China is the new test market for luxury

June 7, 2013: 4:19 AM ET

Kering CEO Francois-Henri Pinault discusses what it takes to succeed in China.

By Megan Barnett

Francois-Henri Pinault

Francois-Henri Pinault

FORTUNE -- Chinese consumers are young, ambitious, and hopeful about the future. They have no fear of losing their jobs, and they get raises of 10%-15% each year. What better place for a luxury goods manufacturer to test its wares?

Francois-Henri Pinault, CEO of Kering (formerly PPR), told an audience at the Fortune Global Forum in Chengdu, China on Friday that his company's brands, which include Gucci, Alexander McQueen, Balenciaga, and Stella McCartney, are increasingly turning to China as a testing ground for new ideas in apparel and accessories. The luxury holding company has had a presence in China for years, and it's grown exponentially as China's economy has exploded: In 2005, Gucci had 5 stores in China. Today it has 71.

"Luxury is not about Europe," Pinault said. "Luxury is linked to tradition, culture, and craftsmanship. Chinese culture has been very influential in the rest of world for centuries." Moreover, because Chinese consumers are buying high-end products at such a young age, their lifetime in the luxury market is twice as long as Kering has seen it with U.S. and European customers.

MORE: Complete coverage of the Fortune Global Forum

This underscores the growing power of the Chinese consumer across all industries, not just luxury. To succeed in the global market, companies must first succeed in China. The theme of this panel was how to achieve that success.

Pinault was joined on the stage by Sir Martin Sorrell, CEO of the British advertising giant WPP, which owns marketing and public relations agencies around the globe and counts multinational giants like Unilever (UL), Procter & Gamble (PG) and Ford (F) among its clients. China is WPP's third-largest market behind the U.S. and the U.K., and it's growing fast.

Sorrell has observed a heated battleground in China between foreign brands, which often enter the country with very little knowledge of the local markets and at a high price point, and the increasingly important Chinese brands. China's own brands are gradually climbing up in price, and they have the distinct advantage of having the awareness of the Chinese consumer.

"There is a mythology that China is about cheap manufacturing and stealing intellectual property," Sorrell said. "That's not the reality. The reality is that Chinese companies are beginning to understand the importance of branding."

That means it will be harder for foreign companies to capture the hearts of the 1.3 billion Chinese consumers. Sorrell emphasized that China's acquisition strategy -- Chinese companies are buying up firms all over the world, including America's largest pork producer -- is only going to exacerbate this battle for global market share in all industries. "Chinese companies are going to be very aggressive," he said.

China's market is clearly seen as a potential gold mine for companies all over the globe, but only those that can keep up with its fast-changing culture will have any chance of winning.

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