With the rise of newly affluent consumers in the Asia-Pacific capitals of Hong Kong, Seoul, Shanghai, Mumbai, and other fast-growing metropolises, ultra-luxury brands like Chanel, Louis Vuitton, Cartier, Ferrari, Hermes, BMW, Prada, and Rolex are aggressively expanding their physical footprints and shifting their marketing strategies to reach this new audience.

Most luxury brands have focused on indigenous cultural, demographic, and behavioral differences to craft regional marketing messages that inform neophyte shoppers about their brand’s value proposition, and their long heritage of fine craftsmanship, innovation, and exclusivity. “There is still some confusion regarding the identification of mid-tier brands from top-tier brands,” explains Sandilya Gopalan, vice president and Asia-Pacific practice leader at Cognizant Business Consulting. Unlike the more mature American, European, and Japanese markets, “the Chinese and Indian luxury retail markets are just getting exposed to luxury items and high-level customer service,” he says.

All luxury brands leverage a customized mix of print, television, and social media to deliver their unique message to shoppers, but chief among their marketing strategies is having a shop located on the world’s priciest retail streets. “Putting luxurious flagship stores on the high streets of Asia-Pacific is critical,” says Milton Pedraza, CEO of Luxury Institute, the New York-based research and consulting firm.

Madison Avenue in New York and Michigan Avenue in Chicago are the shopping thoroughfares of the wealthy in the United States. Overseas, their counterparts are Queen’s Road Central in Hong Kong, Tokyo’s Ginza-Chuo Street, Orchard Road in Singapore, Mumbai’s Altamont Road, and Nanjing Road West in Shanghai. “The newly affluent travel a lot, and know the luxury brands from their excursions to Europe and the U.S.,” says Pedraza. “A highend store at home demonstrates the power of the brand, and is considered the top form of marketing.”

These are robust times for luxury brands in Asia-Pacific. China is speeding past the U.S. to become the world’s largest luxury market for consumer goods, and Bain & Company estimates that luxury sales in greater China (a region encompassing Taiwan, Hong Kong, and Macau) will grow by 6 percent to 8 percent in 2013. With personal income across all of Asia-Pacific ex-Japan during 2012 up 13.8 percent to $28 trillion from the previous year, it’s no
surprise that luxury brands are salivating at the prospects laid out before them.

Many brands are already reaping significant rewards from their expansion efforts, and expectation is that this is still the beginning of a phase. For instance, the French conglomerate LVMH recently reported that it now generates more revenue in Asia-Pacific ex-Japan (28 percent) than it does in the U.S. (23 percent), with 670 stores in Asia-Pacific ex-Japan and 644 in the U.S. Similarly, of the 28 stores Tiffany opened in 2012, two were in Mexico, one in Brazil, five in the United Arab Emirates, and eight in the Asia-Pacific region (with six in China).

Manufacturers of high-end automobiles are accelerating investments in Asia-Pacific, as well. Jaguar Land Rover is expanding its sales network in China, and CEO Ralf Speth recently told Xinhua, the official press agency of China, that he expects the country will soon overtake North America as the company’s second-largest market behind the United Kingdom. Luxury carmaker Audi, meanwhile, plans to launch nine dealerships in second-tier cities (provincial capitals) in India to drive its growth. Recently, it opened dealerships in the Indian cities of Lucknow and Bhubaneswar.

Not all the fun is happening in Asia-Pacific, although many brands have definitely drawn a bullseye on the region. In Brazil, the Iguatemi São Paulo mall hosts Chanel, Burberry, Gucci, and other pricey shops. Iguatemi recently opened a 384,000 square-foot mall in Brasilia, and its CEO Carlos Jereissati Filho told The New York Times that the luxury market will branch out to second-tier cities like Campinas and Belo Horizonte.

A similar phenomenon is underway in China, where BCG predicts that lower-tier population centers will generate more than half of China’s economic growth by 2020. For instance, Louis Vuitton has been focusing on second- and third-tier cities such as Hohhot (the provincial capital of Inner Mongolia, currently experiencing a mining boom) and Urumqi (the capital of Xinjiang, China’s western-most province). “Louis Vuitton’s stores in these regions now outnumber the brand’s first-tier city stores in China by nearly three to one,” says Gopalan.

“Luxury brands are all about experience,” explains Piers Schmidt, founder and chairman of London-based consultancy Luxury Branding. “As Apple proved with its stores, people want theatre in retail. In emerging markets where authenticity has been an issue because of replica products, a store also says ‘this is the real, genuine stuff.’”

A store tells the story of the brand while creating an emotional connection, says Lorre White, self-styled “Luxury Guru” and president of White Light Consulting. She points out that Luxury Swiss watchmaker Blancpain’s newest and third store in Shanghai (its eighth store in China) is the largest of the brand’s 30 “boutiques” worldwide, and sports a lounge bar, terrace, and customer service center from which customers can observe the meticulous work of the watchmakers in action through windows. Similarly, Ralph Lauren’s first Asian flagship store (in Hong Kong) is a three-story monolith with 10,000 square feet of showroom space. The facade features a massive recreation of the painting Bridle Path at Hyde Park by French painter Octave Denis Victor Guillonnet, an artwork owned by the brand’s eponymous founder.

Making such bold brand statements isn’t something these brands can take lightly. The cost of opening such stores in Hong Kong can be staggering—nearly 50 percent higher than a similar spot on Fifth Avenue—making it the world’s most expensive city for retail space. (According to a report earlier this year by CBRE Group, annual retail rent in Hong Kong’s high-end shopping market was $4,328 per square foot.)

In India, Gopalan says most of the luxury stores are located in five-star hotels due to a lack of high-end retail space, whereas in Singapore and China brands are building mega-stores on the high street to reach out to shoppers and build brand awareness and image. “These are some of the brands’ largest stores in the world,” he says. “They have become iconic and a must-visit.”

Although flagship stores are considered a marketing necessity, the business actually conducted in the shops is secondary. “In China, high net worth people often don’t buy at the local flagships, because the price is 30 percent higher than in the U.S. or parts of Europe,” Pedraza points out. With markups due to high import duties and taxes, Pedraza says shoppers “do research at the local shops, but tend to buy on their travels instead.” The lack of business is not a detriment, he adds, given the stores’ marketing value.

Clearly traditional print media, TV, Internet, and social media platforms can be effective channels to attract consumers into stores, but each channel’s relative effectiveness value depends on the behavior of consumers in the markets they’re used in. For instance, print advertising in high-end fashion and lifestyle magazines is much more effective with luxury consumers in the developed nations of Asia, because they have a more mature relationship with the category. Unlike social media channels, “advertising in magazines is a way to demonstrate your credentials to the wealthy,” explains Pedraza.

The wired masses in Asia’s emerging markets, however, are more familiar with and receptive to digital and social media, making them considerably more effective platforms for advertising than print media. According to a recent McKinsey & Co. study, e-commerce in China has increased at a 120 percent annual clip since 2003 (compared with 17 percent in the U.S.), but luxury brands’ use of online, mobile, and social channels for marketing and brand awareness purposes comes with a price. “You need to balance accessibility on the web with the exclusive positioning of your products,” Gopalan explains. In other words, luxury brands may erode the distinctiveness of their products by selling them through such mass-marketing channels.

Demographics have a very limited role in brand marketing decisions in Asia-Pacific today, with luxury brands tending not to tailor their messages to younger or older individuals because they believe that luxury transcends age. Still, Gopalan points out that a few luxury brands like Armani have unveiled “product diffusion lines,” essentially less expensive versions of their higher-end merchandise that will encourage customers to buy pricier items as their income rises.

Down the line, luxury brands owned and produced by companies in Asia-Pacific and other emerged markets are expected to crop up. “Some of the Chinese beauty and skin-care brands are beginning to take off, but in many cases they have copied Western brands and given them Chinese names,” Pedraza says. “Eventually, inroads will be made in luxury automobiles, clothing, and other categories. The Chinese are extremely confident and competent. That combination can be deadly for their competitors if they’re not careful.”

But for now, it’s the established luxury brands that still have the advantage. “Manufacturing and distributing a luxury product is easy,” says Pedraza. “The hard part is the ‘halo effect’—the must-have features characterizing all luxury brands. That does not occur overnight.”

Download a prospectus.

Author Bio: Russ Banham is a Pulitzer-nominated business journalist and author of numerous books, including The Ford Century, the international best-selling history of Ford Motor Co.

Disclaimer: All funds are subject to market risk, including possible loss of principal. Funds
that invest overseas are subject to additional risks, including currency risk, geographic risk, and political risk. These risks are greater for funds that invest in a specific region or country than for a fund with a broader focus.

BMW represented 0.99% of the T. Rowe Price European Stock Fund as of June 30, 2013. The following securities were not held by the T. Rowe Price European Stock Fund, the T. Rowe Price Japan Fund, or the T. Rowe Price Blue Chip Growth Fund as of June 30, 2013: Audi, Cartier, Chanel, Christian Dior, Blancpain, Burberry, Emporio Armani, Gucci, Hermes, Ferrari, Louis Vuitton, Jaguar Land Rover, Prada, Ralph Lauren, Rolex, Tiffany. The funds’ portfolio holdings are historical and subject to change. This material should not
be deemed a recommendation to buy or sell any of the securities mentioned.

T. Rowe Price Investment Services, Inc., distributor.