From Standard & Poor's MarketScope

Nothing says "cool" like $100-plus Nike sneakers to the Beijing student who -- like millions of Chinese youths -- is finding the high-priced kicks increasingly affordable.

Big brand names in consumer goods are frenetically setting up shop in major cities throughout Asia, emphasizing lifestyle. In Standard & Poor's view, demand for status symbols, like luxury Western brands, is high throughout Asia's bustling cosmopolitan centers, as the consuming population expands rapidly.


  "The Asian shopper accounts for 40% of spending on all luxury goods. It is the market that retailers want to go after," says S&P equity analyst Marie Driscoll.

Although opportunities abound, S&P thinks only a select few U.S. companies will be successful in marketing or actively merchandising their high-end brands in Asia while garnering returns for their stateside investors.

Standard & Poor's has identified highly ranked issues in the consumer-discretionary and consumer-staples sectors that explore retail luxury-marketing opportunities in Asia -- exploiting what Coach (COH); recent price, $36) Chairman and CEO Lew Frankfort has referred to as "beachheads." A retail beachhead in a major cosmopolitan city -- such as Hong Kong or Tokyo -- allows merchants to showcase their brands among shoppers with higher incomes, in S&P's view.


  These beachheads provide brands with a geographic foothold, either directly -- through a license -- or with a local joint-venture partner. Asia represents an untapped frontier for many Western consumer marketers. The Far East is home to both one of the world's largest economies, Japan, and one of its fastest-growing, China.

In China, the government is targeting 8% growth in gross domestic product this year and 7.5% annual growth over the next five years. Total retail sales of consumer goods in China reached nearly $760 billion last year, the Ministry of Commerce said in January. The government reported that average sales at specialty stores increased 61% year-over-year.

Japan is the world's second-largest economy, after the U.S. For the year ending March, 2006, its GDP is projected to grow 3.2%, which would be the fastest since the year ending March, 1991, when Japan's economy grew 6%, according to government figures.


  Even during the last 15 years of stagnation and recession, however, the Japanese economy has been a haven for luxury-goods makers. It's reportedly the second-biggest market for sporting goods, after the U.S. Already, 37% of thirtysomething Japanese mothers own genuine Louis Vuitton goods, according to a 2005 survey.

One of Driscoll's picks is 5 STARS (strong buy)-ranked Coach, which she terms a shining example of a consumer brand that's well positioned to benefit over the long term throughout Asia. Coach, which she defines as an "aspirational" brand in Japan, has a retail beachhead advantage and a strategy that seems to be working, according to Driscoll.

Coach's strong sales in Japan were partly responsible for its 37% higher earnings in its December quarter. Driscoll says the U.S. and Japan are growing at equal rates -- more than 20% a year -- and she expects this to continue for the indefinite future.


  Another company with a top S&P ranking that falls into the beachhead category is specialty retailer and apparel company Polo Ralph Lauren (RL; $58), says Driscoll. It's ranked 4 STARS (buy). Later this month, the company will open a new 22,000-square-foot flagship in Tokyo to showcase its luxury labels.

Nike (NKE; $84), best known for marketing its iconic athletic brands -- Nike and Converse -- also markets a high-end fashion brand. Cole Haan operates 40 stores in Japan, a market the brand first entered in 1988. Much like its jock-oriented stablemates, the fashion brand is looking to expand its global footprint by opening stores in China. S&P expects 9% growth for 4 STARS-ranked Nike in fiscal 2006 (ending May) and 2007, driven in part by international growth in the Asia-Pacific region.

The Nike brand appears to be building momentum in Beijing, where the 2008 summer Olympic games will be held. Despite inroads made by its major competitor, Adidas Salomon (ADDDY); $89), which is the sponsor of the 2008 games, Nike's expensive sneakers walk out the door. Nike told The New York Times that in China, its $250 Limited Edition Zoom LeBron III sneakers sold out within two hours.


  "We think the shares should command a premium to [Nike's industry] peers, based on what we view as the company's market-leader status and proven ability to market technologically advanced athletic shoes at premium prices," Driscoll says.

Retailer Quiksilver (ZQK; $13), also a marketer of more than 20 brands with youth appeal, is expected to benefit from the growing popularity of skateboarding and snowboarding -- and S&P's Driscoll sees "significant long-term potential in Asia-Pacific." Whether they're trend-conscious young professionals, hoop fans, or scruffy 'boarders, Asian consumers have a thirst for high-end merchandise from brand-name U.S. outfits that will continue to grow.

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