How to Cash in on Chuppies September 10, 2008

By: Tony Sagami

Reprinted from http://moneyandmarkets.com/issues.aspx?How-to-Cash-in-on-Chuppies-1797

Even though I’m the right age, I’ve never considered myself to be a yuppie. Even when I was young and dumb, I never drove a BMW … bought a Rolex … or belonged to a country club. But I know a yuppie when I see one and China is full of them.

And unlike the U.S. where there is debate about how rapidly the economy and consumer spending are slowing, chuppies are making sure there is no such concern in China.

The Chinese National Bureau of Statistics reported that retail sales soared by an eye-popping 22% in April!

Those Chinese shoppers aren’t just buying chopsticks or tofu, either. They’re buying big ticket goods like crazy. Jewelry sales jumped by 37.5%, apparel by 32.6%, and furniture climbed 41.7%.

The fuel behind that spending boom is growing urban incomes, which rose by 17.6% over the last 12 months, and gave chuppies (also known as “little emperors”) large disposable incomes.

These chuppies are often the sole children due to the one-child policy in China and have been spoiled with an overblown sense of self-importance and entitlement. They often live at home and spend their entire paychecks on luxuries…and frequently on luxury goods.

Asia: The Epicenter of the Luxury Boom

It doesn’t matter where I travel in Asia — Hong Kong, Shanghai, Tokyo, Singapore, Taipei, Beijing, Kuala Lumpur, or Shenzhen — I always find a sea of Louis Vuitton handbags. You’d have to see it with your own eyes, but the number of women without Louis Vuitton handbags is in the minority.

A Louis Vuitton handbag, more than any other luxury good, is the ‘must have’ status symbol for women in Asia. In fact, the last time I was in Singapore, so many shoppers were crowding into the Louis Vuitton store on Orchard Road that the manager had to hire security guards to keep people out. Talk about demand!

And get this: China bought only 1% of luxury handbags five years ago but according to a recent Goldman Sachs survey, China is now the third-largest consumer of luxury handbags at 12% of the market. And it is expected to become the #1 luxury market in the world.

The reason for the luxury spending spree is simple — China’s booming economy is rapidly creating an army of millionaires as well as a bulging eager-to-spend, affluent middle class population.

• There are 100 million middle class Chinese today and that number is expected to double by 2010. These affluent middle class Chinese yuppies are educated, have well-paying city jobs, and have money in their pockets to spend.

• 50 individuals in China had wealth of at least $1 billion, while 2,000 were above $100 million, 35,000 exceeded $10 million, and 150,000 people had $5 million. At the same time, total assets owned by Chinese millionaires reached $1.7 trillion, increasing 8.8% year over year.

Asia is all about consumption. Every time I visit, I’m bowled over by the sheer volume of shopping going on. I’m not talking about people buying crappy tourist-type t-shirts, either. These rich Chinese are buying so aggressively that they are pushing up the prices of all luxury goods.

A popular China luxury index that tracks 32 items, including Rolls-Royce Phantoms and the Louis Vuitton Speedy Bag, showed that the price of luxury products in China jumped 8.7% in 2007.

That’s why luxury retailer Cartier has opened 25 new stores in mainland China as of March 2008 and Hermes International said that it will triple its stores in China over the next five years.

China isn’t the only country that is minting millionaires and a free-spending middle class. India is the second fastest growing economy in the world after China and its economy is growing at a 9.4% annualized rate — the fastest pace in 18 years!

India had 83,000 millionaires in 2006, a 19.3% year-over-year increase, and now has a middle class population of 300 million, roughly equal to the entire population of the United States!

According to the Knowledge Company, a New Dehli consulting company, there are now about 1.6 million Indian households that spend an average of $9,000 a year on luxury goods.

While I don’t usually talk about specific companies here in Money and Markets, I’m going to break that rule today and tell you about a company …

One of the Best Ways to Play The Chuppies’ Luxury Spending Spree

As I see it, few luxury retailers are better positioned to profit from the Chuppies’ spending boom than Louis Vuitton Moet Hennessey (LVMH).

LVMH was formed after mergers brought together Moet et Chandon and Hennessey, a leading manufacturer of cognac, and Louis Vuitton in 1987. The end result was one of the most prestigious luxury brand names in the world.

There is a lot more to LVMH than just Louis Vuitton handbags, though. The conglomerate owns 60 sub-companies that offer a wide variety of luxury brands that are sold only through exclusive boutiques in upscale locations in wealthy cities. As of the end of 2006, LVMH operated approximately 1,900 stores worldwide.

LVMH’s main product lines can be divided into four distinct segments of the luxury market …

1) Fashion and Leather Goods: Louis Vuitton, Givenchy, Donna Karan, Fendi, Celine, Berluti, and several other luxury names that mere mortals like me have never heard of.

2) Wines and Spirits: Moët & Chandon, Dom Pérignon, Hennessy, Glenmorangie, Domaine Chandon, and many other premium brands. The oldest of the LVMH brands is wine producer, Chateau d’Yquem, which dates its origins back to 1593.

3) Perfumes and Cosmetics: Christian Dior, Guerlain of Paris, Kenzo, Loewe, Acqua di Parma, La Brosse et Dupont

4) Watches and Jewelry: TAG Heuer, De Beers, Zenith, Chaumet, FRED of Paris

And get a load of this — LVMH CEO Bernard Arnault said he expects global spending on luxury goods to almost double in the next five years to $440 billion. According to Arnault,

“This is due to three factors. The creation of new wealth, the amount of existing consumers is increasing, and we are continuing to develop new markets.

“Russia, India, and China represent very important business and one third of all luxury goods will go to these markets in the next 10 years.”

Coincidentally, the top four markets for luxury products are the United States, Japan, China, and Russia.

Bottom line: It is no coincidence that LVMH’s fortunes have increased with Asian incomes and that trend is not going to change. In fact, the long-term economic growth story of Asia is still in its infancy.

I have to confess that I wouldn’t dream of dropping $200 on a bottle of Dom Pérignon and I don’t own any Louis Vuitton bags, but all my status-conscious friends and most middle-class women in Asia do. And that’s why I recommended LVMH to my Asia Stock Alert subscribers back in December.

I’m not saying you should run out and buy the shares right now, but I do think the company proves that the explosive Asian economy is creating its own base of money-spending chuppies and that will benefit not just manufacturers and exporters but also plenty of retail concerns.

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