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Guest Article: Charles Russell LLP On How China, US Fight For Luxury Market Driving Seat

Charles Russell LLP

19 August 2013

How will China and the US fare in the luxury goods and services stakes in coming years? Trends in the luxury sector are often as useful temperature gauge for the wealth management industry in figuring out customer desires, new sources of wealth, and potential risks. In this article, Edward Craig, partner and head of the retail and leisure sector, Charles Russell LLP, along with associates Lucy Wicksteed and Sue-Lynn Cashman-Pugsley, examine the issues.

China has been whisked away in a love affair with luxury brands. The growth of this sector in China is reflective of the country being one of the great economic success stories of the last few decades. Rising numbers of increasingly wealthy consumers meant China soon became an obvious target for luxury brands. Brands of watches, womenswear and leather goods (to name a few) began to look to these new consumers and these new consumers began to look to them.

In the last few years the luxury market in China saw levels of growth that reached double-digits and then some. Bain & Company’s study of the Chinese luxury market showed an average of 27 per cent growth in 2009-2010 (which included an impressive 45 per cent growth rate for watches), which then remarkably increased to 30 per cent in 2010-2011. After enjoying the success of setting up in high-profile Chinese cities, brands such as Louis Vuitton, Gucci and Burberry looked to expand into lower profile cities to continue the growth and to provide their services to the increasingly brand-conscious consumer.

Perhaps surprisingly then, whilst the global luxury goods market continued to rocket, 2012 revealed a slow down in the growth of the Chinese luxury market. Bain & Company’s study put the growth rate at 7 per cent in 2011-2012, a significant decrease. Weaker economic growth generally in China no doubt impacted on the slow-down, but other factors contributed. These included the ban on spending funds on luxury items for gifting that came into effect on 1 October 2012 (the extent of the impact of this new policy is debated, but the figures suggested go up to a 25 per cent decrease) and the expanding trend of Chinese consumers buying abroad. Brands face further difficulties as they look to address the balance of allure and accessibility, many having to rethink their strategies in a market that is becoming increasingly sophisticated.

Gear change in the US

In contrast, July 2012 saw President Obama declaring that 'America is open for business', and recent statistics certainly show that business in the US Luxury market is roaring back to pre-2008 figures. 

The relaxation of US visa entry requirements for a number of nations (to include the BRICS - Brazil, Russia, India and China) to promote tourism and spending on US soil is likely to be a key contributor. However, there are other factors at play and there are certainly people living in the US with money to spend. The World Wealth Report 2013, released by Capgemini and RBC Wealth Management, shows that North America reclaimed its position as the largest High Net Worth Individual market in 2012 (the 2011 leader being Asia-Pacific). HNWIs in North America's amounted to 3.73 million HNW individuals in comparison to Asia-Pacific's 3.68 million persons.

It is the sales that do the talking; and the sales of luxury cars are a key indicator of how nationals are spending money. Audi, the Volkswagen Group owned luxury carmaker, has just posted record sales in the US for the 31st consecutive month. July 2013 sales are reported to be 13,064 for the Audi luxury SUVs which reflects an 11.6 per cent growth from the previous year. Porsche has also posted a 30 per cent increase in deliveries in the US for the first half of 2013. Furthermore, of the three Lamborghini Venenos produced this year to mark the iconic brand's 50th anniversary, two were destined for US homes before they had even been completed. US HNW individuals have money and they aren’t afraid to spend it. 

Signs seem to point towards the US racing past China in the luxury market stakes. However, Capgemini Global Financial Services chief sales and marketing officer Jean Lassignardie considers that “North America's lead in both population and wealth is likely to be eclipsed again in the future by Asia-Pacific" . The fact that there is a deceleration in growth in China does not mean it should be now relegated to the scrap yard. Growth in China is continuing, albeit at a slower rate than previous years, but the figures are still remarkable; in July 2013, Audi recorded a double digit growth of 27 per cent in China. Porsche posted a 20 per cent increase in deliveries in China for the first half of 2013.  

Destinations

It is worth remembering that the US and China are not the only shoppers out there. In the near future, the BRICs are still expected to be key drivers of global luxury goods growth over 2012-2017. As more BRIC nationals increase their incomes, the more they are likely to spend. According to the Economic Times, Audi had recently undertaken a study to manufacture cars at its parent Volkswagen's plant in Chakan, Maharashtra, which could be key indicator of its confidence in the Indian luxury car market.

In the long term, countries such as Nigeria are showing prospects of becoming serious spending contenders. In 2012 Porsche took the step of opening a dealership in Lagos and luxury retailer Ermenegildo Zegna has also recently put down roots. Nigeria would indeed be well placed to toast the arrival of additional luxury brands; Euromonitor has reported that Nigeria is one of fastest growing markets in the world for champagne and there are no signs yet of it slowing down.