China's luxury goods market is defying the downturn, with increasing numbers of consumers prepared to pay for high-quality, designer brands. A new study predicts the country's luxury sales will grow between 15% and 20% this year, but as Dominique Patton finds out, expanding in the Chinese market is far from easy.

China's luxury market is relatively small, accounting for only 3.5% of the global EUR167bn (US$250.5bn) sales in 2008, according to consulting firm Bain & Co.

But a new study predicts the country's luxury women's wear, men's wear and accessory sales will grow by between 15% and 20% this year. This compares with an 8% decline in all luxury sales in Europe and a 16% drop in the Americas.

"The downturn had already bottomed out in China in the first quarter of 2009, with recovery accelerating in the last two quarters. Expectations for the last quarter are very strong," said Bruno Lannes, head of consumer and retail practice at Bain in China.

Recent results announcements by luxury brands confirm the positive forecast.

Gucci reported a 22% jump in the brand's China sales for the third quarter and an increase of 37% across the group's brands including Bottega Veneta and Yves Saint Laurent. Gucci rival Louis Vuitton reported that its handbags are selling "exceptionally well" in China. 

First-time buyers
Strong demand is coming from China's rich elite but also the millions of new middle class who are eyeing first-time luxury purchases.

Amanda Zhang, a 28-year-old legal consultant from Beijing, bought her first Chanel bag a few years ago and now has her eye on Jimmy Choo shoes. "Every girl has a dream and mine is to have a Chanel 2.55 bag," she said.

Chinese shoppers buy luxury brands as status symbols, said Lannes. "It's telling the world around you who you are. It's a way to say how successful you've been."

But they are also motivated by desire for high quality and value for money, believes Cindy Lee, senior sales and marketing manager for Longchamp in Hong Kong.

"They're very conscious of what they are buying. They want to know about the materials used, the origin of the product and how it's made."

This means utilitarian products like bags and accessories and classic clothing are among the best-sellers.

"China's luxury shoppers want a bag they can use every day, not a blouse to wear once a month," said Shaun Rein, managing director at the China Market Research (CMR) group, which recently surveyed consumers of luxury products in China. 

This trend will increase as more of the middle class who cannot afford to travel aspire to owning designer brands, he added.

Currently 60% of the luxury goods bought by Chinese are bought in Hong Kong or abroad, where goods are cheaper and come with added caché.

Consumer confidence
But increasingly China's luxury consumers are based far from cosmopolitan Shanghai and Beijing in smaller cities where consumer confidence has not been dented by the financial crisis.

"The second-, third- and fourth-tier cities are where the optimism is. These people are typically working for Chinese companies, and haven't seen the cutbacks that foreign firms have made," said Rein.

In the CMR survey, 80% of the women interviewed in these smaller cities said they would buy more luxury products in the next six months than they had in the previous half of the year. 

Men's wear is also growing rapidly in these cities, driven partly by the Chinese culture for giving gifts to business partners.

About a fifth of the country's luxury sales are for this purpose, estimates Bain, and the trend may have become even more relevant in the downturn as people sought to shore up their business relationships.

New luxury presence
Luxury brands are helping to drive this demand by building a presence in new regions. Gucci plans to have more than 30 stores around China by the end of the year, chief executive Patrizio Di Marco told Reuters in June. 

Smaller brands are expanding too. Longchamp, maker of the iconic 'folding bag', has opened stores in northern cities like Shenyang and Dalian in recent years and is seeing growth of 50-100% at some outlets, said Lee.

"People in second tier cities are keen to shop. They don't have the same pressures as people in Shanghai, such as expensive property and higher living costs. And with all the government investment in these smaller cities, their earnings are increasing."

Brand building
Expanding in the Chinese market is far from easy however. Availability of well-managed shopping malls and trained staff is limited in smaller cities.

The luxury scene is also dominated by heavyweight names like Louis Vuitton, Chanel and Gucci, the three most desired brands, according to Bain's survey of 1,400 Chinese luxury consumers.

"The success of brands here is due to the longevity of their investment in brand building. It's down to how long they've been here and how much they've spent.

"For new brands with a lower ability to spend it's going to be an uphill battle. It's a very competitive market," said Lannes.

Lee agreed that brand knowledge in China's smaller cities is "not very mature".

Longchamp's expansion will require further investment in advertising and customer relationship management (CRM).

"We're going to increase our advertising budget by 30% in 2010 compared with this year. We need to do more tailored communications with individual cities. China's population is huge and we might be well-known in one city but not another."

New opportunities
Despite the consolidation by a few brands in each luxury category, Rein believes there is still opportunity for new entrants.

"People have been buying what everybody else buys because they're afraid of making mistakes. But there's going to be more individualism in the next 10 years."

New brands should offer "starter products" or less pricy items such as belts and key chains, says Rein, to lure consumers into their stores.

"That's why Louis Vuitton and Gucci do so well. They have smaller products on offer for around $200."

Lee says Longchamp's opportunity is in the rising demand for "accessible" luxury brands and classic pieces that represent good value for money. 

Zhang could be a potential customer. "I like Chanel because I'm not so into the latest fashions. I prefer classy clothes you can wear for years."