Mainland buyers spur Asian luxury markets

By Erwan Rambourg, Antoine Belge and Sophie Dargnies
0 Comment(s)Print E-mail Shanghai Daily, April 8, 2013
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The Asian region generally and the five markets of Hong Kong, Singapore, South Korea, Taiwan and Macau specifically are benefiting from the increasing flows of Chinese mainland tourists - who account for as little as 15 percent of luxury sales in Taiwan to as much as 75 percent in Macau.

We acknowledge that travel trends are correlated to greater disposable income, but we view ease of travel as the more important driver of this development. In other words, we believe the reason Chinese mainlanders travel more and more in the region is basically because they can and we think there is evidence that regulation and infrastructure notably will support further increases.

With sheer numbers going up, other parts of the equation must evolve with a natural long-term evolution from group to individual travel and from an initial focus on shopping as the key reason to spend or travel to more holistic experiences.

With Chinese travelers having an impact on several local Asian markets, brands and retail operators need to adapt quickly. This is changing the luxury retail landscape of certain cities. Prices and currencies matter as Chinese consumers are increasingly travelled and demanding. In turn, differentiated concepts are costly but necessary for the brands to stand out in the crowded space.

The key risk for brands operating in the luxury space remains ubiquity in our view and with Chinese outbound travel likely to be sustained over the next few years, the concept of "first-mover disadvantage" we introduced in October 2012 in our research report has a long life expectancy.

We believe that long after the South Korean influence on pop culture in Asia (so-called Hallyu), South Korea is now gradually replacing Japan as the main influence for cosmetics, fashion and potentially luxury itself with the Chinese.

South Korea: consumer is king.

Despite a long-lasting presence of luxury brands, an indebted consumer base and political uncertainties, we believe the South Korean luxury market is far from mature.

However, looking at hyper-segmentation, significant product breadth and prolific brand launches, early movers are under pressure as substitutes abound. The South Korean consumer is spoilt for choice.

With the downtown duty-free sector seeing strong developments, Chinese mainlanders will likely be under the influence of South Korean trends. For imported brands, growth won't come without a fight.

Singapore: extravagant ambitions?

The stereotype of a half-asleep city disappeared with phenomenal architectural projects and entertainment from amusement parks to casinos, shopping, fine dining and arts.

However, we believe the architect's dreams and the consumer's delight do not necessarily mean brands are winning with their Singapore footprint as there could be a case of short-term retail overcapacity.

Furthermore, although the city is a great location to capture Indonesian and Chinese demand, the issue is with sluggish spending from the locals and a political context that may cap population growth.

Hong Kong: servicing the mainland.

We are bullish on luxury prospects for Hong Kong. This may seem counter-intuitive (especially if you live there) but we believe there is not enough luxury retail offer in Hong Kong.

With its impressive infrastructure projects, we are convinced the city will continue to be the go-to destination for mainland shoppers. We also take the view that same-day travel will structurally force retailers to choose between "commoditization" and differentiation, in other words consciously target the mainlanders or decide to take a more global or cosmopolitan approach. Although the slight pick-up seen in the short term may be influenced by currency swings and European price increases, we think Hong Kong will continue to grow into one of the most profitable luxury hubs on the planet despite increasing rents.

Taiwan: Japan with tourists?

We find the Taiwanese luxury market dynamics resemble those of Japan, not just for historical and cultural reasons. We take the view that local demand for luxury will go down or sideways from here. However, with the tourist-targeting infrastructure becoming more qualitative and the greater opening to the mainland, local operators may hope potentially to become the next Hong Kong. We believe this is wishful thinking unless one takes a very long-term view.

Macau: soon a retail destination?

The dominant neon-lit gaming capital of the world has taken a while to diversify into entertainment and retail: this is now changing. However, until retail becomes a real reason to travel to Macau (instead of a gaming sideshow), we look for efficiency and metrics in the luxury trade, not sophistication. We see more opportunities than risks locally but question marks on the viability of the business model will be recurrent.

The rest of Asia

Japan remains a tough market dominated by local consumption for a good reason: it is amongst the most expensive markets. The four "Asian tiger cubs" - Thailand, Malaysia, Vietnam and Indonesia - may one day grow to become tigers, but there are clear limitations to these luxury markets linked to infrastructure, import issues, regulation, lack of a sufficient target market or a combination. Similarly, we are not too optimistic in the short term on the prospects in India for luxury. Some markets, such as Australia and New Zealand, are small yet also highly influenced by Chinese travel.

The article was based on a research note issued by the Hongkong and Shanghai Banking Corporation Limited on March 28. The opinions expressed are their own.

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