The Chinese are fast becoming more affluent. In a report by China Merchants Bank and consulting group Bain & Co., research confirms that the world’s most populous nation now has 500,000 high-net-worth individuals with at least Rmb10 million ($1.5 million) in investable assets.
This swell of wealth means the Chinese are becoming even more brand-conscious. Take, for example, the surge in demand for luxury cars. In the first quarter, Mercedes Benz saw its sales jump 112% year-on-year in China, while Ferrari’s sales climbed 50% in 2010 versus the previous year.
It’s not just the motor industry that is realizing the huge potential of China’s wealth market. Louis Vuitton (GM:MAGOF) has unveiled its "Louis Vuitton Voyages" exhibition in China’s National Museum. The gallery showcases suitcases through the ages and holiday outfits in glass cases. This is the latest ploy by the French luxury brand to charm Chinese consumers.
So with China’s surging passion for high-end western brands, the trend of growing middle classes is positive for the whole consumer discretionary sector, but should be most experienced for consumer durables companies (luxury and sporting goods producers).
Growth in middle classes also leads to growth in millionaires. Globally, millionaires' financial wealth grew 9.7% in 2010 to reach USD 42.7 trillion, surpassing the 2007 pre-crisis peak, according to the World Wealth Report (Capgemini and Merrill Lynch).
Millionaires in the Asia-Pacific were the best performers: The wealth of 3.3 million high-net-worth individuals in the Asia-Pacific region climbed 12.1% last year to USD 10.8 trillion, exceeding Europe for the first time. India entered the top 12 country rankings, while the number of millionaires in China grew by 12%. The U.S. still has the greatest number of high-net-worth individuals of any country, followed by Japan, Germany and China.
China is expected to become the world's largest market for luxury goods, worth USD 107 billion according to research firm CLSA. Asian demand is becoming more important for many Western luxury companies.
But which Western luxury companies can profit or have already a decent share of their revenues in the Asia-Pacific region? I selected 10 companies that are worthy to look at and investigate.
Coach Inc. (COH)
Coach, Inc. is a marketer of fine accessories and gifts for women and men. Coach’s product offerings include handbags, women’s and men’s accessories, footwear, business cases, jewelry, wearables, sunwear, travel bags, fragrance and watches. Coach operates in two business segments: Direct-to-Consumer and Indirect.
The Direct-to-Consumer segment consists of channels that provide the company with controlled access to consumers, which includes Coach-operated stores in North America, Japan, Hong Kong, Macau and mainland China, the Internet and the Coach catalog. This segment represented approximately 87% of Coach’s total net sales in fiscal 2010, with North American stores and the Internet, Coach Japan and Coach China contributing approximately 64%, 20% and 3% of total net sales, respectively.
Polo Ralph Lauren Corp. (RL)
Polo Ralph Lauren Corporation is engaged in the design, marketing and distribution of products, including men’s, women’s and children’s apparel, accessories, fragrances and home furnishings. The company operates in three segments: Wholesale, Retail and Licensing. Apparel products include collections of men’s, women’s and children’s clothing. Accessories include a range of footwear, eyewear, watches, jewelry, hats, belts and leather goods, including handbags and luggage. Home products include bedding and bath products, furniture, fabric and wallpaper, paint, tabletop, and giftware. Fragrance products are sold under its Romance, Polo, Lauren, Safari, Ralph and Black Label brands, among others.
Tiffany & Co. is a holding company and conducts all business through its subsidiary companies. The Company, through its subsidiaries, including Tiffany and Company (Tiffany), sells fine jewelry and other items that it manufactures or has been made by others. Its segments include Americas, Asia-Pacific, Japan and Europe. Its Asia-Pacific and Europe segments are included in the Other. The TIFFANY & CO. brand (the Brand) is a primary asset of Tiffany and, indirectly, of the company. During the fiscal year ended January 31, 2011 (fiscal 2011), the Company’s principal product category was jewelry, which represented 91%, its net sales.
Tiffany offers a range of selection of TIFFANY & CO. brand jewelry at a range of prices. The Company also sells timepieces, sterling silver goods (other than jewelry), china, crystal, stationery, fragrances, personal accessories and leather goods. It advertises, primarily in newspapers and magazines, and also through digital media, and periodically conducts product promotional events. Tiffany purchases diamond from Botswana, Canada, Namibia, South Africa, Sierra Leone, Russia and Australia. It has diamond processing operations in Belgium, South Africa, Botswana, Namibia, Mauritius and Vietnam. During fiscal 2011, approximately 60% of the polished diamonds acquired by Tiffany for use in jewelry were produced from rough diamonds purchased by the Company.
LVMH Moet Hennessy Louis Vuitton SA is a France-based luxury goods company. The company includes a portfolio of 60 brands. The business activities of the company are divided into five business groups: Wines and Spirits; Fashion and Leather Goods; Perfumes and Cosmetics; Watches and Jewelry, and Selective Retailing. The activities of the wines and spirits sector include the Champagne and Wines branch, and the Cognac and Spirits branch. In February 2011, the company completed the acquisition of Ole Henriksen, a botanical skincare company. In March 2011, the Company acquired Bulgari SpA by buying a 50.43% stake in the group from the Bulgari family.
The company’s Fashion and Leather Goods business group includes Louis Vuitton, Donna Karan, Fendi, Loewe, Celine, Kenzo, Marc Jacobs, Givenchy, Thomas Pink, Pucci, Berluti, Rossimoda, StefanoBi, brands. The perfumes and cosmetics business include CHRISTIAN DIOR, GUERLAIN, GIVENCHY and KENZo brands. The company also supports the development of brands, such as BENEFIT COSMETICS, FRESH, ACQUA DI PARMA and PARFUMS LOEWE. The Watches and Jewelry business group sells products, such as TAG Heuer, Zenith, Hublot, Chaumet, Dior Watches, Fred and De Beers. The company’s Selective Retailing businesses operate Europe, North America, Asia, and the Middle East. The businesses are operated in two segments: retailing designed for customers who are international travellers (travel retail) and the selective retail concepts.
PPR SA, formerly Pinault-Printemps-Redoute, is a France-based company that specializes in retail and luxury goods distribution. The company's Retail division markets fashion, accessories, beauty care products, home furnishings, cultural products, electronic goods and household appliances. The division operates through five core subsidiaries: Conforama, Fnac, Redcats, Puma and Gucci Group. Its Luxury Goods division is operated by the Gucci Group, which designs, manufactures and markets high-end luxury items, such as ready-to-wear clothing, leather goods, shoes, watches, jewelry, fragrances, cosmetics and beauty care products. The Gucci Group owns a portfolio of luxury brands, including Gucci, Yves Saint Laurent Couture, Sergio Rossi, Boucheron, Bottega Veneta, Alexander McQueen, Stella McCartney and Balenciaga, among others. PPR SA has activities in Europe, Asia, the Americas and Africa. In June 2011, it acquired Volcom, Inc.
Compagnie Financiere Richemont SA (Richemont) is a Switzerland-based luxury goods company. The company operates in four segments: Jewellery Maisons, which is engaged in the design, manufacture and distribution of jewellery products; Specialist Watchmakers, whose primary activity includes the design, manufacture and distribution of precision timepieces; Writing Instrument Maison, whose primary activity includes the design, manufacture and distribution of writing instruments, namely Montblanc, and Others, which mainly comprise Alfred Dunhill, Lancel, Chloe, textile brands and other manufacturing entities. The company’s luxury goods interests encompass names, including Cartier, Van Cleef & Arpels, Piaget, A. Lange & Sohne, Jaeger-LeCoultre, Vacheron Constantin, Officine Panerai, IWC, Baume & Mercier, and Roger Dubuis. The company operates through a number of subsidiaries throughout the world.
The Swatch Group Ltd. is a Switzerland-based company engaged in the manufacture of watches, jewelry and accessories as its core business. The company offers watches in all price and market categories, including brands such as Breguet, Blancpain, Glashuette Original, Jaquet Droz, Leon Hatot, Omega and Tiffany & Co. in the prestige and luxury-range segment; Union Glashuette, Longines and Rado in the high-range segments; Tissot, ck watch & jewelry, Balmain, Hamilton, Certina and Mido in the middle-range segment; Swatch and Flik Flak in the basic-range segment, and Endura in the private-label segment. The company also manufactures mechanical and quartz movements, and is active in the design, production and marketing of electronic components. It also supplies movements and components to third-party watchmakers in Switzerland and around the world. The Swatch Group Ltd. is represented worldwide through its subsidiaries and distributors.
Burburry Group (OTCPK:BURBY)
Burberry Group plc is a holding company. It is a global luxury goods manufacturer, wholesaler and retailer. The company designs, sources, and markets luxury men’s, women’s and children’s clothing and non-apparel accessories globally through a diversified network of retail, wholesale, franchise and digital commerce channels worldwide. It also licenses third parties to manufacture and distribute products using the Burberry trademarks. The company’s operates through its two channels to market, which include Retail/Wholesale and Licensing. On September 1, 2010, Burberry (Shanghai) Trading Co., Ltd took control of key store assets and inventory across 50 retail stores and daily operations at 43 of the stores were transferred to the company. On January 31, 2011, the remaining seven stores had all transferred daily operations. During the fiscal year ended March 31, 2011 (fiscal 2011), the production of the local Spanish collection and related operations ceased.
Prada SpA is an Italy-based company engaged in fashion and luxury goods. The company designs, manufactures, promotes and sells leather goods, ready-to-wear and footwear through the Prada, Miu Miu, Church’s and Car Shoe brands. Prada and Miu Miu brands provide customers with an array of luxury goods, including leather goods, ready-to-wear and footwear and, through licensing agreements, eyewear and fragrances. The Church’s and Car Shoe brands target the niche luxury footwear market, offering footwear made of leather with handmade craftsmanship. The company distributes its products through retail and wholesale channels. As of January 31, 2011, their retail channel consisted of 319 Directly-Operated Stores, including the Prada Epicenters in New York, Los Angeles and Tokyo, and 18 outlets. The wholesale channel consists of luxury multi-brand and department stores, as well as franchise stores.
After consulting several analysts I came to the conclusion that most of them are very positive about Swatch. Swatch is extremely well positioned in emerging Asia, with four brands and different pricing strategies the company is among the ten most preferred brands. Emerging markets sales exposure accounts for about 35%, which is also among the highest in the luxury goods universe. Swatch should continue to benefit from its current geographical mix with low exposure to the US (14-15% of watch sales) and Japan (10-12%) where there are concerns on economic and consumption growth. But also Richemont is a stock with potential, especially now China and Switzerland have launched negotiations aimed at a Free Trade Agreement. Currently import tariffs on watches are some 10% (rising to 16% depending on type). In addition to import tariff, there is a tax on luxury watches of some 20% depending on price. A FTA (in 2012 or 2013?) should lead to the removal of import tariffs for watches. Expectations are that watches win share of luxury wallet in China, benefiting both Swiss companies.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.