Why China Should Strengthen This Stylish Stock

Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

High-class clothier Ralph Lauren (NYSE: RL) is now primarily relying on the Chinese market for overall growth as other markets get saturated. The Chinese luxury market is expected to account for more than 33% of the global high end luxury market by 2015. In addition, Chinese consumers in US and Europe are responsible for nearly 15% and 30% of  total luxury goods sales, respectively. Thus, Ralph Lauren realizes the importance and opportunity China presents, and is now making considerable efforts in building its brand image.

Lauren believes that its efforts in China will also bolster sales in mature markets like US and Europe. The company currently reports a contribution of 14% from Asia to its overall revenues. But going forward, it expects its Chinese operations to lift the total contribution from the Asian region to approximately 33%. China's luxury market is growing exponentially, thanks to growing credit card penetration and increasing consumer spending. Ralph Lauren can incrementally develop and capitalize on this growing demand if it successfully establishes its brand image in China.

Here are the current trends impacting the luxury segment in China, and the potential risks that may hinder Ralph Lauren’s growth.

Size of the Chinese Market

Luxury spending in China has been on a constant rise in the past decade. According to McKinsey, China accounted for a mere 1% of total luxury spending in 1995. That share had grown to 27% by the end of 2012. China is expected to hold a staggering 33% share in the total luxury spending ($175 billion) by the end of 2015.

Growth in China is a huge opportunity for Ralph Lauren, as sales from mature markets like Europe and US are on a decline due to low consumer spending and a weak economic environment. Furthermore, the rapidly increasing demand from Chinese consumers based outside China should be another key driver for the luxury market. Recently, Bain & Co. published research revealing that nearly 60% of the total luxury spending from Chinese consumers comes from consumers based outside China.

Ralph Lauren traditionally has not been the first choice of Chinese consumers. In Europe, only 2% of its sales came from Chinese consumers in 2012. Going forward, building its brand image in China will be extremely crucial in order to bolster sales from other developed regions.

Increasing Millionaires

The number of high-net-worth individuals, or HNIs, is growing rapidly in China. Currently, there are more than a million individuals in China with a total net worth exceeding $1.5 million. Going forward, the number of HNI’s in China is expected to grow at more than 20% annually. This is a key factor that may underpin the increasing growth in demand for luxury products.

Credit Card Penetration on the Rise

Expansion in credit is a key driver for the luxury industry. Historically, even developed regions such as Europe and US witnessed a rise in luxury spending as credit card penetration grew. During 2005, there were less than 50 million credit cards issued in China; by the end of 2010, the figure reached 220 million. According to MasterCard, the number may hit 800 million by 2020.

Increased Spending on Luxury

Increased spending by women in China will be another driving factor moving forward. Traditionally, men in China spend more on luxury products. Notably, men in China are responsible for more than 50% of the total spending on luxury goods; in contrast, that figure drops to 40% on the global scale. More Chinese women are expected to shop for luxury products as disposable income rises, and Western high-end retailers open shop in China, raising the country's awareness of luxury brands.

Competitive Landscape and Potential Roadblocks

The potential roadblock for Ralph Lauren could be the cultural acceptance of buying expensive luxury goods. Luxury sales in China primarily depend on personal and corporate gifting. However, corrective measures by the government to trim down corruption could impact the luxury market to a certain degree.

Expansion of other American and European brands in China will cannibalize the market at some point. Retailers such as PVH (NYSE: PVH), which owns several apparel brands, already have a presence in China.

PVH owns two of the most popular fashion brands: Calvin Klein and Tommy Hilfiger. Calvin Klein already is an established player in the Chinese market and has witnessed staggering growth from the region in the past few years. It already claims China as its biggest market after the US.

Another luxury retailer with a huge presence in China is Coach (NYSE: COH). Coach is not a major player in apparel; it primarily deals in high-end handbags, belts and various other accessories. It operates both retail and factory outlets in China, and overall, the company owns approximately 320 stores across Asia. It has a market cap of $13.9 billion and is primarily known in China for its handbags.

Strategy in China

Ralph Lauren will continue to position itself as a high-end retailer in China. The company aims to open some 60 stores in the most premium locations  across China by the end of 2014.

I believe that like other luxury retailers, Ralph Lauren has huge potential to gain from the growing luxury market in China. Its top competitors have reported robust growth from the region in the last few years already, and going forward, I see no reason why Lauren cannot make China its biggest market after US. The growing demand from the region is a positive sign for its global expansion plan. That's why I keep an optimistic view on Ralph Lauren's stock.

Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach and MasterCard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus