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In an excellent article about luxury retailers going online in China, Laurie Burkitt at The Wall Street Journal drops an interesting little insight halfway through the piece:

China is the world’s second-largest market for luxury brands when counting purchases by Chinese consumers world-wide and is set to overtake Japan for No. 1 in a few years, according to consulting firm Bain & Co. Chinese sales of luxury products surged 20% to €9.2 billion ($12.1 billion) last year, Bain said. [italics mine]

Counting purchases worldwide vs. locally is no small distinction. China’s consumers know they pay a steep duty on the price of the baubles they buy in China, and those with the means (and the patience) often shop locally but put off their purchases for when they go abroad. That’s important for a couple of reasons.

First, it is impossible to judge the real return-on-investment of a store inside of China based solely on how much product that store sells, because that store is probably winning sales for stores elsewhere in Asia, in Europe, and in the Americas. By extension, it is impossible to judge the profitability of China luxury operations based on retail sales in China. To some degree, the China operations of luxury lines are subsidizing global sales.

That arithmetic is going to get increasingly critical as the cost of labor and prime retail space rises in China’s second, third, and fourth tier cities, and as more Chinese get comfortable buying their luxury goods direct from the labels online. Put another way, retail in China is not just a sales expense, it is a marketing expense as well. The companies that learn how much of those costs to allocate to sales and how much to marketing (and then plan and behave accordingly) will be the long-term winners in this market.

Second, as home-grown luxury brands emerge, they will have to do so knowing that high-end shoppers are used to making purchases at overseas destinations. Those brands will thus need to begin their development with global expansion in mind, so as to catch shoppers while they are overseas and in a buying mood. That is not to say their first stores need to be overseas, but that depending on the product, luxury brands will want to address their competition globally so as to capture their local market globally as well.

Thus I am betting that some of China’s early home-grown luxury brands will find themselves compelled to ally with – or be bought by – one of the major global luxury houses, much as Shanghai Tang went to Richemont. Retail presence in China is important marketing, but having global retail presence will be an important part of placing Chinese luxury brands on an even par with the global majors in the eyes of locals, once those locals are even amenable to a local luxury marque.

Disclosure: No positions

Source: Insight Into China's Global Luxury Consumer