The proliferation of fake designer goods in China has not stopped famous name brands such as Gucci from opening shops in Shanghai, China's richest city

As bigwigs on Wall Street scrambled in a last minute effort in mid-September to rescue the debt-saddled investment bank Lehman Brothers, there was commotion of another kind unfolding half a world away.

At Hong Kong’s Louis Vuitton flagship store in Tsim Sha Tsui, Chinese tourists from mainland China were equally anxious, jostling for prime position so they could be the first in line to snap up the brand’s leather goods from the latest collection.

The world’s tumultuous financial markets, the high cost of energy and plunging house prices may have converged to dampen the purchasing sentiment of most American and European consumers but in Asia, and especially in Hong Kong and mainland China, it appears that it’s business as usual.

Despite the region’s slower economic growth, there is little sign of consumer appetite weakening. This is hardly a surprise, considering the region is now home to the world’s fastest growing newly rich population.

The wealth of the world’s high net worth individuals (HNWIs) rose 9.4 percent to US$40.7 trillion in 2007, with China and India underpinning much of the 6 percent growth in the number of individuals worldwide with financial assets of at least US$1 million, according to the latest World Wealth Report published jointly by investment bank Merrill Lynch and Capgemini.

India led the world in HNWI population growth at 22.7 percent, driven by market capitalisation growth of 118 percent and real GDP growth of 7.9 percent, the report noted. China followed closely behind with the second largest expansion of HNWI population, up 20.3 percent fueled by market capital growth of 291 percent and a GDP hike of 11.4 percent.

Though developed Western economies continue to dominate the world’s wealth market, the landscape is clearly evolving with growth in Europe and the US visibly slowing in recent years.

Nothing to worry about

As defined by Michel Phan, LVMH chair professor of marketing at the Paris-based ESSEC Business School, luxury brands are characterised by exclusive and selective distribution, the ability to charge higher than average prices compared with goods and services in the same category, and overall superior quality and design.

And China – a market still very much in its infancy – is underwriting much of the demand for these goods in Asia-Pacific.

“In Asia, people buy luxury brands to show they have made it. They are used as a statement to express social status and gain social acceptance, whereas Western consumers purchase luxury products for themselves to mark a special time in their life,” said Phan.

According to MasterCard research, the collective income of China’s rich households (those with an annual income of at least $50,000) is expected to grow about tenfold to exceed $29 billion by 2015.

Luxury brands are therefore not as worried about the threat of a looming recession impacting the Asian market. Rather, their issue is centered on what brands can do to distinguish themselves amid the intense competition.

As economic growth weakens, however, Phan advises luxury brands to focus on their core customer groups and to further nurture relationships with their loyal client base.

“By developing a closer relationship with the key customers during difficult times through special events, education and information opportunities, the brand is more likely to ensure their clients’ return,” he said.

“In general, the affluent market is in a better position than the rest of the market to go through the ups and downs of the economic cycle,” said Danny Cheung, vice president and business manager, Greater China, for MasterCard Worldwide.

“The sale of entry-point watch and jewellery pieces is more likely to be impacted than high-end products because demand for high-end luxury commodities will always be there, as the rich are generally more sheltered from the global downturn,” Phan added.

Old and young markets

Last year, MasterCard Worldwide’s research found that two consumer segments, the old and the young, stood out as the most important drivers of the demand in luxury products in Asia-Pacific.

The young premium consumers are defined as the top one-third income earners in the young singles (unmarried and under the age of 35) and young married (married with no children under the age of 35) sub-groups.

These young premium consumers have a greater appetite for luxury goods and services because of their lifestyles and spending power, the research found.

“A high proportion of their disposable income is spent and not saved, hence their higher discretionary spending power. Their lifestyles are focused on defining who they are and highly attuned to the fashion trends of their peers. They channel a relatively higher proportion of their discretionary spending toward luxuries,” noted the study.

In the booming emerging markets of China and India, these young consumers constitute a set of the best-educated, most technologically savvy individuals. They are more likely to be professionally employed, enjoying higher incomes, higher purchasing power and above-average market sophistication.

At the other end of the spectrum are the older premium consumers, defined as being over the age of 60 and in the top one-third by net household assets. This baby boomer generation also has unique demand characteristics.

“Instead of looking for items to buy, they seek enjoyable experiences. Many of these older premium consumers lead active lifestyles and are avid travellers. They travel for authentic experiences; hence their preferred destinations are not beach resorts, however luxurious. Rather they choose sites of genuine cultural and historical interest,” the study said.

In recent years, MasterCard has worked closely with banks to tap into these wealthy sub-groups. “We have targeted not only the high income group but also high asset worth individuals because their spending pattern tends to be more constant even during downturns,” said Cheung.

Japan meanwhile has the region’s largest luxury market in US dollar terms: An estimated 95 percent of women living in Tokyo and under the age of 30 own a Louis Vuitton bag or accessory. In 2006, its young premium consumers spent US$21.4 billion on luxuries while the older premium segment spent US$27 billion. The MasterCard study forecast spending would reach US$35.2 billion for the former group and US$67.8 billion for the latter by 2016.

Though China’s affluent market is smaller by value, it is undoubtedly the region’s fastest growing, tracking triple-digit growth rates with the younger generation driving much of the increase.

The young premium segment’s spending on luxury products is expected to exceed US$26 billion by 2016 from US$10.4 billion in 2006, and about 44 percent higher than the older premium segment.

Hong Kong influential

Of all the regional markets, Hong Kong has emerged as most unique, underscored in equal measure by the sophistication of Hong Kongers, on par with the Japanese in their understanding and desire for luxury commodities, and Mainland tourists who gravitate to the city’s malls for tax-free luxury purchases.

Hong Kong relies heavily on Mainland tourists. In 2007, the total number of tourists who visited Hong Kong exceeded 28 million, an increase of more than 10 percent from 2006, of which over 50 percent were from mainland China -- the equivalent of some 1.2 million each month.

Up to half of the watches sold in Hong Kong for example are purchased by Mainland tourists, eager to avoid the import, consumption and value added taxes in China, said Leo Poon, brand manager for Glashütte Original for North Asia.

“For Swatch Group brands including Glashütte Original, retail prices in China inclusive of VAT, are about 17 percent higher than Hong Kong. For other brands in the market, the price difference can be 25-30 percent higher,” noted Mr Poon.

Meanwhile, Hong Kong shoppers have also proved their resiliency despite the global financial downturn. The Experian Retail FootFall index which tracks traffic at 80 percent of Hong Kong’s shopping centres indicates the volume of shoppers is up 5 percent this year in comparison to last, and surged 10 percent in 2007 versus 2006.

“So far, shoppers in Hong Kong have been resilient. We haven’t seen the global downturn have any major impact on the flow of shoppers,” said Yannick Kennel, general manager of Experian-Footfall Asia (see box, next page).

This retail growth is even more remarkable when set against the context of traffic flow in European malls, where the index has registered an overall downward trend in the last three years.

“The volume of shoppers at shopping centres all across Europe has been falling 4 to 5 percent year-on-year on the back of inflation, high energy prices and depressing economic news. The index is unlikely to go up,” Mr Kennel noted.

Not all brands are created equal

Luxury commodities expected to be most adversely impacted by the economic downturn are goods at the entry price level, industry sources concurred.

“Mass luxury brands such as Omega, Cartier and Rolex for watches and BMW and Mercedes for cars, are likely to suffer a bit more than Porsche and Rolls Royce for example, because of the supply demand issue,” said Mr Poon. “Mid-tier luxury brand names produce considerably more supply than the top-end brands which have limited production capacity and demand exceeding supply.”

For example, Rolex produces around 850,000 watches each year in contrast to Glashütte’s 7,000 pieces, he said.

“The clientele mix is also slightly different. Many of the mass luxury clients are the newly rich who have made their money on the stock market and are more exposed to the downturn,” explained Mr Poon.

“The ultra high-end luxury brands, however, attract the more established wealth generation. To them, earning half a million less each month is not a huge problem if they have had a monthly income of $1 million for years.”

Forging bonds

In a bid to capture Asia’s growing newly rich population, luxury brands are increasingly taking steps to build a rapport with the consumer early, and making their goods accessible to a larger segment of the population.

“Brands are offering more access through different product entry points in efforts to develop customer bonding. Though you may not be able to afford the leather goods today, customers can still purchase the brand’s lipsticks or sunglasses,” explained Phan. And to keep customers on their toes, brands have stepped up product launches to every quarter instead of seasonally.

“Luxury brands have adopted a global strategy of launching new products every quarter as part of an effort to incite excitement and create desire among the customers,” he added.

Aside from creating a buzz among consumers, the rapid pace of product development also discourages counterfeiters from replicating the products.

However, Phan emphasises that the counterfeit issue remains a big problem in Asia, particularly for brands that identify strongly by their logos. “Fake goods are now so well made that it can really damage a brand’s reputation. When you see the brand and its logo everywhere, it becomes too common, too accessible and cheapens the value of the brand.

“Going forward, this is a huge problem for the luxury brands. They cannot tackle it alone, however, but must also have the co-operation of local governments and regional authorities because the problem has become so prevalent in Asia.”