Deluxe: How Luxury Lost Its Luster (35 page)

Today, luxury—like everything else in China—is booming. The Chinese economy has grown like no other in history. By
2006
, China had become the world’s fourth largest economy, after the United States, Japan, and Germany, and economists predict that it will be number one within a matter of a few decades. By
2005
, the luxury market in China was worth about $
1
.
3
billion, according to Bain & Company, an American consulting company.

The luxury customer in China has evolved into what Wilfred Koo, Givenchy’s president for China–Asia Pacific, calls nouveau chic: young Chinese who “were born post–Nixon opening China, use the Internet, and have so much information.” They spend money on themselves and buy top-of-the-line. The nouveau chic bought so much of Armani’s more expensive Black Label at Three on the Bund that Lee decided in
2006
to transform the Emporio Armani store upstairs into Black Label space as well. Givenchy introduced a slimmer, more fashionably cut suit, and Zegna manufactures a men’s wear line in China solely for the Chinese market. “And the women’s business in China is going to boom-boom-boom!” Koo said with a smile.

When I met Koo, a third-generation retail merchant, in Hong Kong in November
2005
, he was busy searching for new boutique locations in China. At that time, Givenchy had forty-eight men’s wear stores, plus accessories boutiques in Beijing and Shanghai. All the stores there were franchises. “Three hundred shopping malls will open in the next three years in China,” he said, incredulously. There were six big malls planned in Beijing alone, making up six million square feet of shopping, most to be open in time for the Summer Olympics in
2008
. Givenchy was planning to open two LVMH-owned flagships, in Beijing and in Shanghai, in
2006
. “You will see Beijing and Shanghai transformed,” Koo assured me.

Handel Lee is a major force in the transformation of both. In the fall of
2007
, he plans to open Legation Quarter in Beijing, the city’s first luxury complex outside a hotel, at a four-acre compound on the southeast corner of Tiananmen Square that served as the American Embassy from
1903
to
1949
and where Lee’s grandfather worked for several years. Legation Quarter, as it is called, will include a
180
-seat repertory theater; a twenty-five-thousand-square-foot art gallery; seven restaurants, including one by star New York chef Daniel Boulud; and a handful of “superluxury” brand boutiques, as Lee calls them. “Destination luxury like Brioni and Patek Philippe,” he said, “brands that don’t want to congregate with their competitors.”

In Shanghai, Lee is constructing another luxury destination on the six-acre site of the former British consulate just north of the Peace Hotel on the Bund, a neighborhood that is currently undergoing a major facelift. Among the upscale projects under way are the Peninsula Hotel, Saks Fifth Avenue, and a retail-residential-office complex developed by the Rockefellers. When Lee’s complex opens in late
2009
, it will have a small concert hall, art museum, luxury retailers and a boutique hotel. Like Three on the Bund, both Legation Quarter and the new Shanghai project should do a bang-up business. Analysts at Ernst & Young predict that in
2010
there will be
250
million Chinese who will be able to afford luxury goods, and by
2014
the Chinese will displace the Japanese as the world’s premier luxury brand consumer. “We started early because we were really convinced that modernization was going on in China,” Bernard Arnault said at the opening of the Louis Vuitton Mansion at the China World Trade Centre in Beijing in November
2005
. “We knew [China] would someday be the biggest market in the world. Whether it would be in twenty, thirty, forty years, it was irreversible.”

The Chinese domestic retail market is only part of the story. Like the Japanese, the Chinese like to travel and shop. Mainland China represented only
2
percent of the luxury market in
2006
, but the Chinese accounted for
11
percent of world sales. That figure will likely double within a decade, according to Merrill Lynch. “There are
25
million Chinese traveling [now] and there will be
100
million in
2020
,” Antoine Colonna, luxury analyst for Merrill Lynch in Paris, said in
2004
. “They spend an average of $
1
,
000
on luxury goods [per person per trip]. They might save on dinner or lodging, but not on luxury goods.” Vuitton chairman and CEO Yves Carcelle told me at the Vuitton store inauguration in Shanghai in
2004
, “Mainland Chinese are one of the most eager to buy when they travel. Each time we sell
100
in China, we sell
150
to Chinese abroad.”

The Chinese travel boom began in July
2003
, when the Chinese government eased travel restrictions to Hong Kong. By
2005
,
76
percent of all mainlanders traveling abroad headed to Hong Kong, and their preferred activity was and is shopping: there’s more choice in Hong Kong, and prices are
10
percent lower than back home, where they pay luxury taxes. “Three years ago, Hong Kong accounted for
2
percent of our sales,” Bulgari CEO Francesco Trapani told a luxury-brand roundtable in
2004
. “Now it accounts for between
15
and
20
percent.”

Luxury brands have expanded in Hong Kong to meet the demand. In a matter of weeks in late
2005
, both Louis Vuitton and Chanel opened Peter Marino–designed megastores. Louis Vuitton now has six stores in Hong Kong and one in nearby Macau. In comparison, it has three in Paris. DFS is opening a Galleria in Macau in
2008
, primarily to target the Chinese. Dior has nine boutiques in Hong Kong, including a flagship on Peking Road in Kowloon that is a massive eleven thousand square feet. “Mainlanders go to Hong Kong with one goal—to buy,” said Tom Doctoroff, director for JWT advertising in Shanghai. “Chinese people will gladly spend a price premium for goods that are publicly consumed. But it’s like buying a big glob of shiny glitter. They know which brands are famous, but they can’t tell you the difference between them in terms of quality or design. [They buy] to burnish their credentials as someone of the modern world by stocking up on a year’s supply of prestige.”

That doesn’t perturb Bernard Arnault. “I think, ultimately, the customers of luxury in China will be sophisticated customers,” he said at the Vuitton opening in Beijing in
2005
. They are certainly trying. Mainlanders are enrolling their five-and six-year-olds in private lessons (golf, music, ballet, horseback riding, ice skating, polo), etiquette schools, and fast-track courses that bill themselves as junior MBA programs. “These people are rich economically but lacking in basic manners, and they are not very fond of their own reputation,” Wang Lianyi, an expert in comparative cultural studies at the Chinese Academy of Social Sciences in Beijing, told the
New York Times
. “These new rich not only want money, they want people to respect them in the future.”

A
R
USSIAN MAN
buys a big new Mercedes. Two weeks later he brings it back to the dealer and says, “I want a new one.”

“But sir, you just bought that car,” the dealer sputters. “What’s wrong with it?”

“The ashtrays are full.”

That joke epitomizes Russia’s new wealth today: young billionaire oligarchs with a taste for
richesse
to rival the Romanovs’. “I have customers coming in to the store and buying seven hundred socks because they wear them once and then throw them away,” said David Gisi, managing director for men’s wear at Mercury, one of Russia’s largest retail groups. “They consider Rolex to be almost like Swatch.”

At first, wealthy Russians spent their wealth overseas. They bought the Côte d’Azur’s grandest villas, Ferraris by the dozen, French couture by the collection. So many wealthy Russians have settled in London, Europe’s primary financial center, that it is sometimes referred to in the British press as Londongrad or Moscow-on-Thames. The chic neighborhood of Chelsea has been dubbed “Chelsky” and the luxury department store Harvey Nichols is now known as “Harvey Nicholsky.” When I asked a Dior employee at the avenue Montaigne store in Paris who were the best customers, she told me without hesitation, “Russians.” They came in regularly and dropped $
10
,
000
to $
20
,
000
in an hour. The salesgirls who speak Russian were among the store’s busiest. At many of Armani’s ready-to-wear stores, Russians bought more than Americans and Japanese.

Now luxury brands are bringing their wares to Moscow, taking advantage of the extraordinary baroque architecture erected when luxury last flourished in the Russian Empire, during the Romanov period. Outside of Moscow and Saint Petersburg, there is no wealth—Russian’s minimum wage was about $
27
a month in
2005
, and wage arrears in
2004
were $
820
million—and therefore no luxury market. But there is enough money in Moscow to make luxury tycoons rich and happy. After the
1998
financial crisis that led to the collapse and disappearance of most banks, Russians hoarded an estimated $
50
billion in cash, much of which they now spend in luxury brand stores in force. Merrill Lynch analysts have called Russia “a young consumption economy unwilling to save.” Pambiamco Consultants, a top fashion marketing and strategy firm in Milan, stated in
2004
that the luxury market in Russia was about $
600
million, with an annual increase of
6
to
8
percent. According to AT Kearney, a Chicago-based consulting firm, Moscow was the most attractive emerging market for retailers in
2003
and
2004
, and second, after India, in
2005
. By
2009
, analysts believe Russians will account for
7
percent of all luxury brand sales.

Across Red Square from the Kremlin and Lenin’s Tomb is GUM, the historic nineteenth-century galleria that, during the Communist era, was the State Universal Store. It sold government-issued clothes and food to locals and
matryoshka
nesting dolls to tourists, and was known for its empty shelves and grumpy personnel. Today it is a luxury mall. Among the tenants along the marble walkway are Louis Vuitton, Dior, and Moschino. For the Dior opening in October
2006
, actress Sharon Stone cut the ribbon with Christian Dior’s own scissors. Then the company hosted a lavish cocktail party for
600
and, later, an intimate dinner of Beluga caviar, roasted lamb, Belvedere vodka, and vintage Dom Perignon for
250
at Turandot, Moscow’s new gold-encrusted imperial Asian restaurant.

Nearby, Mercury Group built a one-hundred-thousand-square-foot arcade-like mall in an old cobblestone street called Tretyakovsky Proyezd (Tretyakov Drive). There you’ll find wildly rich Russians cleaning out dozens of luxury brand boutiques, including Gucci, Prada, Dolce & Gabanna, and a three-floor Armani spread, replete with a VIP salon. In the evening, they return to Tretyakovsky Proyezd in their darkened-windowed Mercedes SUVs, dressed in their luxury brand purchases, to dine at Mercury’s haute-priced haute cuisine restaurant, Tretyakov. “We are building Via Montenapoleone,” Mercury’s vice president and retail director, Alla Verber, said, referring to the luxury shopping street in Milan. “We deal only in luxury, luxury, luxury. That means luxury cars, luxury fashion, luxury jewelry, luxury food and luxury home products. We are a luxury empire.”

A thirty-minute drive from downtown Moscow is Crocus City, a gigantic
690
,
000
-square-foot luxury mall that opened in
2002
and has
180
boutiques, including Armani, Pucci, Céline, Chloé, Versace, and Gianfranco Ferré. “Before we designed Crocus City, we went to Bal Harbour [in Miami] and Short Hills [New Jersey], and we visited luxury malls across Europe. Then we combined everything we liked together in one vision,” Crocus International co-owner and commercial director Emin Agalarov said. “Crocus City is a place where you can walk in on a cold day and find yourself in a tropical paradise where you can shop, relax and be entertained. There’s a huge swimming pool with professional synchronized swimmers who do shows every three hours. There’s a river that streams down the limestone hallways.” It is in the midst of expanding, adding another
120
boutiques, a thousand-room hotel that Agalarov said will be like “the Venetian or the Bellagio, with Russia’s biggest casino, and…Russia’s biggest movie theater with
20
to
25
screens.” When finished in
2010
, Crocus City will encompass
10
.
8
million square feet.

The Russian expansion is working. Christian Dior reported sales growth there of more than
50
percent in
2004
, and said that its Moscow flagship was the fifth most profitable of its
170
stores. Louis Vuitton CEO Yves Carcelle said that the company sells more ready-to-wear in Moscow than anywhere else in the world. No wonder Christian Lacroix took his haute couture collection to Saint Petersburg in
2005
. “And it sold very well,” a Lacroix spokeswoman told me cheerfully.

“
I
F YOU THINK
C
HINA
is something,” Yves Carcelle told me, “wait until you see India.”

Unlike Russia or China, which both underwent communist periods that all but erased the social and economic class system and cultural heritage, India has always had a wealthy elite that lived well. The maharajas often shopped in Europe and patronized luxury companies, including Louis Vuitton, Chanel, and Cartier, which established the names back home.