The rapid expansion of countries such as China is propelling rapid growth in the luxury goods industry but tapping into this market is more complex than at first sight.

The surge in the numbers of high net worth and ultra HNW individuals is propelling the luxury goods and services industries at a dizzying speed, especially in nations such as China, but making money in this market is no easy win, a London conference heard last week.

The number of millionaires in the world – currently around 17 million – is set to rise to around 22.1 million by 2015, with an increasing proportion living in the Asia-Pacific region, overtaking Western Europe, James Lawson, founding director of Ledbury Research, told the Luxury Briefing Wealth Summit at the suitably luxurious Corinthia Hotel.

To tap into this market, Lawson said, requires firms to understand the nuances of the variety of personalities in the market, giving examples from Russia, China and the United Arab Emirates. In Russia, for example, there are “friends of state” – those oligarchs closely allied to the government and often involved in the energy sector; “smart operators” – entrepreneurs in newer sectors and more liberal in their outlook – and “capital heirs” – heavily Westernised children of the first-generation super-rich.

In the case of China, Lawson identified three types of wealthy person: “Guanxi connectors – people closely associated with the Communist government – “maverick entrepreneurs” – people in manufacturing and related sectors who are very brand-conscious and ostentatious – and “ambitious successors” – offspring of the rich. And another category is the “modern matriarch” – wives of the super-rich, who tend to stay involved in a business while also taking charge of a whole family household.

In contemplating these markets, bankers, investors and luxury-related businesses needed to plan for the unexpected, Lawson added. “Prepare for black swan events,” Lawson said.

The rise in Asia was a repeated theme at the conference. There is a total of $11 trillion of private wealth in Asia, only $2 trillion behind North America (source: Citi Private Bank, Knight Frank). Asia is now on a par with Europe. In February this year, a fund manager for Swiss & Global said the luxury goods market would expand by 8 to 10 per cent this year, driven by emerging markets as well as a rebound in developed market consumption.

The rapid expansion of the luxury goods market is also a useful barometer for wealth managers, as spending habits also indicate new sources of wealth and the age groups, occupations and countries where opportunities exist.

A frequent term used at the London conference was “passion” to describe luxury spending objects such as yachts, cars or properties. This year’s Merrill Lynch/Capgemini annual report on wealth trends said that, in terms of asset allocation luxury, collectables remained the most popular, with HNW individuals globally allocating 29 per cent in 2010 (2009: 30 per cent). This was followed by art, which remained flat at 22 per cent, and jewellery, gems and watches, also at 22 per cent (2009: 23 per cent). Next was the other collectibles category which includes antiques, wine and coins at 15 per cent (2009: 14 per cent), then sports investments, which remained flat at 8 per cent. Finally the miscellaneous category, which includes such things as club memberships, travel, guns, instruments, rose to 5 per cent (2009: 3 per cent).

Pros and cons

As an example of the challenges, as well as opportunities, in these new luxury markets, are the problems of an unreliable postal network and protectionist regulatory climate in Brazil, Harry Brantly, founder of FB Collection, a beachware and lifestyle brand firm, told the conference.

On the positive side, Brazil stands to benefit from the double advantage of the forthcoming World Cup soccer tournament and Olympic Games, Brantly said, as these events will intensify focus on what this Latin American giant has to offer in terms of its economic prowess.

“Brazil is the only BRIC country with a real luxury goods industry of its own,” he added, arguing that one of the side-effects of years of protectionist trade policy was a relatively developed home-grown luxury goods sector, contrasting with other nations.

According to a recent article by Forbes, the country’s luxury market is far smaller than that of China but is growing at an annual rate of 22 per cent, rapidly outpacing the general retail sales market growth rate of 11 per cent in 2010. The growing Brazilian middle class will create bumper luxury goods sales in the next decade of $63.5 billion by 2025 (Source: Goldman Sachs, Forbes).

Paul Sagoo, founder of UK-based Lemon Group International, talked about the potential of the India luxury market, while cautioning that the country suffered, for example, from a relative dearth of luxury real estate opportunities. The number of millionaires in India is rising by around 20 per cent a year, he said, and the luxury market is currently worth around $6 billion. As an example of the wealth of the country and its issues, Sagoo said around $2 trillion of India-sourced wealth is held offshore in bank accounts, with Indians being the single largest holders of Swiss bank accounts. The country continues to impose restrictions on how foreign direct investment is made, insisting on local partners in business ventures, although there are moves to liberalise the rules, he added.

(ClearView Financial Media, publisher of this website, was a media partner at the conference).