Commentary
The China Luxury Investor: Bagging Local And Going Global
- by Patricia Pao , June 29, 2011
I was recently in Beijing meeting with a leading Chinese beauty distributor about launching one of my client's brands. In the middle of the meeting, the CEO interrupted me (which is highly unusual) and said that he wasn't interested in taking my client's brand but he was extremely interested in having my company create and develop a proprietary and innovative skincare line that would be manufactured in the U.S. and imported into China.
He explained that beauty and luxury goods made in China lack cachet among the Chinese and that the most successful brands were from Europe (e.g. France, Italy) and the U.S. He said that he spent over 30 years in successful partnership with leading global beauty companies and the time was now to begin thinking of building his own global beauty brand.
I found this dialogue to be extremely fascinating as it caused me to ask, "If he wants to be the next Estee Lauder, are there other Chinese companies who want this as well?"
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It appears the answer is a resounding YES! Prada's IPO is already oversubscribed after its Hong Kong and Singapore road shows due to Chinese investor hunger to acquire global brands. Until it transitions from an export-based to a consumption-driven economy, China will continue to be classified as a developing country.
Since China's most fervent desire is to be the number one global superpower, it is aggressively looking to "go global" as one of the initiatives towards achieving its goal. And, unlike most countries, it is happy to discard its local roots in favor of acquiring global brands and integrating them into the local Chinese economy.
This can also be seen in Mandarin Capital Partners' investment in Miroglio, the second-largest women's textile group in Italy. Mandarin Capital Partners claims to be the "largest Sino-European private equity fund." It recently announced plans to invest $57.9 million in Miroglio. Founded in 1947 and headquartered in northern Italy, Miroglio controls 58 companies in 36 countries around the world, and employs around 12,000 people throughout 2,000-plus outlets.
One of Europe's largest textiles and fashion retailers, the group has spent the last several years focusing more intently on emerging markets like China, Russia, Brazil and Turkey. In China, the Miroglio Group is perhaps best known for its fast fashion brand Motivi, a favorite among young female shoppers. Aimed at the same consumer base as brands like Zara, Motivi currently has locations in Shanghai, Beijing, Harbin, Dalian and Shenzhen, with plans to open more than 100 outlets in China over the next three years.
Our recent study of high-net worth Chinese luxury buyers showed Folli Follie to be a strong fine jewelry brand. Specifically, Folli Follie was the fourth-most purchased fine jewelry brand behind Tiffany, Cartier and Bulgari. The Chinese were quick to jump on the Folli Follie bandwagon. Fosun, one of China's largest private companies, recently announced plans to invest $121 million in the brand in order to help Folli Follie more effectively tap China's growing consumer market.
The investment activity in foreign luxury brands will continue to grow as the Chinese want to learn from and leverage the brand positioning and product development know-how of these companies. We will be seeing a lot more courting of vulnerable brands with great global pedigrees such as Folli Follie that produce the kinds of products most sought-after by Chinese luxury goods buyers.
I believe that within the next 20 years, the Chinese will have assimilated the knowledge and use this knowledge to develop their own brands. It's a "win-win" situation as Chinese investors can capitalize on the brands' existing global business while helping them to expand into China's prized consumer market. I am already taking bets as to see who will be next. I am predicting that a company like Loro Piano, with its stellar pedigree and need for cash to expand, will be next.
It likely will not even take 10 years Patricia. What I also find compelling is the eventual export of these Chinese luxury brands to Europe and the U.S. - there's no reason why that should also happen simultaneously.
Im not sure if I agree with the basis of your argument of China wanting to "go global". Without getting into a rather extensive explanation of China's place in the Asia-Pacific region/global market place, I don't believe that China's most "fervent desire" is to become the next global superpower. China has three main focuses to their foreign policy efforts; Taiwan, Economic Growth, and the People's Army (in that order)- the latter being the only effort to exert influence in the region. That being said, the economic growth that China has experienced since the 1970's could provide a basis for regional and global influence, but this type of development is focused inward as the ruling party enjoys the legitimacy that an ever increasing GDP garners.
Yes, Chinese companies are acquiring western brands to bring to their domestic market and flip as they are converted into export, but this is easier than internal development in a cash rich environment. China though growing, still lacks much of the infrastructure and educated human capital to create a well known Chinese brand identity or domestic product base. They're not discarding their local roots because there are no roots to discard- at least not yet.
The move to luxury goods is evident, but China's "prized consumer market" is a burgeoning middle class. Rather than predicting the rampant growth to a high end luxury market, the more realistic future should come with mid level consumer based products. The Chinese middle class is getting its first taste of western-style consumerism. You need to give them time to crawl before they can walk into a Cartier or Tiffany's.