High-end brands spy opportunity in Asia's emerging markets

At the time, the existence of the Mongolian nouveau riche and LV’s move into central Asia took many by surprise, as the region is better known for yurts, nomads and yak milk than designer bags.

During the launch, Carcelle said that LV “never does market research”, adding that its decision to expand into the territory was based on intuition and observations about changes in consumer behaviour. “Mongolia is ready for us,” he concluded.

Ermenegildo Zegna, Hugo Boss, Emporio Armani and Burberry were quick to lease space in the same Ulan Bator mall in the capital’s main Sukhbaatar Square, clearly equally convinced by the potential of the metropolis of 1.1 million inhabitants, 120 miles from the Russian border.

Rich supplies of commodities, from gold to copper and uranium, plus some of the world’s finest cashmere, are behind the generation of considerable wealth in Mongolia, and a growing tribe of moneyed locals want to show off their new-found status.

Indeed, across Asia small pockets of wealthy elite are emerging in increasingly far-flung locations, and brands are responding accordingly, keenly aware of the first-mover advantage. Goris Verburg, GM of the International Watch Company (IWC) Schaffhausen, points to Vietnam and Indonesia as priority markets for development, with no established leader in the timepiece sector.

In China, meanwhile, luxury brands such as Swarovski and Tag Heuer, having established themselves in Beijing and Shanghai, are now entering new frontiers in the country’s largely uncharted second and third tier cities. Even India, so far a laggard when it comes to luxury brand expansion in Asia, is showing signs of change, with a number of big name brands preparing to branch out.

As if to hammer the point home, the doyen of luxe, Francois-Henri Pinault, chief executive of Pinault-Printemps-Redoute, predicted earlier this month that “emerging market consumers will buy some 65 per cent of all luxury goods in the next decade”.

The conglomerate that Pinault heads up, which controls the Yves St Laurent, Alexander McQueen and Stella McCartney labels, is expecting to generate 80 per cent of its growth from emerging markets this year.

From a global perspective, it is not difficult to understand why these rising economies hold such fascination for the world’s grandes maisons.

According to a worldwide study of luxury goods by consultancy Bain & Company, the Asia-Pacific region (excluding Japan) will see 22 per cent growth by the end of this year. This compares with growth of 12 per cent in the US and six per cent in Europe.

Though, as LVMH among others admits, operating profits in markets like China and India are lower than in Europe or the US, the saturation rates of developed markets leave considerably less room for growth. That’s why LVMH outposts in Ho Chi Minh City, Vietnam, Phnom Penh, Cambodia and potentially Lhasa in Tibet are increasingly important.

“We believe that the motivation for this territorial conquest [by luxury brands] is to become closer to their clients and progressively part of their culture,” says Yukino Yamamoto, a consultant for Labbrand in Shanghai. “This is a long-term process that took more than a century in many Western countries, but takes only a few decades in these emerging markets.

“Luxury brands evolve and initiate a deepening of the relationship with consumers. It results in the increasing sophistication of their clientele. Luxury brands create emotions that are building a new culture, which is the best guarantee for longevity.”

But as luxury brands go local in Asia, challenges with regard to branding and marketing inevitably arise. As Sarah Reiter, executive director of Future Brand in Singapore warns: “Beware the brand owner who considers Asia a homogenised market of luxury consumers sharing similar drivers and seekingsimilar experiences.”

In India for example, the luxury automobile segment has had considerable success because the brands figured out how to tweak their strategies to suit the market. Although Mercedes-Benz was the only luxury car marque in India until 2005, in the last five years, Rolls Royce, Maybach and Audi have rolled into town and the auto industry is booming. 

Where in more developed markets the driving experience is a key selling point for top-end cars, in India, where the majority of wealthy car-owners have a chauffeur, the comfort of the back seat takes precedence. Marketers latched onto this point early and focused on promoting their cars’ rideability rather than driveability.

According to Subhash Kamath, managing partner at BBH in Mumbai, to simply replicate a strategy from an existing market and use it in India is a “recipe for disaster”. But he claims that high-end brands stretching themselves to really connect with the Indian consumer are few and far between. 

“Categories such as luxury accessories are really struggling to tap the India mindset,” agrees Santosh Desai, chief executive of Futurebrands in Mumbai. Earlier this year, German penmaker Montblanc learned the hard way that identifying with local cultural icons is no guarantee of success. The company withdrew a special edition ‘Gandhi’ pen following outrage at the use of the famed ascetic’s name for commercial purposes. 

While India is an attractive, if problematic, prospect, China remains the biggest driver of luxury goods growth in Asia and indeed for the luxury industry as a whole. The majority of new luxury stores today are opened in Asia with a large proportion on the Chinese mainland and the country is estimated to have between 10 and 13 million luxury brand consumers. But more and more demand for the quality luxury names lies outside the top-tier cities.

“Some brands are even seeing that emerging city retail outlets are already generating significant sales,” says Angelito Tan, founding and managing partner of BBDO Proximity Live. “One brand we spoke with recently said that their store in Urumqi was generating some of their best sales in China. Obviously the appetite for luxury is not just centred around the major eastern cities any more.”

As in India, Tan says that targeting consumers in emerging cities in China requires a different approach. His agency recently worked with a luxury watch brand to advise them on the use of a local ambassador for the first time.

“Before this, they had stuck with their global ambassadors. However, as they expanded to emerging markets within China they understood the need for a locally relevant ‘face’ for their brand, which would resonate with local consumers. We worked with them to source and secure this talent and develop a local advertising campaign, which was a first for them,” Tan explains.

Nonetheless, one of the biggest challenges for global brands marching into new territories is educating their new consumers. US jeweller Tiffany & Co, for example, says that its marketing on the mainland is focused on education rather than products.

Within the next three years Tiffany plans to have 25 to 30 outlets in total and more stores in China’s second and third tier cities, James Fernandez, executive vice president and chief financial officer, told analysts recently. The company is preparing to open a store in Kunming (in China’s far Western Yunnan province) this month.

According to Fernandez, the company aims to communicate its brand heritage and present clear reasons for consumers to buy its products over local Chinese jewellers. Part of this process involves telling the story of diamond sourcing and cutting, and what makes them desirable.

While education might be key to improving luxury sales in certain territories, in others, understanding consumer motivation, and ultimately shaping their habits, is proving far harder. 

In Sri Lanka, for example, a healthy appetite for luxury exists among the affluent, but, as brands like Kenzo have found, purchases are made almost exclusively overseas in more developed markets that fit with Sri Lankans’ perception of ‘luxury’. 

In India, Desai points to the realisation of individuality as a trend marketers are struggling to take advantage of. “People want to express themselves but brands have not been very successful at chanelling this,” he observes. “It’s not a question of money; the money is here, but there’s no history of a luxury market for things like accessories. The brands have to create it, but it takes time to build desire. I think it will be five years before most luxury brands become meaningful in customers’ minds.”

Luxury industry insiders in India often claim that it is the same 300-500 people in the country making all of the luxury label purchases.

However, Desai cites Tag Heuer as a rare example of foreign luxury brands that has expanded its customer base successfully in India, although he has reservations about the speed of its rollout.

“They’ve been doing good volumes and have penetrated deeper than any other luxury brand. They signed a Bollywood star. But everything they’ve done has been very mass appeal. The danger is that Tag will be run-of-the-mill in five to 10 years. The question is, did they move too early?” he asks.

While the rest of the industry ponders just that, French luxury brand Hermès is set to take luxury retail out of the traditional confines of five-star hotels and luxury malls in India by opening an independent store in a heritage building in south Mumbai next year. It’s a clear sign that luxury brands are beginning to look for ways to overcome the very limited retail infrastructure in the country - one of the major factors hampering the growth of the market.

Due to the relatively low volumes in the Indian luxury market, the sales often do not justify expensive advertising. As a result, a greater emphasis is placed on retail space.

“A few years ago, some luxury brands did advertise in the mass media, but that didn’t work,” Kamath recalls. “Brands here are mostly driven by exclusive retail presence and very exclusive promotional strategies. There lies the biggest challenge in marketing luxury to Indians.”

Meanwhile, in Vietnam, where six years ago luxury brands were extremely thin on the ground, opulent clothing and watch brands jostle for shoppers’ dollars in the swish Sofitel Metropole in Hanoi, while further upscale retail outlets continue to spring up across the country. Most luxury brands enter the market via a local distributor operating under a tight direct-franchising contract. For the first time ever, shoppers in Vietnam are reporting that they no longer have to wait for business trips abroad to buy luxury items - a clear sign of just how far luxury brand presence is beginning to stretch across Asia.

Tan notes that in emerging markets, the retail space and especially the staff are essential tools to communicate the brand and drive influence and affinity with ‘luxury followers’, consumers who buy luxury goods but largely follow trends dictated by advertising and who have little brand knowledge. The retail experience is then leveraged as a brand-building tool as much as for generating sales.

But as Kamath points out, good quality service  remains a hurdle for brands in emerging markets, particularly those trying to give top-end consumers an incentive to shop at home rather than abroad. 

“Getting genuinely trained staff in all these emerging markets is a huge challenge for luxury brands,” he says. “In many cases, the local franchisee hasn’t bothered to inculcate the staff into the brand values or presentation. Hence, the subsequent experience and interaction has left the high-end customer disappointed. Proper training should be seen as a genuine investment into the brand, and not an expenditure. Unfortunately, the brand owners haven’t necessarily seen it that way.”

This article was originally published in the December issue of Campaign Asia-Pacific.