July/August 2003 • Little Luxuries : Emerging Gem Markets • Afghani Gem Trade More Dangerous Than Ever • Euro Halts E.U. Imports • Books: Tsavorite Garnet • News & Updates • In This Issue

Where are the world's most promising new luxury markets? By Suzanne Wade

One of the biggest challenges for people who sell luxury products has been identifying up-and-coming new markets. The prospect of being in the right place as millions of the newly-affluent are looking for status symbols can be intoxicating for expansion-hungry companies. How to predict where that will happen is another story.

It seems like a simple question: How many people in a particular country have the means to afford luxury goods?

For the more expensive items, like top-end jewelry, it's a very select group. Marketers of very high-end luxury goods may target households with liquid portfolios of more than $1 million, says Greg Furman of the Luxury Marketing Council in New York. Regardless of the currency, in most countries that's equivalent to the wealthiest 10 to 20 percent of the population.

"In order for a significant potential for conspicuous consumption to exist, there must be very unequal distribution of wealth," says University of Rhode Island professor Gilbert Suzawa, whose specialty is the economics of the jewelry industry. "If the 'rich' are inclined to distinguish themselves from the masses, they may do so via their pattern of consumption. Thus the demand for 'luxury' merchandise and services arises."

The most often-cited example is China. China's income distribution puts 46.6 percent of the country's income in the hands of just 20 percent of its population.

But China is also a country of 1.2 billion people. Twenty percent represents 240 million people — a number just slightly smaller than the entire population of the United States. If even a tiny percentage becomes wealthy enough to afford luxury products, it translates into a big market for such goods.

"It doesn't take a lot of growth in China to generate demand," observes Paul Groncki, a marketing consultant and former director of global marketing research for JP Morgan/Chase & Co. Even if a large percentage of Chinese are still too poor to be considered a significant market for luxury products, the number of wealthy consumers is ample to generate impressive sales of luxury goods.

The World Gold Council estimates the Chinese jewelry market at $11.65 billion in 2001, with sales of gemstones and gem-set jewelry estimated at $4.29 billion. Compare that to Japan's estimated market size of $16.5 billion, and you can see why jewelry producers are excited by the Chinese market.

The free market in Salvador, Bahia, Brazil. TOP: A Brazilian shopper browses for high-end clothing and accessories. Photos by Marco Antonio Pajola, © StockBrazil.

But there's more to having a luxury market than just the extremely wealthy. "Lots of luxury goods purchases are aspirational," says Groncki. "A growing wealthy class is helpful, but it's really the middle class, which aspires to own luxury brands, that drives the luxury brand demand."

The demand for mass-market luxury products is often particularly strong among those who are newly middle class, and find themselves for the first time in a position to enjoy luxury goods. But evaluating the size of the middle class in a particular country can be challenging, not least because there is no standardized definition of what the "middle class" is.

One measure of a country's wealth is gross national income (GNI) per capita. (Gross national income measures a country's total income; GNI per capita divides the GNI by the country's population.)

The World Bank classifies "middle income" as anywhere between $746 and $9,205 GNI per capita. Obviously, the standards vary: While in the United States households considered middle class generally earn $30,000 to $70,000 annually, in Russia households considered middle class may earn as little as $1,800 per year.

It's no surprise to find well-established luxury markets like the United States, Japan, and European countries have the world's highest levels of GNI per capita. Indeed, a study conducted by the World Bank determined that even the poorest citizens of these countries are usually better off than all but the wealthiest citizens of Third World countries. As a result, citizens in "First World" countries are normally far more able to buy luxury products than their counterparts in the developing world.

While income gives an indication of what the people of a country can afford, it's not the only factor. It can also be informative to look at the prevalence of certain popular "middle-class" products, such as telephones, computers, and televisions. For example, a World Bank report notes that in China, a middle-class household may earn $14,000 per year. Although this figure would be considered poverty-level income in developed nations like the United States, in China, it's enough to purchase a variety of mass-market luxury products, such as color televisions and DVD players.

Fueling the growth of the middle class is the development of business and industry that offer more job opportunities. A prime example of this is India. Although most of its 1 billion people remain mired in poverty, the country has a booming software industry and a growing middle class. Numerous high-tech companies, including Motorola, Texas Instruments, Cisco Systems, and IBM have opened or expanded operations in Bangalore, the heart of southern India's growing technology center.

These types of professionals can help spur demand for luxury products, says Suzawa. "The trend toward international sourcing of high-technology manufactured products and computer software has the potential of rapidly creating a high-income [middle] class of consumers in some emerging market countries," he notes.

Industrialization spurs urban growth, concentrating more and more people in cities. That can fuel consumption of luxury items, too: It gives people easier access to goods, not to mention more people to impress with their newly-acquired wealth. Cities also offer a more sophisticated, worldly outlook, which tends to go with the purchase of luxury goods.

All of these factors — income, industrialization, and urbanization — are tied to the health of the economy in question. Because sales of luxury products are sensitive to drops in income, a weak economy can cause the market for these goods to weaken. This is the scenario playing out in Japan, where a decade-long economic slump has reduced sales of many types of luxury products, including jewelry.

Shoppers peruse a department store in Shanghai, China. Photo © Retail Image Consulting Inc.

A growing economy, on the other hand, has the potential to pull consumers into income classes where they are newly able to afford luxuries. This is part of what is happening in China, where GDP has grown at 7 to 10 percent a year for the last five years. Newly-affluent Chinese consumers have responded by increasing their purchases of luxury goods, such as jewelry, from $24 million in the early 1980s to $11.6 billion in 2001.

The global trend toward free trade has knocked down many of the trade barriers — like taxes and legislative restrictions — that once prevented luxury goods from making inroads in developing countries. As long as that trend continues, it will likely open up even more new markets to these goods.

"The single most important trend that contributes to the growth in luxury goods sales is globalization," says Suzawa. "As individual nations get integrated into international trade, international capital flows, international communications such as the Internet, and international travel, pockets of inequalities of wealth distribution will occur in various countries. The 'new' rich will probably want to distinguish themselves from the rest of the society by participating in 'conspicuous consumption.'" In other words, by buying luxury products.

igers &

urkeys

One problem is the uncertainty of economic growth. For example, a decade ago Argentina's rapidly expanding middle class made it a darling for international marketers, notes Groncki. Today, after several years of dramatic economic decline, the country's middle class is vanishing, and few are citing Argentina as an up-and-coming market. Today's tiger can all too easily turn into tomorrow's turkey, and even the experts find predictions chancy at best.

The Economist has identified 24 countries that it believes meet the criteria of emerging markets. According to a Michigan State University study, in 2002 the countries with the best growth potential were Hong Kong, Singapore, South Korea, Israel, and China.

Each has its challenges. Hong Kong, Singapore, and Israel rank high in commercial infrastructure and economic freedom, but have too small a market size to be major players in international terms. South Korea and China are growing quickly and have a large capacity for consumption, but rank relatively low in terms of infrastructure and market receptivity. India is number 10 on the list, and despite its large population and the growth of its industrial capacity it still falls behind the other nations in growth and infrastructure.

Also, just because a market has the resources for luxury products doesn't mean it will embrace a particular item — like gemstones or jewelry. According to economists, the desire for luxury products boils down to the human tendency to want to keep up with the Joneses. If you have it, you inevitably want to flaunt it by buying exquisitely crafted or brand-name products that demonstrate your wealth to the world.

So while statistics can give us an idea of where to look for up-and-coming luxury markets, ultimately success can depend less on adequate reading of the numbers than on the marketer's feel for his market.

"You're really looking at how do people feel about the artisanal value of things? How do people view how things are made, and does that quality make a difference to people?" says Groncki. "[Identifying new markets] is more an art than a science."