Chow Tai Fook Is Barely International. So How Did It Become the World's Fourth-Largest Luxury Company?

A nimble jeweler with a vast sales network: Chow Tai Fook may be bigger than you think.

Deloitte, the international consulting firm, recently released its Global Powers of Luxury Goods 2015 report, which ranks the world's 100 largest luxury companies by revenue.

First was LVMH, with annual sales of US$21.7 billion. Second was Richemont, the parent company of Cartier, at US$13.4 billion. Third was Estée Lauder, at US$10.9 billion.

Fourth place went to a surprise: Chow Tai Fook.

Yes, this homegrown Hong Kong jeweler now earns more than Kering, the world's third-largest luxury group, and more than Tiffany, the famous American diamond brand.

Luxury goods are struggling around the world right now. Exchange rates are unstable, the economies of Brazil and Russia, two of the BRIC countries, are weak, mainland China and Hong Kong have each taken their own hits, and luxury sales are flat. Luxury brands have responded by cutting prices in China across the board: Chanel lowered its prices, and Gucci at one point offered 50% off.

In this climate, how did Chow Tai Fook, a company with little international reach, squeeze into the top four luxury companies in the world?

First, how did Chow Tai Fook become what it is today?

This giant, now among the world's elite, began as a small gold shop.

Chow Chi-yuen founded Chow Tai Fook in Guangzhou in 1929. His son-in-law Cheng Yu-tung, who was also the son of an old family friend, built it into something far bigger, taking 20,000 yuan in capital and 24 taels of gold to Hong Kong to open a flagship store. In 1956, Cheng formally took over the company and restructured its capital, forming Chow Tai Fook Jewellery & Gold Company Limited, the first limited company in Hong Kong's gold and jewelry trade.

You may know Cheng Yu-tung in another role: founder of New World Development, friend of Li Ka-shing, and known across Hong Kong as "Uncle Tung." Today's New World Department Store and K11 are Cheng family businesses.

In the 1940s, Hong Kong had many shops selling gold jewelry, and winning in such crowded competition was hard. The standard fineness of gold in Hong Kong then was 99%, known as "two-nines gold." Cheng Yu-tung was the first to sell "four-nines" pure gold (99.99% gold content), purer even than "three-nines" gold (99.9%). The move filled Chow Tai Fook's shop with customers, but at a heavy cost: the company lost several dozen yuan on every tael of gold it sold.

Cheng kept selling four-nines gold anyway. Within just two years it had won a sizable share of the market and given Chow Tai Fook a foothold in Hong Kong. In 1984, when Hong Kong legislated standards for gold products, it made the 999.9 pure-gold jewelry that Chow Tai Fook had pioneered the official fineness standard for gold jewelry in the city. For the first time, Chow Tai Fook had made its name.

In 1964, Cheng moved first again: he bought a South African company that held a De Beers license for rough diamonds, and began importing diamonds into Hong Kong. Since 1888, De Beers has distributed most of the world's gem-quality rough diamonds and used that position to keep the global diamond market stable. In the 1960s, international rules allowed only holders of a De Beers license to buy diamonds wholesale, and there were just 500 such licenses in the world.

At the time, the only person in Hong Kong with a De Beers diamond import license was Liu Guichang, the "Diamond King." The Liu family owned a diamond-cutting plant in Hong Kong, where cheap small diamonds bought in South Africa were set into watches that could then be resold at a handsome price. Cheng Yu-tung's purchase secured Chow Tai Fook's place in the diamond business.

One reason it ranks fourth in the world: an extremely dense store network

Hong Kong was, after all, a small market. In 1988, Chow Tai Fook began testing the waters in mainland China. In 1993 it moved into Wuhan, forming a joint venture, Wuhan Xinfu Jewellery & Gold Company Limited, its first step into the mainland.

Five years later, Chow Tai Fook opened its first dedicated mainland store, in the Guiyou department store at Jianguomen in Beijing. That same year, it set up an operations center in Guangdong to run its mainland business. From then on, the mainland business grew fast.

When Chow Tai Fook entered Wuhan in 1998, it had only 100 branches. By the end of 2015, that number was set to reach 2,124.

More than 90% of Chow Tai Fook's stores are in mainland China. Most are in second-tier cities, followed by third-tier cities; first-tier cities have the fewest.

Its most remote store is in Bayannur, in western Inner Mongolia. A Chow Tai Fook in Baotou or Ordos would be no surprise, but Bayannur is a young, up-and-coming city.

Before Chow Tai Fook arrived in Bayannur, most consumers there did not even recognize the brand. The local gold market was dominated by shops such as Bomeng, Hairong and Qiankun, along with Lao Feng Xiang, Chow Tai Seng, Tianze Longtai, Fandashi and Jinjiali.

Chow Tai Fook plans to add a net 150 to 160 retail outlets in mainland China in fiscal year 2016. "At this stage we will not only consolidate our position in second- and third-tier cities, but also keep pushing our channels down, opening new stores in cities, towns and townships with populations of 200,000 to 300,000 or more," the company said in its financial report. But according to its latest quarterly report, released on June 30, Chow Tai Fook Jewellery Group's retail value fell 6% in the first quarter. With the Hong Kong and Macau markets in a slump, same-store sales there plunged 24%, and Chow Tai Fook plans to close four branches in Hong Kong.

New stores also take time to pay off. They often need six to eight years to reach average sales levels, and the older a store, the more it contributes to Chow Tai Fook's retail sales.

In overseas markets such as Taiwan and Malaysia, Chow Tai Fook's strategy is to open stores where Chinese people like to go. After all, wherever there are Chinese people, there are people who love gold.

Besides gold, it is also a powerful watch distributor

Of Chow Tai Fook's total revenue in 2015, about HK$3.4 billion came from watches, a very large sum for the watch industry. Chow Tai Fook mainly distributes watches; it does not make them.

Because Chow Tai Fook's sales network is so large, a watch brand with modest sales entering China can do no better than partner with it to get into stores quickly.

In 2008, Chow Tai Fook entered the mainland's high-end watch market and set up Chow Tai Fook Watches specifically to grow the business. It distributes 10 international watch brands, including Ball, Baume & Mercier, Bell & Ross, Chronoswiss, Dubey & Schaldenbrand, Ernst Benz, Franck Muller, Girard-Perregaux, Milus and Tiangetu, and it is Tiangetu's exclusive distributor in Greater China.

The same year, Chow Tai Fook bought part of the assets of Asia Commercial, Asia's largest high-end watch retailer, which at the time distributed luxury watches such as Rolex and Omega.

The deal gave Chow Tai Fook about 120 high-end watch stores and more than 1,000 mid-range watch stores in China. It also picked up the 51% controlling stake in the Tianjin Seagull watch factory that Asia Commercial had bought in 2007, along with Seagull's 1,800 sales points across the country.

Five years later, Chow Tai Fook Watches, a subsidiary, formed a 50-50 joint venture with Richemont to run Richemont's watch brand Baume & Mercier. Chow Tai Fook's ties with Richemont go back a long way; it also distributes Richemont brands such as Cartier, Piaget and Jaeger-LeCoultre.

Luxury watch brands in China are usually sold through distributors or through the brands' own stores. A setup like Richemont's, with a separate joint venture with Chow Tai Fook to run a single watch brand, is rare. And unlike past arrangements, the Baume & Mercier joint venture not only manages the brand's sales but also handles its marketing in mainland China.

In choosing Chow Tai Fook, Richemont passed over another well-known watch distributor, Hengdeli. Hengdeli is the largest retail distributor in China for European watches such as Rolex, Richemont's brands and Swatch, and in 2011 it had more than 400 stores on the mainland.

Channels alone are not enough: Chow Tai Fook succeeds because it understands what Chinese consumers really want when they buy gold

In traditional Chinese culture, gold is a symbol of status and an auspicious gift for birthdays and special occasions. China is not only the world's largest gold producer but also one of its largest gold importers. In recent years, buying gold coins and bars has become a way for Chinese people to protect themselves against inflation.

Chow Tai Fook knows how much Chinese people love gold, and about half its sales come from gold products. In 2014, its best year for sales, gold products made up as much as 61.2% of the total.

In 2013, Asia saw its biggest wave of gold buying in 30 years, led by China's "dama," the middle-aged women who rushed to snap up gold. Buyers of investment-grade gold bars lined up outside Caibai, a Beijing gold shop; banks, jewelers and even the Hong Kong gold exchange ran short of gold. Some Chow Tai Fook stores in its busiest mainland regions sold out of gold bars.

China's newly rich like to flaunt their wealth, so Chow Tai Fook makes gold zodiac figures and ornaments. Collaborations with Chinese designers are another way it grabs attention.

Mainland China now sees 14 million new married couples a year, and Chow Tai Fook has prepared for the wedding market more thoroughly than anyone. "Weddings remain our main source of revenue, and gem-set jewelry is increasingly popular in the wedding business," Chow Tai Fook wrote in its financial report. In 2015, wedding sales made up 39.2% of its retail sales.

Chow Tai Fook launched a dedicated wedding collection, offers custom pieces for consumers born in the 1980s and 1990s, and ran an online "Operation Proposal" campaign for couples. On the mainland, it has opened wedding-only stores. Unlike an ordinary counter, 80% of the goods there are for weddings: diamond rings for the proposal, the "three golds" for the engagement, and matching bands for the wedding.

Mainland China has no real tradition of the marriage proposal; women in the mainland market are only now encountering the foreign custom. Chow Tai Fook is deliberately cultivating it. The company has studied everything a couple needs from proposal to wedding: a big diamond ring for the proposal, a pair of bands for the wedding, and gifts for the elders.

By customer group, Chow Tai Fook's main products now fall into three categories: mainstream jewelry, fine jewelry and youth jewelry.

Mainstream jewelry depends on the wedding market. To win over young people, Chow Tai Fook has also launched younger designs and sells them online. These include a collaboration with Rio Tinto, a licensed "Disney Princess" collection, the Caprice collection for office workers, and a "Superman" collection licensed from Man of Steel. Its tie-up with the mobile game Angry Birds is widely seen as a sign that it is courting younger consumers.

Finally, it is a nimble investor

Cheng Yu-tung's investments are highly diversified. Besides the New World group mentioned at the start of this article (New World Development, which develops real estate; New World China, which develops property on the mainland; NWS Holdings, which focuses on infrastructure and utilities; and New World Department Store, which runs department stores), the group is also active on the mainland in property development, property investment, leasing, hotels and residential projects. Its developments include K11 and the redevelopment of the old city in Beijing's Chongwen District.

The New World group's expansion has helped Chow Tai Fook place stores in more than 400 cities across China. The two companies also help each other's marketing: Chow Tai Fook and New World have signed a cross-promotion agreement, and New World drives sales with a "buy a home, get free gold" offer run with Chow Tai Fook, its controlling shareholder.

Chow Tai Fook's investments are also growing more varied; it has even gone into oil.

In January this year, Beijing's administration for industry and commerce approved the registration of Chow Tai Fook Energy (China) Limited. The company has already opened an office in Beijing, registered an entity in Singapore, and will set up offices in London and Houston.

This year Chow Tai Fook has also tried peer-to-peer (P2P) lending: it has completed an investment in Paipaidai, China's first purely online P2P platform.

Chow Tai Fook has its eye on gambling, too. In March it planned to invest US$2.6 billion in a casino project in Incheon, South Korea, to draw more Chinese tourists. Beyond Korea, it has teamed up with Far East Consortium to bid for the rights to develop the Brisbane casino at Queen's Wharf in Queensland, Australia.

And in 2012, Cheng Yu-tung's private company bought a 24.01% stake in Giordano, becoming its largest single shareholder.

The next time you see Chow Tai Fook's red-and-gold storefront on a busy city street or in a remote town, do you see the vast business empire behind it, with its astonishing wealth and reach?