China's Investment in European Luxury: Buyer Beware
by Melvin Glapion, Managing Director, London
Today, some of the major luxury brands derive a significant share of revenue from the Asia Pacific region, with China representing the greatest share. In 2010, Chinese consumers accounted for roughly 10% of the luxury goods market and by 2020 China will account for 44% of global luxury goods sales, according to CLSA Asia Pacific Markets.
Despite the local heritage of luxury brands and their connections to the national identities of the countries where they were founded, the world of luxury fashion has decidedly and emphatically relocated to China, and Chinese investment in the luxury fashion sector is on the rise.
While some Chinese investors have acquired stakes in local brands, the real focus has been on acquiring stakes in Western brands. Given Kroll’s experience, having worked for a number of clients in the sector, good brands are still available. However, there are some significant issues that Chinese investors need to consider when investing in Western brands:
- Beware of the halo effect - The halo effect of branding can often obscure the fact that the brand has limited growth opportunities for the future, or has had limited success entering the Asian market.
- Understand the seller’s motivation - The headline stories of why firms or individuals might be selling a luxury brand is rarely the full story.
- Realize that multiple store openings are not enough - Having stores in China is different from having a growth story in China.
- Justify the valuation - Luxury goods brands compared to other assets on stock exchanges typically trade at higher price multiples.