How Important Is China To Ralph Lauren’s Long-Term Growth?

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Quick Take -

  • Ralph Lauren aims to elevate its brand image in China to tap the growing demand from Chinese customers
  • This strategy will also help fuel its sales in Europe and the US, where Chinese customers account for 30% and 15% of the luxury sales
  • The company aims to enhance its revenue contribution from Asia from current total sales of 14% to around one-third in the long run
  • The Chinese luxury market is forecast to account for one-third of the global luxury market by 2015
  • Government measures to check corruption and change in the Chinese spending habits are certain factors that could challenge growth

Ralph Lauren (NYSE:RL) is focusing on elevating its brand image in China to tap the growing demand from Chinese shoppers, both within and outside China. Since Chinese customers account for around 15% and 30% of the luxury sales in the U.S. and Europe respectively, we feel this strategy will also help drive its sales in other developed markets. While sales in Asia currently contribute to only 14% of its sales, the company aims at enhancing this share to one-third in the long run. We feel the company will be able to achieve this target on account of its expansion plans and strong luxury demand within the region.

China’s luxury market is growing rapidly fueled by an expanding middle class, rising credit card penetration and higher luxury spending, and we believe Ralph Lauren will be able to leverage this demand as it bolsters its brand awareness in the region. In this article, we evaluate the opportunities in the Chinese luxury market, current trends driving demand and potential risks that could impact the retailer’s growth rate in the region. We also analyze Ralph Lauren’s brand building strategy in China.

See our complete analysis for Ralph Lauren

What Is The Estimated Size Of The Luxury Market In China?

The percentage of luxury spending by Chinese consumers has grown rapidly over the last decade. According to McKinsey, while Chinese shoppers comprised for only 1% of the global luxury spending in 1995, their share grew to 27% in 2012. By 2015, China is expected to represent one-third of the estimated $175 billion global luxury market. [1] Rapid expansion in the Chinese luxury market offers significant growth opportunity for Ralph Lauren as sales in other developed markets such as Europe continue to suffer from economic uncertainty.

In addition to higher demand from China, the increasing demand from Chinese consumers in markets outside of China is another important growth driver for the global luxury market. According to Bain & Company, 60% of the total luxury spending by Chinese consumers is made abroad since luxury goods’ prices are more expensive in the country due to high tax rates and other restrictions. [2] According to Ralph Lauren, Chinese customers account for 30% and 15% of industry wide sales of luxury goods in Europe and U.S., respectively. [3]

Traditionally not popular among Chinese tourists, Ralph Lauren’s European luxury sales figure to Chinese customers stood at less than 2% in fiscal 2012, while many luxury brands attribute around 25-40% to this sales figure. We feel it is important for Ralph Lauren to build its brand image in China to leverage the growing demand from Chinese customers both within and outside China.

What Are The Factors That Could Contribute To A Faster Growth Rate

An expanding upper class, rising credit card penetration and increased luxury spending by women, and younger shoppers are the key factors driving the growth of luxury market in China.

Rising number of millionaires

There are more than a million “millionaires” in mainland China who have personal assets of over $1.5 million, according to Chinese research firm Huran. The number of “unknown” millionaires is likely double this. [4] [5] According to MaxMagni, a McKinsey & Company partner who heads the Greater China consumer goods practice, the figure of the wealthy is growing by around 20% annually in the region. [6]

A rising number of millionaires will drive the demand for Ralph Lauren’s products as they will aspire to wear luxury brands.

Increasing credit card penetration

An increase in the number of credit card users in China is another factor contributing to the rising Chinese luxury market. While less than 50 million credit cards were issued in 2005, the figure increased to 221 million in 2010. MasterCard forecasts the number of credit cards in China to surpass 800 million by 2020. This rapid expansion in credit will help drive luxury sales in the region. [7]

Increased luxury spending by women and younger population

Another important factor contributing to the growth is higher luxury spending by the Chinese women. While men account for 55% of luxury goods market in China, as compared to the global average of 40% according to CLSA, the share of women is rising as they gain more spending power. [8] Additionally, rising demand from younger shoppers who aspire to wear luxury brands has also boost luxury sales in China.

What Are The Possible Roadblocks That Can Slow The Growth In China?

Gifting, which includes personal and corporate gifting, accounts for a significant percentage of luxury sales in China. However, changes in the Chinese culture and anti-corruption measures taken by the Chinese government have negatively impacted luxury gift sales in China. Gifting luxury goods was previously common in China, but the government wants to restrict gifts received by its officials to check corruption in the country. These recent controls have impacted sales.

Moreover, according to a report by HSBC, the trend of wealthy Chinese men to keep mistresses has been on a decline. As Chinese men are more inclined to buy luxury products for their mistresses, this social change is also expected to have a negative impact on the sales of luxury gifts in China. [9]

Any decline in the Chinese economic growth could also have a direct impact on the Chinese luxury market as the sales of luxury goods are directly dependent on the disposable income of consumers. However, while these factors may present some roadblocks to growth, we feel the Chinese demand will continue to increase rapidly in the future on account of rising wealth in the country.

What Is Ralph Lauren’s Strategy in China?

Prior to 2010, Ralph Lauren licensed its Chinese operations to Hong Kong-based Dickson Concepts. However, Ralph Lauren’s brand reputation suffered under this relationship on account of Dickson’s focus on low price products. Hence, in 2010, the company acquired its operations from Dickson’s to attain direct control over the business and enhance its brand image in the country. Later in 2011, Ralph Lauren closed down 95 points of distribution in Greater China (representing 60% of its network), to replace them with more premium stores.

Ralph Lauren aims to position itself as a premium brand within Greater China by focusing on direct-to-consumer business and marketing its most fashionable and premium products in the region. Ralph Lauren targets opening 60 new stores in Greater China during 2012-2014.  These stores will be situated at premium locations, adjacent to other leading luxury brands. While Ralph Lauren may not be able to re-position its image immediately, we feel in the long run it will gain significant benefits from this strategy. As Chinese consumers are becoming increasingly important on the world stage, we feel the company took the right steps in restructuring its Chinese operations.

While Asian sales currently account for around 14% of the total Ralph Lauren’s sales, it aims to increase the proportion to approximately one-third in the long run. [10] Since other fashion retailers such as Louis Vuitton derived 28% of its total sales from Asia (excluding Japan) in 2012, we believe this is a reasonable goal for the company. We feel the company can reach this target owing to its expansion plans and strong demand within the region.

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Notes:
  1. Chinese shoppers ‘biggest spenders on luxury goods’, South China Morning Post, December 13, 2012 []
  2. Chinese shoppers world’s top luxury goods spenders, while China luxury market cools to seven percent growth in 2012, Bain & Company, December 12, 2012 []
  3. Ralph Lauren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2013 []
  4. GroupM Knowledge and Hurun Release Wealth Report []
  5. Meet the average Chinese millionaire: 39, plays golf, and owns an iPad, Business Insider, August 01, 2012 []
  6. Luxury sales boom in China, where giving gifts is an art, USA Today, January 15th 2012 []
  7. Don’t Underestimate China’s Luxury Market, Harvard Business Review, December 12, 2012) ((Luxury lifestyles in China/HK, CLSA, January 2011 []
  8. Luxury goods sales in the bag for male fashionistas, The Irish Times, February 5, 2013 []
  9. Chinese Mistresses to Blame for Global Luxury Slowdown?, CNBC, September 11, 2012 []
  10. Goldman sees Ralph Lauren back in the saddle, MarketWatch, January 09, 2012 []
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