Homegrown Luxe

Ten years ago, the most gracious hosts in China provided dinner-party guests with imported vintage reds, a rare treat as the country began to open up to Western-style extravagance. Today, they still serve $5,000 bottles of Château Lafite the way they did back then, often mixed with tomato juice or Sprite (wine isn't yet about enjoyment, but about showing wealth). Increasingly, though, tables are filled with something more palatable to local tastes: premium baijiu, a fiery, traditional Chinese grain-based alcoholic beverage (from brands like Wuliangye, Swellfun or Wen Jun), which outsells all other spirits.

It's a much anticipated shift. For years now, rich Chinese, who today represent 12 percent of the global luxury market, have been snapping up Western brands like Chanel, Armani, Cartier, Rolls-Royce and Louis Vuitton. Goldman Sachs predicts that by 2015, China will be the world's largest luxury market, accounting for 29 percent of sales, some $11.5 billion. It's no wonder that Western brands can't build stores in the country fast enough.

But now, as the Chinese begin to feel more comfortable with their place in the world, they are also willing to pay top renminbi for a small but growing tribe of homegrown brands, including not only premium baijiu labels, but also high-end fashion brands like Ports 1961 and Passerby, or cosmetics like Yue Sai, acquired by L'Oreal in 2004. "There are two elements that are important in luxury: exclusivity and making people dream. History and culture become important at some point," says Denis Morisset, a former CEO for Armani and Ralph Lauren, who now heads the luxury-brand management program at ESSEC, a French business school. "China has both."

Increasingly, it also has top-quality production, crucial to building a luxury industry. While Chinese manufacturing standards have come under fire recently after a raft of safety scandals, many overseas luxury-goods brands are boosting production in the Middle Kingdom—Armani, Paul Smith, and Coach to name a few. Production standards, particularly in the south, are increasing, and the skills gained will support the homegrown luxury business. Lorraine Justice, head of Hong Kong Polytechnic University's design school, says that leather craftsmanship is now equal with Europe and that the government has supported the flourishing of more than 200 design schools, a boost to what Beijing considers "cultural industries."

The mainland is also mastering the art of marketing, which is essential to selling luxury. Leveraging celebrity helps—Yue-Sai Kan, the founder of Yue Sai cosmetics, is one of the most famous women in China. Born in Guilin, she left in the 1950s for Hong Kong and then the United States, but returned in the 1990s as a tremendously successful author, TV presenter, and lifestyle guru. Her blog gets approximately 150,000 hits a day, and her personal Web site features pictures of her art-filled Shanghai apartment and her New York townhouse. Later this year, she plans to open her own 5,000-square-foot lifestyle store in Shanghai inspired by how she lives.

It was pure spin that made baijiu a luxury product. The drink, a favorite of farm workers and manual laborers, is mass—if not down—market, accounting for 99 percent of China's wine and spirits market. The trick was in proper packaging—a number of companies evoked China's rich imperial past on fancy boxes containing bottles with crystal decanters—and pricing ($3,600 for fine, aged baijiu). "Price-points communicate everything here. Most people still use price to assess quality," says Lilian Yap, a director in Shanghai for Nielsen, the consumer-research company. Last year at a public auction in the southern boomtown of Shenzhen, a connoisseur bought a bottle, no more than half a liter of Wuliangye 90-year-old baijiu, for a record $117,000, the equivalent of the lucky-sounding 880,000 renminbi.

Now those prices are attracting foreign money. In January, Diageo, the maker of Johnnie Walker and Smirnoff, acquired 43 percent of Sichuan Chengdu Quanxing, parent company of Sichuan Swellfun, China's oldest baijiu distiller. In May, the French conglomerate LVMH bought 55 percent of Wen Jun from Jiannanchun, the No. 3 producer. These Western buyers are no doubt counting on the fact that the rest of the world may someday mimic China, and raise a glass of baijiu with guests.

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