COMMENTARY

------By Daniel Inman

Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure." Those words were written in 1899 by the economist Thorstein Veblen in his influential work Theory of the Leisure Class, referring to (and mocking) life in the increasingly prosperous United States.

At that time, China was on the brink of the Boxer Rebellion, its weakened empire was in the process of being carved up by the Western powers, and it was counted one of the very poorest countries in the world in terms of individual purchasing power.

What a difference a century makes. Much ink has been spilled proclaiming China's monumental economic growth in recent years. Chinese production is by now an old (though hardly unfinished) story. But what about Chinese consumption - particularly the kind of status-flaunting luxury purchases which fall under "conspicuous consumption," for which European brands rule the market? This may seem an odd question in a country where a single Louis Vuitton handbag may cost the better part of the average annual salary, but it is not. Chinese consumers now buy more than US$6 billion (4.5 billion) worth of luxury items a year, making them the third-largest segment in the world after their counterparts in the US and Japan. That segment is only likely to grow, as a recent report from Credit Suisse bank predicts that China will rank second behind the US as the world's biggest consumer market by 2015. Chinese retail sales rose 14.7 percent in the first two months of 2007 compared with a year earlier.

Closer to the ground, the picture gets fuzzier with dispute over the actual size of the elusive Chinese "middle class", which numerous sources have an interest in inflating. Accounts vary, but the middle class is probably closer to about 70 million, than the 300 million claimed by the government. Meanwhile, the luxury market is aimed at the roughly 15 million people who earn more than RMB250,000 (?24,000) a year. At the top of the heap are the 320,000 millionaires in US dollar terms, compared with 450,000 in Great Britain.

They will buy

It is especially among the latter group that European luxury goods hold such sway - just as they did for wealthy Americans a century ago. Any major shopping district is littered with high-end stores: Zegnas stacked upon Guccis atop Herm¨¨s, and so on. Many of them have been around since the mid-'90s. Call it the Field of Dreams method: If you build it, they will come. It is not only a matter of grabbing prime real estate and waiting for the growing economy to provide a customer base. The presence of those shops on Shanghai's Bund or Plaza 66 amounts to a form of advertising. They are creating a taste among affluent and aspiring Chinese for fine European clothing, jewellery, and even automobiles, among other goods.

Up until now, it is a long game. For years, Armani operated a single store through a franchise agreement in China before assuming direct control in 2002. After twelve years of doing business in China, Hugo Boss finally opened its first directly operated shop last year, in Shanghai, with another opening this April in Beijing. For others, real expansion has only just begun to take place. Cartier has announced that it will double its presence to 24 stores on the mainland by 2008 to leverage its position in the minds of Chinese consumers. And Italian luxury goods maker Salvatore Ferragamo plans to double the number of its outlets to 50 by 2010.

There is of course concern about local competition, particularly when it comes to fashion accessories. A range of stores throughout China, with vaguely French or Portuguese names, boasts clothing lines modelled directly on the latest European styles. Some even make up a story about Italian or French roots.

Fakes can be okay

Even more problematic may be the legions of counterfeits that flood the streets and alleyways of major cities. However, Tom Doctoroff, author of Billions: Selling to the New Chinese Consumer, considers these more like a double-edged sword than a monolithic threat.

Indeed, their very success is both a tribute and a boon to authentic retailers. Though illegal and unethical, they are meeting a real longing for luxury goods among those that can't afford them. This bespeaks the hold that European fashion has over Chinese consciousness. It also serves as a kind of free advertising, heightening the desire for the real thing, instilling fine tastes in those who may one day become buyers.

Doctoroff argues that European retailers ought not try to compete for market share by lowering their prices. "Stiff prices are precisely what make these goods attractive for Chinese consumers. When it comes to questions of status, they can see a range of things which [Westerners] can't." This is also where accessories become crucial. Status is not displayed in a single item, but in a variety of things that reveal an authentically opulent and sophisticated lifestyle.

Ultimately, this goes well beyond fashion. As status-seeking yields ever-diminishing returns, wealthy Chinese will require increasingly lavish chances to distinguish themselves. For some this means entering with ease into a rarefied world, inaccessible to most. Quintessentially, a London-based club, provides its members with an array of luxury services: securing rooms at a overbooked resorts or front row tickets at fashion shows. For those who like their displays of wealth a little less esoteric, Edmiston, a London-based company, introduced its Mediterranean-style yachts to Shanghai two years ago. Such expenses represent a shortcut into a kind of aristocracy for those who can afford it.

In all this, Doctoroff stresses that there is always a risk of over-saturation. Part of what makes these goods and services so appealing is the fact that they are essentially elite. By design, they must appeal to a relatively small portion of the overall population at any given time. The trick, as always, is to capture that precious slice.