subsidiaries are you going to set
up there? You have to get this structure right
from the very beginning because coordinating between different cities and different
provinces can be very difficult, she says.
Part of that legal structure and strategy
is choosing your distributor and joint venture partner, another process that can be
problematic. Gabriela Kennedy, partner at
Hogan Lovells, elaborates that: In China, the
extra difficulties are how you are going to do
your business in that market; are you going
to choose a distributor? You have to be very
careful and make sure that they have the right
legal contract to protect your position. Are
you going to trust and license a local party
and enter into a joint venture? Brands need
to have their exit strategy in advance, in case
things dont work out.
Inevitably, data protection issues also
raise an ugly head. Alongside fake shops
and counterfeit products, market sources
also point out that in their eagerness to enter
China, many luxury brands do not ensure that
they possess the best portfolio in terms of
the protection that they need in the market.
Kennedy says that: Very few brands actually
consider thinking about their Chinese brands;
they come in with a foreign name but you
have to educate your consumers on how that
is pronounced. The reality is that most of the
Chinese people will approximate, give up,
and choose a Chinese name or brand for you.
If youre not careful, it may not be the brand
that you want.
Fendi and Ferraris; finding a foothold in India
Despite the flurry of attention devoted to
Indias economy and its growing middle class,

CHINAS LUXURY MARKET

100

Chinas domestic luxury consumption forecasts

% of global luxury mrkt
Luxury consumption
Bln euros

20

80

16

60

12

40

Louis Vuitton
Chanel

20

Most desired luxury brands in China 2011

Brand
Stores
% of mentions in luxury survey

10

20

30

40

45

Dior

30

Armani

104

Hermes

19

luxury brands have failed to find a firm footing here, with the international luxury goods sector worth only about $1.3 billion, accounting for
1 to 2 percent of the global luxury market. Myriad reasons underline
this lack of growth, from scarcity of retail locations to incredibly high
import duties. But industry experts point to foreign direct investment
regulations as one of the primary obstacles.
Previously, Indias FDI laws capped foreign ownership of retail operations at 51 percent, but in a high- profile decision earlier this year,
the government officially lifted restrictions on foreign investment in the
retail sector, which would allow international luxury brands like LVMH,
Burberry and Gucci to acquire 100 percent ownership of their India
operations. Aparna Mittal, partner at Luthra & Luthra says: When
the new policy was announced, there was palpable excitement in the
market, anticipating that the market would really open up. However
upon closer examination, there remain some ambiguities in the way
that this policy has been drafted.
The main requirement is that foreign companies intending to invest
on the 100% route are required to source 30% of their production from
India. Mittal continues that, as luxury brands are associated with a
particular quality and sometimes even geographic associations, (such
as Thai silk, or Swiss watches) sourcing from India may entail some
significant commercial challenges. Many brands will be unable to alter
their Made in France or Made in Italy specifications, leaving them

N.A.

Cartier

37

Prada

18

Burberry

56

50

Note: Most desired brands according to Bain Survey of Luxury Goods Consumers in Mainland China (n=1,959). Cartier store data
excludes watch counters.
Sources: CLSA, 2011 Bain China Luxury Market Study.
Reuters graphic/Christine Chan 24/09/12

Gucci

Rolex

'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

38

A woman walks by a Gucci luxury boutique at the IFC Mall in Shanghai June 4, 2012. REUTERS/Carlos Barria

Now its about expansion within

China. Luxury brands are expanding
from the first tier cities into the
second, and even the third.
Helena Huang, King & Wood Mallesons

no wiggle room in the new sourcing requirements.

FDI reforms aside, several other challenges remain. Jai Pathak,
partner at Gibson, Dunn & Crutcher, recounts that, In the new policy,
at least $100 million must be invested in the relevant multi-brand
retail company, and 50% of the foreign investment proceeds must be
invested over 3 years, in back-end infrastructure. The foreign investor needs to factor that in to his financial model as he thinks about
investment in multi-brand retail in India.
Distribution is also a sticking point, says Rahul Sharma, managing
director of retail consultancy firm Neev Capital. Sharma comments,
saying: Up till now, the route has been to go to a five star hotel and
set up shops there; the approach has been very piecemeal. The local
customer comes to the flagship, but its a showcase; he will actually
purchase the goods when he travels to Europe or the U.S. Its almost
like an advertisement as opposed to a serious approach of making
the product available.
A diamond-bright future
It is evident that luxury brands still face hurdles when it comes to

entering the subcontinent and the problem

is far from resolved, even given the recent
reforms. However, taking a long term view,
Pathak says that the government is moving very aggressively and clearly intends to
push through economic reforms and attract
foreign investment given the recent slump
due to the uncertainty over tax treaties and
taxable transactions.
Sharma agrees, relating that the demand for and awareness of luxury goods is
prevalent in the Indian consumer, and global
brands need to start taking India more seriously as a potential market.
Hopping across to China, a similar outlook emerges. The number of rich Asians
exceeded that in the U.S. for the first time
this year (see A Wealth of Opportunity,
in ALBs September issue) as reported by
Capgemini and RBC Wealth Management.
Home to now 3.37 million high net worth
individuals, 17 percent of Asias wealthy are
based in China, and their appetite for luxury
goods may be insatiable. Huang sums up, by
saying: There may be some adjustment in
growth due to the slowdown, but Chinese
wealth is still at a very early stage. This
market has not matured yet, and has great
potential.