Examining The Growth Of The Luxury Industry In Asia Through 'The Cult Of The Luxury Brand'

by: Xinyun Hang


Radha Chadha and Paul Husband's Book "The Cult of the Luxury Brand" describes the process by which luxury brands become popular in Asian countries.

According to them, that process follows a model called the "Spread of Luxury" model.

Using this model, we can predict how long it will take for the luxury industry to reach saturation in Asia.

This, in turn, allows us to estimate the long-term growth of luxury companies in Asia and to see if those companies are attractive investments or not.

Radha Chadha and Paul Husband's book The Cult of the Luxury Brand: Inside Asia's Love Affair With Luxury describes the rise of the luxury industry in Asia.

In the past 40 years, Asia has become the world's largest market for personal luxury goods such as clothing and jewelry. According to Bain & Company s Fall-Winter 2016 Luxury Goods Worldwide Market Study, Asians bought more than half of all luxury goods in 2016:

Source: Bain & Company Fall-Winter 2016 Luxury Goods Worldwide Market Study

Chadha and Husband's book examines the cultural and economic reasons for Western luxury brands's popularity in Asia. For example, they argue that the conspicuous wearing of luxury clothing has become a way for Asians to define their position in society. This trend, they say, has been influenced by the significant social changes in Asia in the past half-century.

Moreover, they argue that Asian countries, particularly East Asian countries such as Japan, South Korea, and China, have collectivist cultures, as opposed to individualistic cultures such as those in the West. In their words, "collectivism believes that conforming to the norms set by your groups is the proper way to behave." Chadha and Husband attribute luxury goods companies' success in Asia to their ability to create the norm that everyone who aspires to values such as "class" and "sophistication" buys their products.

It is beyond the scope of this article to decide if such broad cultural analyses are correct. However, if they are, there are interesting implications for investment analysis. Chadha and Husband's key model, based on their cultural analysis, is the "Spread of Luxury" model. According to the model, luxury good consumption in Asian nations passes through five stages based on the nations' levels of development. If this is true, it opens up a way to project the growth of the luxury industry in Asia.

(Author Update, 6/21/17, 4.50 A.M.: Figures in this article were initially calculated based on the assumption that the "American" luxury goods sales figures in the Bain & Company report referred to sales in the U.S. or to U.S. individuals, whereas they actually referred to sales in North and South America. Changes have been made to reflect the correct interpretation.)

The "Spread of Luxury" Model

In their book, Chadha and Husband place Asian nations at various points on the "Spread of Luxury" model based on their luxury goods consumption:



Places at this Stage


  • Authoritarian Rule
  • Poverty and deprivation

Start of Money

  • Economic growth
  • Masses buy white goods
  • Elites start buying luxe

India, Indonesia, Philippines

Show Off

  • Acquire symbols of wealth
  • Display economic status

Mainland China, Malaysia, Thailand

Fit In

  • Large scale adaptation of luxe
  • Fueled by need to conform

Taiwan, South Korea

Way of Life

  • Locked into luxe habit
  • Confident, discerning buyers

Japan, Hong Kong, Singapore

Source: The Cult of the Luxury Brand

Though they only focus on Asian countries, we can also put the regions from Bain & Company's analysis onto various stages of the model as well:



Rest of World

Start of Money/Show Off

Other Asian

Start of Money/Show Off (Primarily)


Show Off


Way of Life


Way of Life, Fit In, Show Off


Way of Life, Fit In, Show Off

This placement becomes interesting when examined alongside the sales statistics in Bain & Company's report for each region:



Percentage of Personal Luxury Goods Sales

Personal Luxury Goods Sales (Million Euros)

Approximate Population (Millions)

Per Capita Annual Sales


Way of Life






Way of Life, Fit In, Show Off 18.6% €46,289.10 743.1 €62.29


Way of Life, Fit In, Show Off






Show Off 29.9% €74,401.20 1371.0 €54.27

Rest of World

Start of Money, Show Off (Primarily)





Other Asian

Start of Money, Show Off (Primarily)





As can be seen, a region's per capita sales of personal luxury goods correspond directly to the region's stage on the "Spread of Luxury" model.

This is unsurprising, though there are a few oddities in the analysis. Despite being the origin of much of high fashion, per capita sales are much lower in Europe than in Japan. This is likely due to the lower penetration rate of the luxury goods industry in Eastern Europe. Similarly, though the "Other Asian" region includes such fashion hotbeds as Singapore and Hong Kong, its per capita sales are the lowest of any region due to comparatively low luxury sales in places such as India and Indonesia.

This per capita analysis of personal luxury goods sales initially looks like nothing more than trivia-interesting but not particularly useful. However, when combined with the "Spread of Luxury" model, it actually offers a tool to analyze the industry. To take advantage of this tool, though, it is necessary to combine Chadha and Husband's model with a thought process for analyzing a company in a totally different industry: Coca-Cola (NYSE:KO).

The Spread of Coca-Cola and Growth in the Luxury Goods Industry

When I first read about the "Spread of Luxury" model, I was reminded of a piece of investment analysis about Warren Buffett's investment in Coca-Cola. That analysis was written by one of my favorite investment writers, Geoff Gannon. In his words:

I think there were really only 3 reasons why Warren Buffett bought Coca-Cola stock:

1. Pricing power

2. Consumption per capita growth

3. CEO focused on growth

The "Spread of Luxury" model can be directly connected to that second reason: consumption per capita growth. Gannon notes that when Buffett made his investment, per capita Coke consumption in the U.S. was six times higher than the worldwide rate. However, there was no reason why Coke consumption had to be much higher in the U.S. than worldwide. Even if Coke consumption abroad never quite reached U.S. levels, it would at least approach those levels as the world became wealthier.

The same is true of the luxury goods industry. Per capita consumption of personal luxury goods in the developing world should increase with increasing wealth. This seems obvious-and it is. However, what is not obvious is how high per capita consumption will rise due to development.

Here is where the "Spread of Luxury" model is valuable. By arguing that Asia follows a standard path in which per capita luxury goods consumption rises with wealth, until it reaches levels like those in Japan, Chadha and Husband are implicitly arguing that once Asia becomes fully developed, per capita luxury goods consumption in Asia will become the same as-or at least similar to-that in Japan. Once this assumption is established, we can quantify the future growth of the luxury goods industry in Asia.

Quantifying the Luxury Goods Industry's Growth in Asia

The first question to consider in quantifying this growth is how many years it will take for both China and the rest of Asia to reach Japan-like per capita personal luxury goods consumption levels. Implicitly, this means considering how long it will take for those regions to reach Japan-like levels of development. This is obviously no easy question!

It is far outside the scope of this article to make precise predictions about the economic futures of billions, if that's even possible. However, the power of Buffett's thought process on Coke, which we are now applying to the luxury goods industry, is that no such precise predictions are necessary. Buffett only needed to know that Coke consumption worldwide would grow towards U.S. levels over the next few decades to know that Coca-Cola was an attractive investment. He did not need an exact prediction of the rate of that growth, just a rough estimate.

Similarly, all we need is a rough estimate of how long it will take for personal luxury goods consumption in the rest of Asia to approach Japanese levels. If that estimate is not totally inaccurate, we will be able to forecast whether the luxury industry will have an attractive growth rate, and thus whether it will be an attractive investment.

To make this estimate, we can look at the personal luxury goods market's growth between 1994 and 2016:

Source: Bain & Company Fall-Winter 2016 Luxury Goods Worldwide Market Study

Bain & Company's report divides this period into three growth periods. The first was the "Sortie du temple," or "descent from the temple," in which luxury brands began to seek a mass audience. The second was the period of democratization, in which mass adoption of luxury goods became commonplace. The third was the "Chinese shopping frenzy," in which global luxury goods consumption was driven by Chinese demand. Those three periods were offset by two periods of weakness, one caused by the Great Recession, the other by today's economic and political uncertainty.

The Compounded Annual Growth Rate, or CAGR, for the industry in those periods can be seen here:

Source: Bain & Company Fall-Winter 2016 Luxury Goods Worldwide Market Study

I think it's too optimistic to think that personal luxury goods demand will continue to grow at 9%, as it did after the Great Recession, or even at 7%, as it did between 1994 and 2007. On the other hand, I think it's too pessimistic to think that no growth is truly the "new normal," particularly in Asia. After all, the above growth rates are global rates, meaning that the rate of growth in high growth regions such as Asia was actually higher than these rates.

Moreover, despite the turmoil of the past two years, the economies of China, India, and Bangladesh all grew about 7% year over year in 2016, while the economies of Pakistan and Indonesia both grew around 5%. These countries represent nearly half of the world's people and the great majority of Asians, and it is hard to believe that such economic growth will not result in increased luxury goods sales. Thus, I think it's reasonable to imagine that personal luxury goods consumption, at least in Asia outside of Japan, will grow at an annualized 6% for the foreseeable future-a bit slower than past rates, but still a respectable rate of growth.

I also think that personal luxury goods consumption in Japan-which Chadha and Husband describe as a "mature market" where "the overall imported luxury market has started declining in recent years" will remain about flat. This is supported by the historical data-sales were about 21 billion Euros in 2005, according to Bain's 2011 survey of the industry, versus 22 billion Euros in 2016. In that context, a reasonable annualized growth rate for Japanese personal luxury goods sales is, I think, 0.5%.

Incidentally, it is worth emphasizing that these growth rates are annualized rates. In any given year, the industry's growth in Asia will probably not follow these rates. Over the long run, though, I believe the total growth will be equivalent to about 6% per year.

Once we have determined the growth rates for the luxury industry in Asia, it is worth considering the endpoint for that growth. As we have established, Japan has already hit saturation in terms of per capita luxury goods consumption. However, we still need to determine what saturation looks like for the rest of Asia.

The "Spread of Luxury" model sees Asian countries' luxury goods consumption develop linearly to the "Way of Life" stage, as exemplified by Japan. That said, I don't think every Asian country will ultimately reach Japanese per capita luxury consumption levels. There are too many differences between the countries of Asia to fit a single model to all of them so simplistically.

However, I do think that it's reasonable to imagine a fully luxury saturated Asia with consumption rates 60% of Japan's. Such a rate would be a little less than halfway between that of Europe and Japan today-a fair estimate, I think.

Having established our luxury consumption growth rates for Japan and the rest of Asia as well as the endpoints of such growth, we can now project how many years it will take to reach those endpoints. Again, here are our assumptions:


Rest of Asia

Starting Point (Per-Capita Annual Luxury Goods Sales)



Growth Rate



End Point (Saturation)


60% of Japanese Per Capita Consumption

*Calculated by taking the weighed average of luxury goods consumption in China and the rest of Asia.

Based on these assumptions, Asian luxury consumption will reach saturation around 2049, 32 years from now. Though this calculation was made by combining some basic assumptions with the theories put forth in Chadha and Husband's book, it fits historical reality surprisingly closely. The luxury goods industry first began making inroads into Japan at the beginning of the 1980s, and consumption there hit saturation in the mid 2000s, or about 25 years later. Given that most of Asia is starting from a lower base, economically, than Japan's position at the beginning of the 80s, a slightly longer runway to saturation seems plausible.

That said, we should take a step back and consider if it makes sense to make such far-reaching predictions. I am generally suspicious of people who say they can predict what will happen decades from now. After all, 32 years ago, in 1983, few people could have predicted the fall of the Soviet Union-only 8 years away-never mind the world we live in today. Thus, how can we know what personal luxury goods consumption will be 32 years from now?

The answer, of course, is that we can't. However, we can make some basic assumptions about the world. Those assumptions are:

  1. The developing world will continue to grow at rates similar to-if perhaps somewhat slower than-the rate it has growth at in the past 30 years.
  2. People who become wealthier will express that wealth by buying more personal luxury goods.

The second assumption seems fairly obvious based on human history. The world's confidence in the first assumption has been shaken in recent years. However, I believe it is still the assumption that most people-especially most policymakers-follow. If it proves to be untrue, I believe we will have more to worry about than whether this humble article was accurate or not.

Having said that, Chadha and Husband's book allows us to add a third assumption to the two above:

  1. Asian personal luxury goods consumption, driven by growing development, will approach-if not necessarily reach-Japanese levels as the level of development approaches Japanese levels.

This third assumption, combined with the other two, lets us quantify how long it will take for Asian personal luxury goods consumption to reach saturation. The answer is about 30 years, based on the above estimates.

Moreover, even if such estimates are off-and they likely are-they can still be used to value companies. A company that appears attractive based on such estimates will still be attractive as long as those estimates are not totally incorrect. This is the power of Buffett's thought process, which abstracts away from such details as the exact per-capita consumption of luxury goods-or Coca-Cola-in a country. Instead, it only worries about general trends, such as whether consumption in the developing world will approach those in the developed world. By doing so, it manages to focus on only the facts that matter to a valuation and ignores everything else.

Next Steps: Applying the "Spread of Luxury" Model to Valuations

That said, using the "Spread of Luxury" model to value individual companies will still be hard.

First, we will need to consider which companies the "Spread of Luxury" model can be applied to.

Next, we will need to consider how to apply the model to each company. It will not be as simple as applying a 6% growth rate to non-Japanese Asian operations and a 0.5% growth rate to Japanese operations. Rather, it will be necessary to consider each company's per capita sales in each region. Having done so, we will need to calculate what growth rates result from a convergence of Asian sales levels towards Japanese levels.

However, to consider such regional per capita sales levels, it will also be necessary to consider the different ways in which each company accounts for sales by region. For example, a significant number of luxury sales to Asian consumers occur outside of Asia. Thus, it will be necessary to understand how companies account for those sales to see what portion of each company's sales are to Asians.

These are just some of the challenges which will be faced in estimating each company's growth. Given their complexity, I will save the valuation of individual personal luxury goods companies using the "Spread of Luxury" model for my upcoming articles, starting with this one.

Disclaimer: The content here is not meant as investment advice. Do not rely on it in making an investment decision. Do your own research. The content here reflects only the author's opinions. Those opinions might be wrong. This content is meant solely for the entertainment of the reader and its author.

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