China has become increasingly important to the growth of the world's luxury goods market. In an environment of stagnant growth in developed countries, Chinese consumers are the key source of revenue for luxury good distributors. CLSA Asia-Pacific Markets forecasts demand for luxury goods and travel from Greater Chinese to account for 44.0 percent of global sales by 2020, up from 15.0 percent today. Bain & Company released a recent report in November 2010, showing that Chinese paid RMB 68.40 billion (US$10.21 billion) for luxury goods in 2009 and are likely to have spent 23.0 percent more in 2010. CLSA predicts that China will become the world's largest domestic market for luxury goods, accounting for EUR 74 billion or 0.6 percent of the country's total GDP, over the next decade.

As incomes rise, China's burgeoning middle class is adopting previously unattainable high-end lifestyles and is transitioning from a saving to a spending culture. A CLSA survey of 340 consumers and 31 luxury store managers in China's Tier 1-3 cities found that more than half have made or are planning a luxury purchase. Those who bought luxury goods in the past 12 months spent an average 10.0 to 12.0 percent of their total household income on these items, demonstrating a high propensity to spend.

According to a survey of 1,471 luxury goods consumers in more than 10 cities in China by Bain, Chinese consumers spent the most for luxury cosmetic and perfume products, totaling RMB 16.90 billion or 24.7 percent of total luxury goods spending in 2009. The second largest sector for luxury product spending was luxury watches, recording sales of RMB 15.50 billion, with bags and suitcases ranking third.

A number of cultural and social differences contribute to the rapid growth of the luxury goods sector relative to Chinese consumers. The first of these is that mainland Chinese millionaires are on average 15 years younger than their overseas peers. The number of individuals with more than RMB 1 billion has increased at an annual rate of 50.0 percent from 24 in 2000 to 1,363 in 2010. Secondly, success, wealth and social standing are highly regarded in Chinese culture and displaying this through watches, jewelry, apparel, cars and wine earns a measure of respect. Chinese consumers enjoy displaying their wealth and success and not just spending on themselves but also purchasing gifts for friends and family. Gift giving is particularly popular around important holidays such as the Chinese New Year in early February. Moreover, Chinese appreciate high-quality craftsmanship. Foreign luxury brands in particular, with large logos and signature collections, are particularly desirable. Spending among female consumers in China is increasing and luxury handbags are gaining increasing popularity.

While on business in Paris and London during Chinese Spring Festival last week, I could not help but notice the ever-increasing number of Chinese buyers in Paris' and London's most exclusive shopping districts. As Chinese consumers become wealthier they are traveling more and more for purchases of luxury goods. According to Bain's report, 56.0 percent of Chinese consumers purchase luxury goods overseas, while only 44.0 percent of Chinese consumers purchase them at home. This is partly due to the appreciation of the RMB, luxury goods pricing being lower overseas, and a wider range of choice available overseas. When I travel abroad, most recently in the Middle East and Europe, I see more and more Chinese traveling and buying goods as well. The Champs Elysees and all Paris luxury goods districts are filled with Chinese consumers.

More Chinese luxury brands will inevitably be established at home, but we expect this to occur in product categories where China has a perceived fundamental advantage, primarily in the use of materials such as jade, porcelain or precious woods that can be used in jewelry, home-ware and furniture. In the meantime, we expect Chinese companies to look to acquire prominent European and American brands and build up manufacturing expertise.

Luxury goods companies are expanding rapidly in China to accommodate demand that will account for half of their forecasted global growth in the next 10 years. Handbags, leather goods, watches and jewelry are expected to see the fastest growth. Louis Vuitton's biggest customers are already Chinese buyers, while Greater China represents 28.0 percent of sales for Swatch, 22.0 percent for Richemont, 18.0 percent for Gucci, 14.0 percent for Bulgari and 11.0 percent for Hermes. Bain discovered that 30.0 percent of Bulgari’s sales in London were contributed by Chinese tourists. Gucci believed that during the first nine months of 2010, 22.0 percent of its sales in Europe were from Chinese consumers.

Clearly luxury goods are an increasingly fast growing sector in the Chinese economy and it will be imperative for foreign luxury brands across the world to devote an appropriate amount of attention to the Chinese consumer.