Engaging China By Going Public

by Patricia Pao, Dec 7, 2011, 6:57 AM

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China is forecast to be the world’s top buyer of products such as cosmetics, handbags, watches, shoes and clothes by 2015, according to consultancy PricewaterhouseCoopers. To capitalize on this opportunity, many luxury goods companies have filed their IPOs or joined the Hong Kong stock exchange.

 In a move to bolster its presence in Asian markets, Coach announced that it will list just over 10% of its U.S.-based shares in Hong Kong.

In doing so, Coach has joined the ranks of other luxury labels such as Prada and Samsonite.  Unlike Prada, which raised $2.1 billion, and Samsonite, which generated $1.2 billion for their respective IPOs, Coach’s offering will not raise additional cash but the move "would demonstrate Coach's commitment to, and focus on, Asia," it says.

Prada CEO Patrizio Bertelli hailed his company’s IPO as a “landmark” for Hong Kong, adding that it was “opening a new wave for the luxury goods sector.” He said, “We’re positive that the greater China region is going to be one of the most interesting prospects in the luxury industry.”

This is an extremely interesting phenomenon and demonstrates the huge importance of China’s new affluent (and rapidly) growing consumer base. Currently, China has approximately 300 million potential luxury buyers with over 1 billion consumers eagerly waiting for their opportunity to move from third-tier to first-tier status.

And their wait is not so long. Unlike Chicago, which took 70 years to become a first-tier city, Chengdu has taken fewer than 12 years to emerge from a second-tier to a first-tier city. What this means is that, ironically, we will be seeing a mass movement into luxury consumption.

According to Bain & Co, China's market for luxury goods will grow 35% in 2011, with luxury spending by Chinese to account for just over 20% of the global market.

Coach Chairman and CEO Lew Frankfort said: “This listing will raise awareness of the Coach brand among investors and consumers in the China market as well as throughout Asia. It also clearly signals the importance of China to Coach – our largest geographic opportunity. Based on our rapid growth, it is clear that the Coach proposition is resonating with Chinese consumers, who are participating in this category in increasing numbers.”

According to Bain & Co, China’s market for luxury goods will grow 35% in 2011, with luxury spending by Chinese to account for just over 20% of the global market.

Graff, the venerated jewelry firm, is also planning to field its IPO in Hong Kong, seeking to raise money in a region where demand for luxury goods is accelerating as the European and U.S. economies stall.

Sales of luxury items in China such as clothes, handbags, fine jewelry and watches will more than double, to about ¥180 billion ($28 billion) in 2015 from last year, McKinsey & Co. says.

“This is yet another example of a Western brand seeking to list its shares on a Far Eastern stock market where it believes that it will not only achieve a higher valuation but it will also gain good PR in an increasingly important market,” says Chris Searle, corporate finance partner at BDO LLP.

Additionally, there is speculation that other firms such as Burberry and PPR, which owns Gucci, YSL and Stella McCartney brands, will also list on the Hong Kong exchange. It’s an interesting phenomenon and one that will be eagerly watched.

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