Mainland buyers resist the trappings of wealth

In a study last year by the business consultancy Bain & Company, China was rated as the No 3 market for luxury goods after the US and Japan. Many observers believe China will overtake Japan soon, if it hasn't already. Whatever the precise timing of this, one should be more circumspect about the state of the Chinese luxury market, and European luxury brands need to tread more carefully when approaching this market.

Three issues need to be considered.

First, the real size of the Chinese mainland luxury market is hardly larger than that of Britain. Chinese customers still largely buy their luxury goods outside the Chinese mainland, that is either in Hong Kong/Macao or when traveling to Europe. According to Bain, in 2010 Chinese luxury customers spent 24.5 percent of their luxury budget abroad, 34 percent in Hong Kong and Macao and only 41.5 percent in the Chinese mainland, down from 43.5 percent in 2009. This means that one can say today that the Chinese are luxury's No 2 customers worldwide but not in the Chinese mainland. This of course is linked to the important price differences that exist between the Chinese mainland and the rest of the world.

For instance, the University of International Business and Economics in China reported that the prices of luxury watches sold in the Chinese mainland were 161 percent higher than those sold overseas.

A survey by the Ministry of Commerce also revealed that the prices of 20 luxury brands over five categories, namely watches, leather goods, apparel, liquor and electronic products, were about 45 percent, 51 percent and 72 cent higher in the Chinese mainland than those sold in Hong Kong, the US and France, respectively.

It is assumed that import taxes on luxury goods will be reduced in the coming year. Nevertheless, luxury brands have a tradition of maintaining high prices in some markets, a policy they have led successfully in Japan for years. There is no reason to think that the most important brands will reduce their prices in the Chinese mainland if the taxes are reduced.

Second, the question needs to be asked as to whether some luxury brands are overstretching themselves on the Chinese market. Boss now has 114 stores, Dunhill and Armani both have 104, and Bally 69. A paper in Women's Wear Daily in March reminded us that 40 percent of Dunhill's customers are now Chinese, but that it is losing both its identity and its sense of direction.

An interviewee said: "I recall seeing Dunhill points of sale in smaller, midend department stores, selling polo shirts, belts and other accessories that did not really seem to be in line with the brand image they want to convey."

An executive of one of China's leading high-end department store chains was quoted as saying: "They are going downhill. They are either going to have to close some stores and become top tier or just have a lot of stores and go for sales. We consider them a second-tier brand. They are everywhere; they have lost their exclusivity."

Figures are really the best way to understand the danger that awaits these luxury brands. Dunhill has 13 shops in Beijing, five in Chengdu and three in Kunming. Brands such as Aquascutum, Armani, Cerrutti 1881 (now owned by Li & Fung), Zegna and Gieves & Hawkes have gone the same way. Where do the major luxury brands stand in China? Louis Vuitton has only 38 shops, Cartier 37, Hermes 19 and Chanel seven. Contrary to what is happening with these famous brands, it will soon be possible to view the brands we are talking about as middle-tier fashion brands rather than brands meant to be the embodiment of European luxury.

Third, there is a huge talent shortage in China when it comes to sales people. Luxury brands are opening more than 150 shops a year (meaning six to 20 sales people for each additional store, or about 2,000 to 3,000 new sales people a year), with a strong focus on second- and third-tier cities, so the talent pool is shrinking rapidly. Chinese customers are among the most demanding when it comes to service. Luxury brands are faced with multiple challenges: people who do not show up for interviews (up to 30 percent), poor motivation, poor service skills, rising demand for better pay (and not necessarily for long-term career goals).

All this is now well documented, and some luxury brands are trying to face the challenge. The Richemont Group recently opened a retail academy in Shanghai, and Starwood is creating a mentoring program for its Chinese workers. All luxury brands will have to maintain consistent service levels throughout China if they wish to keep their upmarket luxury image and satisfy the wants of their Chinese customers, who may decide to go overseas to get the level of service they want.

The author is an adviser of the French brand strategy agency The Scriptorium Company. The views do not necessarily reflect those of China Daily.