In the two decades since China opened up its economy, luxury brands have piled into the world’s most populous nation in anticipation of a rapidly expanding flock of affluent spenders.
Overall, it has been a good bet. The country’s luxury goods market grew to $6bn by 2004 and is projected to reach $12bn next year, according to consultancy OC&C.
Until recently, most brands had to rely on a crop of middlemen, or brand management companies, that have specialised in navigating China’s complex licensing system and distribution channels. Bally, for example, has long employed Hong Kong-based Fairton, one of the largest such agents, to promote and distribute its products in China.
Though China lifted its ban on foreign direct investment in retail in 1992, foreign companies were allowed in only through joint ventures with mainland partners. These JVs, of which the foreign partner could own 49 per cent, could open shops in nine designated coastal cities.
Hong Kong companies gained preferential status after the city returned to Chinese rule in 1997, when some provinces allowed them to incorporate locally while keeping their doors closed to foreign companies. That advantage vanished last year as China allowed foreign companies unfettered access to its retail market in accordance with World Trade Organisation rules.
Some, such as Louis Vuitton, have taken the opportunity to go their own way, but others find there is value in keeping the middleman.
Two months ago, Italian brand Moschino gave exclusive distribution rights in China to Hembly, a seven-year-old Hong Kong company that went public last year. As part of the agreement, Hembly will invest HK$100m ($12.7m) to open 30 shops over the next five years. Aside from an option to manufacture up to 50 per cent of the Moschino-brand jeans it sells, Hembly will buy clothing from Moschino at wholesale prices and keep any profits made from selling them at retail prices.
“China needs a different level of investment and professionalism,” says Thierry Andretta, Moschino chief executive. “It is potentially the fastest-growing market in the world.”
Eric Ng, director of Fairton, says agents such as his company would see a diminished role as large multinational luxury companies muscle into China but he is confident they will still occupy a unique niche.
“They need time to build up a presence but we are already there,” he says. “With a large enough network we can bargain against the big brands. As long as we can do a better job, there is no need for you to do it yourself.”
Fairton, which was founded 50 years ago, first entered China in 1992 with Bally. It has built a network of shops in 30 Chinese cities but says it was not until the past few years that luxury retailing became profitable. Mr Ng says that while demand for luxury goods continues to grow at a blistering pace, costs have also been steadily increasing.
“If you just consider Shanghai, rent and wages have both shot up recently, plus you are looking at a 25 per cent tax rate once China completes the proposed tax unification,” he says. “If you are entering China today, it will take five years before you start making money.
“The top brands have an eye on market entry so they do not care about short-term costs,” Mr Ng says. “But if you are a second tier brand, then building a network takes time and prime sites in Shanghai and Beijing are getting very expensive.”