01/03/2007, 00.00
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Meagre profits for luxury brands

The big western names, drawn by the economic boom and potential huge markets, are selling far less than predicted. Luxury cars are an exception.

Beijing (AsiaNews/Agencies) – Luxury products by top western brands are finding it hard to carve out a niche in the Chinese market. Sales are far less than predicted while costs for rent and labour are increasing, so much so that many companies are not excluding the option of closing shop. The only exception is luxury cars that are enjoying a rapid rise in sales.


Drawn by the country’s constant annual economic growth that exceeds 10%, exclusive western names from Cartier to Chanel to Versace opened big stores in the most expensive neighbourhoods of big cities. But according to Ivan Kwok, Ivan Kwok, a manager at Boston Consulting Group, so far, only about 10% have reaped the anticipated benefits.


Analysts say the annual average income of urban households, even after doubling since 1996, is just ,327, about as much as a single Louis Vuitton handbag costs.


Jonathan Anderson, chief Asia economist at the Union Bank of Switzerland in Hong Kong, estimated that the size of the middle class was between 65 million and 75 million, not the 250 million to 300 million reflected in government figures.

But most of the Chinese middle class do not enjoy, as opposed to other countries, free or low cost services of health, education and housing to name a few. So a good part of their income is pumped into paying housing, medical expenses including possible future costs, and their children’s education. Anderson said the Chinese people have a tendency to save money and their aggregate savings are as high as 50% of the gross domestic product, compared with 30% in Japan, 39% in Hong Kong and less than 14% in the United States.


What’s more, luxury products are heavily taxed by duties and tariffs that push prices up by as much as 35% compared to Hong Kong and neighbouring markets.


What experts say for certain is that those interested in such products are the 15 million Chinese with an annual income of more than 250,000 yuan (,970), according to researchers at AC Nielsen.


However the hottest and most successful products must be a status symbol and sought after, so firms must spend a lot of money on publicity in the big country.


Nigel Luk, Cartier's managing director for China, said the company spends about million a year on advertising to make the brand better known.


The market remains enticing for future prospects: there were 320,000 millionaires at the end of 2005 with an increase of 6.7% over the year, compared to 2.7 million in the US and 448,000 in Great Britain, according to estimates of Merryl Linch. But analysts of Morgan Stanley predict that there will be no less than 100 million buyers of luxury goods by 2015.


Some products have already enjoyed instant success. Bloomberg said that in Shanghai, the 900-square-meter Louis Vuitton shop immediately ran out of supplies of the trendiest bag that costs 24,200 yuan (,096) and now they have a waiting list that is weeks long.


Luxury goods like cars are in a class of their own: even a few sales are fine. In November, the Beijing Auto Show, Rolls-Royce Phantom on display was bought for 6.6 million yuan (8,681) and a Bentley Arnage Mulliner sold for 6.48 million yuan. In 2005, Bentley sold 64 cars, 30 of which were Arnage models, with the minimum price 3.88 million yuan. Also in 2005, Jaguar sales in China rose by 220% and those of Land Rover by 107%. Ferrari believes that China will become its fifth or sixth best market within a few years.

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