2

The

the extra difficulties are how you are going to

do your business in that market; are you going
to choose a distributor? You have to be very
careful and make sure that they have the right
legal contract to protect your position. Are
you going to trust and license a local party
and enter into a joint venture? Brands need
to have their exit strategy in advance, in case
things dont work out.
Inevitably, data protection issues also
raise an ugly head. Alongside fake shops
and counterfeit products, market sources
also point out that in their eagerness to enter
China, many luxury brands do not ensure that
they possess the best portfolio in terms of
the protection that they need in the market.
Kennedy says that: Very few brands actually
consider thinking about their Chinese brands;
they come in with a foreign name but you
have to educate your consumers on how that
is pronounced. The reality is that most of the
Chinese people will approximate, give up,
and choose a Chinese name or brand for you.
If youre not careful, it may not be the brand
that you want.

life

Burberry, Bulgari and Bentley; as luxury brands experience a slowdown

in Asia, Seher Hussain investigates what obstacles, regulatory and legal,
lie ahead for the Chinese and Indian markets.

he luxury brand market in general has continued to defy

the global economic downturn, posting sustained growth
especially in the East, with China continuing to grow at a
much faster rate than the traditionally established markets
of Japan, Italy, Europe and the U.S. However, Chinas recent slowdown
has affected the luxury industry, with a recent report by Bain citing
that global luxury goods sales are expected to grow by 5 percent this
year, compared with 13 percent last year. Despite that, the might of
the Chinese consumer has vaulted the country into the top echelon,
with the country becoming the worlds second-largest luxury market
this year, topped only by the U.S. However, as the Chinese buyer grows
increasingly more sophisticated, international brands face an evolving
set of obstacles
Luxury companies also continue to eye India; as one of the worlds
fastest growing economies with an increasingly number of high net
worth individuals, it is well placed to capture a significant market
share. Will the newly released FDI regulations give this sector the
much needed boost it has been waiting for?

Helena Huang, King & Wood Mallesons

one of the primary obstacles.
Previously, Indias FDI laws capped foreign
ownership of retail operations at 51 percent,
but in a high- profile decision earlier this year,
the government officially lifted restrictions on
foreign investment in the retail sector, which
would allow international luxury brands like
LVMH, Burberry and Gucci to acquire 100
percent ownership of their India operations.
Aparna Mittal, partner at Luthra & Luthra
says: When the new policy was announced,
there was palpable excitement in the market,
anticipating that the market would really
open up. However upon closer examination,
there remain some ambiguities in the way
that this policy has been drafted.
The main requirement is that foreign
companies intending to invest on the 100%
route are required to source 30% of their
production from India. Mittal continues
that, as luxury brands are associated with
a particular quality and sometimes even
geographic associations, (such as Thai silk,
or Swiss watches) sourcing from India may
entail some significant commercial challenges. Many brands will be unable to alter
their Made in France or Made in Italy
specifications, leaving them no wiggle room
in the new sourcing requirements.
FDI reforms aside, several other challenges

Fendi and Ferraris; finding a foothold in India

Despite the flurry of attention devoted to
Indias economy and its growing middle class,
luxury brands have failed to find a firm footing
here, with the international luxury goods sector worth only about $1.3 billion, accounting
for 1 to 2 percent of the global luxury market.
Myriad reasons underline this lack of growth,
from scarcity of retail locations to incredibly
high import duties. But industry experts point
to foreign direct investment regulations as

CHINAS LUXURY MARKET

100

Chinas domestic luxury consumption forecasts

% of global luxury mrkt
Luxury consumption
Bln euros

80

REUTERS/Claro Cortes IV

Gucci and Givenchy; grappling with China

According to the Bain report, Chinese luxury goods sales are set to
rise by 8 percent at constant currencies and 20 percent at current currencies, while last year they climbed to 30 percent on both measures.
Burberry, Hermes and other brands have reported slowing revenue
growth in Asia over the past year; however they have still performed
well, with LVMH up 4.1 percent, Burberry up 17 percent and Hermes
up 9.4 percent. Now, Chinese buyers make up half of all the luxury
purchases in all of Asia. So what challenges do these international
brands face?
Its not about the new brands per se; its not about entering China
anymore, says Helena Huang, partner at King & Wood Mallesons,
now, its about expansion within the country. Luxury brands are expanding from the first tier cities into the second, and even the third.
As these companies expand, Huang points out several challenges that
arise, namely nailing down the correct legal structure for the brand.
Once you have regional headquarters in China, how many stores or
subsidiaries are you going to set up there? You have to get this structure
right from the very beginning because coordinating between different
cities and different provinces can be very difficult, she says.
Part of that legal structure and strategy is choosing your distributor
and joint venture partner, another process that can be problematic.
Gabriela Kennedy, partner at Hogan Lovells, elaborates that: In China,

Now its about expansion within

China. Luxury brands are expanding
from the first tier cities into the
second, and even the third.

20

Louis Vuitton
Chanel

16

60

12

40

20

Most desired luxury brands in China 2011

Brand
Stores
% of mentions in luxury survey

10

20

30

40

45

Dior

30

Armani

104

Hermes

19
N.A.

Cartier

37

Prada

18

Burberry

56

50

Note: Most desired brands according to Bain Survey of Luxury Goods Consumers in Mainland China (n=1,959). Cartier store data
excludes watch counters.
Sources: CLSA, 2011 Bain China Luxury Market Study.
Reuters graphic/Christine Chan 24/09/12

Gucci

Rolex

'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

38

remain. Jai Pathak, partner at Gibson, Dunn

& Crutcher, recounts that, In the new policy,
at least $100 million must be invested in the
relevant multi-brand retail company, and
50% of the foreign investment proceeds
must be invested over 3 years, in back-end
infrastructure. The foreign investor needs
to factor that in to his financial model as he
thinks about investment in multi-brand retail
in India.
Distribution is also a sticking point, says
Rahul Sharma, managing director of retail
consultancy firm Neev Capital. Sharma
comments, saying: Up till now, the route
has been to go to a five star hotel and set
up shops there; the approach has been very
piecemeal. The local customer comes to the
flagship, but its a showcase; he will actually
purchase the goods when he travels to Europe
or the U.S. Its almost like an advertisement
as opposed to a serious approach of making
the product available.
A diamond-bright future
It is evident that luxury brands still face hurdles when it comes to entering the subcontinent and the problem is far from resolved,
even given the recent reforms. However,
taking a long term view, Pathak says that
the government is moving very aggressively
and clearly intends to push through economic
reforms and attract foreign investment given
the recent slump due to the uncertainty over
tax treaties and taxable transactions.
Sharma agrees, relating that the demand for and awareness of luxury goods is
prevalent in the Indian consumer, and global
brands need to start taking India more seriously as a potential market.
Hopping across to China, a similar outlook
emerges. The number of rich Asians exceeded
that in the U.S. for the first time this year
(see A Wealth of Opportunity, in ALBs
September issue) as reported by Capgemini
and RBC Wealth Management. Home to now
3.37 million high net worth individuals, 17
percent of Asias wealthy are based in China,
and their appetite for luxury goods may be
insatiable. Huang sums up, by saying: There
may be some adjustment in growth due to the
slowdown, but Chinese wealth is still at a very
early stage. This market has not matured yet,
and has great potential.