China's luxury goods market already the world's third largest is expected to grow by 20 per cent annually in the next three years.

That's according to an Ernst & Young report released in Beijing yesterday.

The booming economy coupled with more mature consumers has apparently led to an appetite for luxury goods.

This translates into enormous potential for global luxury goods retailers, said Conway Lee from Ernst & Young.

Lee pointed out that China's luxury market is still in its infancy, different to developed markets.

"In China the consumption of luxury goods is very much item- driven, meaning consumers search for the latest collection or products. In more developed markets consumers tend to seek experiences that pamper them, such as a luxury holiday or a service such as home delivery of groceries," Lee said.

He said foreign luxury brands face many challenges in the Chinese market. These include high rents, distribution and logistics issues, difficulties in personnel training and the need to overcome cultural differences.

Lee added that partnering local firms or entering into joint ventures may help firms overcome such challenges.

"They have to be cautious in choosing credible local partners and engage in comprehensive, on-the-ground research before entering into any such agreements," he warned.

The ability to gain a thorough understanding of China's regional markets is one of the most critical factors if a luxury brand is to be successful. Companies may consider pitching different brand names and offering different products to meet various consumer preferences in China's regional markets, he added.

Lee suggested luxury brands should be prepared to look beyond short-term profits and think about investing in China over a longer period, with the aim of securing market share before the competition does.

The recent revaluation of the renminbi is expected to help strengthen most Asian currencies and will likely spur long-term spending in the region as well as outbound travel from China, he said.

Counterfeits remain one of the biggest problems for luxury brands, the report said.

Firms could consider refreshing their designs quickly in order to keep ahead of counterfeits, Lee suggested.

Ernst & Young's report also said China's homegrown luxury brands may grow in popularity over the next five to 10 years.

Lee gave the example of Shanghai Tang, a Hong Kong based retailer which has successfully entered the global marketplace.

(China Daily September 15, 2005)