Partaking in a little luxury to crack the Chinese market

China has long been seen as the new Mecca for banks, despite the difficult regulatory environment hampering international banks’ ability to offer a complete product and service suite. Indeed, our own analysis covered the competing business models in November 2009. Apart from being the world’s most populous nation, wealth in China fell at a much slower rate overall (-11 per cent) than any other country, bar Germany, in 2008/2009, according to the Scorpio Partnership Wealth Distribution Matrix. Moreover, our matrix indicates that there is currently at least $1,200bn (€875bn) in high net worth (HNW) individual assets on the mainland. Add to this the US-based Boston Consulting Group’s predictions of a 30 per cent future growth rate in $1m plus households and one is faced with headline data that few private banking executives can, or will, ignore. The question is, therefore, not if China is an interesting market, but how to enter this market most effectively and where to concentrate resources. So far, many banks have contained their ambitions to offshore banking (via Hong Kong or Singapore) and an office in one or two of the top-tier metropolises, usually Shanghai and Beijing. However, with the market becoming more contested, especially in the HNW and mass-affluent segment, wealth managers will need to reassess their presence in the market, and so they should. Currently, 60 per cent of the total HNW assets are held in the sub-$10m segment and these individuals are by no means confined to a few key cities. It is, therefore, interesting to review the logistical development of the luxury goods industry within China for insights on how best to ensure increased market penetration. Consumer, and luxury goods manufacturers in particular, had initially adopted a strategy similar to that of private banks to date, focusing on top-three cities only. This was followed by an expansion by some luxury houses to top-three and tier-one cities and finally to tier-two and lower cities. Interestingly, this has created three tiers of luxury goods providers, ranging from top-tier brands to entry level brands as can be seen in the table below. This market penetration creates an interesting case study for the private banking market as it puts forward two strategies. First, rapid penetration can be achieved by those brands willing to sacrifice geographical exclusivity for wider reach. However, by applying geographical exclusivity, institutions can safeguard their image of being open for business “only for the very wealthy”. Clearly the first strategy holds the greatest potential for accessing the coveted sub-$10m market, while the latter is more akin to the rarefied private banking days of old and family offices. Each serves a purpose, but in a market where volume will decide who reaps the biggest benefits, and customer loyalty is historically low, those wealth managers with the biggest and most recognisable brand, among a brand conscious emerging wealth class, are set to emerge as the market leaders. Karl von Bezing is a director at Scorpio Partnership, a consultancy dedicated to the global wealth management industry