As China sales falter due to a slowing economy and crackdown on corruption, luxury brands seek a turnaround.
For luxury brands in Asia, the last decade has been the best of times, and the worst of times. Many have seen the breakneck speed in terms of expansion and growth: in particular, a growing wealthy class that has emerged since 1990 in China has driven the world’s luxury market to new heights.
In Campaign Asia’s Top 1000 Brands this year, only one major luxury brand has dropped in the rankings—Burberry—while the rest have maintained robust placing and several have climbed, showing luxury brands are on firm footing.
But the easy period for premium brands in Asia might be over. The main growth generator, China, is facing a slowing economy, and luxury market sales have been hit by an anti-corruption drive which has put an end to the practice of ‘gifting’ officials with luxury watches and handbags. Consultancy Bain estimated that growth in personal luxury sales in Greater China fell from 30 percent in 2011 to 2 percent in 2013. The country’s overall luxury market fell 2 percent to US$ 17 billion in 2015.
Hong Kong has been particularly hit by these changing headwinds. Wealthy mainland shoppers have turned lukewarm towards Hong Kong, once the preferred—or only—destination for Chinese shoppers. Now, an increasingly international Chinese consumer base is heading abroad.
The Fortune Character Research Centre estimated that Chinese overseas consumption of luxury goods last year was US$116.8 billion, accounting for 46 percent of luxury purchases globally. Along with the allure of overseas travel, this is largely also due to the high cost of luxury goods on the mainland, with achingly high import taxes making luxury consumer goods as much as 68 percent more expensive in China than in other markets.
Many countries such as Thailand have been easing their visa restrictions for Chinese travellers, in a bid to capture some of the huge amount of Chinese spend going beyond traditional destinations. Cambodia saw 24-percent growth in the number of Chinese visitors last year and aims to pull in two million Chinese arrivals annually by 2020.
With so many more choices of shopping destination, and rising tensions between Hong Kong and the mainland, arrivals of Chinese tourists in Hong Kong have been falling. Numbers fell 18 percent during the first two months of 2016, compared with the same period last year, according to the Hong Kong government data, while their retail spending fell 8.3 percent in 2015, after nearly a decade of double-digit growth.
And in February alone, sales plunged the most since 1999, as fewer Chinese tourists visited Hong Kong during the Lunar New Year holiday season. Retail sales dropped 21 percent in February to US$4.8 billion year-on-year, with sales of jewellery, watches and electrical goods have been particularly badly hit.
Downward pressure on spending can be felt in other main shopping destinations across Asia. In Japan, consumer sales have been slipping, the central bank has introduced negative interest rates to stimulate growth, and consumption remains low—figures in March recorded a 2.3-percent monthly fall in retail sales.
Singapore’s economy has been similarly flat, with official figures showing a 3.2-percent fall in retail sales in February, and economic growth remaining stagnant in the first quarter.
But with so many different forces shifting in Asia’s luxury markets, how should luxury brands position themselves for survival?
Many have already been adapting to the changing economic climate. Some began closing shops across Asia to focus on fewer, better locations. At the end of 2015, luxury retailer Louis Vuitton said it had already closed a number of stores in China, especially second-tier cities with more than one store. China’s slowing economy also led to a profit warning at Hugo Boss, while Italian brand Prada blamed China’s changing demand for a 28-percent drop in its profits in 2015.
British fashion house Burberry saw shares fall sharply in April after it suffered a double-digit fall in Chinese spending, with China reportedly accounting for 38 percent of their global sales. The brand’s like-for-like sales in Hong Kong plunged by more than a fifth for the third consecutive quarter, and the CFO Carol Fairweather admitted they were missing out on the influx of money into Japan by not having a large enough store presence—mistakes they were planning to correct by opening more Japanese stores.
But as brands adapt to challenging new market conditions, consumers are evolving, too.
“Where the last decade saw shoppers flocking to big and brash items bedecked in highly visible branding, consumers are now seeking out more exclusive but less visible labelling,” says PwC in its recent retail market outlook report, warning that wealthy consumers in Asia, particularly in mainland China, like fresh, new brands and are increasingly turning from more established brands.
Clever brands are looking for new ways to engage their customers and encourage brand loyalty. Examples of this include events by Info/Nation, a niche marketing brand which works with luxury brands to design high-end, extremely niche events. Their events have included a Cartier watch-making process for a very small, select group of invited customers, and a Boucheron dinner with the maison’s managing director, where attendees were invited to wear any jewellery they like through the dinner. For these wealthy individuals, says Shawn Hiltz, CEO of Info/Nation, the key draw is personalisation and offering unique experiences.
“Nobody needs a recognition campaign about Cartier, but a lot of people might not think of Cartier as a place for watches—men in particular,” he says. “But it turns out the first wristwatch ever made was made by Cartier, and it was made by Cartier himself for his best friend who was a pilot, so he could see the time while flying. That all came out in our event. So there’s this knowledge about the brand, this history and this craftsmanship, and it helps people to feel they know and understand the brand.
“Even a brand like Cartier, there is still an opportunity for education and aspiration building.”
Other luxury brands are responding to changing consumer profiles. “Globally, the average age of the Rolls-Royce customer has dropped from 53 to 45 in a matter of only five years,” says Paul Harris, Asia-Pacific regional director of Rolls-Royce Motor Cars. “In Asia, we have observed a similar trend of younger audiences being attracted to the brand,” Harris points out. “Studies show that some US$30 trillion of wealth has been and will continue to be passed on to younger generations. That’s just in North America alone, and we expect this figure to be matched or even surpassed in Asia. For future sustainable growth, these disruptors, innovators, game-changers and tech-preneurs will be very important to Rolls-Royce.”
Harris says many of their products now reflect this, referencing new models such as Wraith and Dawn, which are both designed to be more contemporary models of car.
“Even our accessories now appeal to a younger set: we have a Cocktail Hamper made to fit the boot of our cars,” he adds. “It consists of—but is not limited to—decanters, tumblers and a shaker to prepare the perfect cocktail drink.”
Another trend is the increasing influence of women in the luxury world. Info/Nation’s Hiltz points out that they have seen increasing interest from high-net-worth female individuals, particularly in niche investments such as the diamonds, art and jewellery sectors.
Key to understanding the changing consumer to this is a very comprehensive member database. Hiltz highlights the need for luxury brands to collect layers of data for marketing projects.
“We have a very detailed customer database, which tracks what individuals are really interested in, and we only contact them if we know they will be interested. We don’t communicate everything to everybody, and that’s very important,” says Hiltz. “We don’t ever treat any audience as homogenous: our business model is very much based on personal taste and passions.”
The key will be in how well brands can personalise and customise their products and services.
“I think one of the things with the younger customers is customisation and personalisation. The millennial customer wants to have a product that is all his or her own,” says Erica Kerner, vice-president of marketing and communications for Tiffany & Co Asia-Pacific. “Whether it’s a bespoke product, engraving or even how they are wearing the product, it shows how people are customising and personalising their products. For Tiffany, that’s definitely something that’s top-of-mind for the future and something we spend a lot of time thinking about.”
Building personalisation and interaction into the brand is essential. Luxury brands are increasingly developing store capacity for personal shoppers, VIP rooms and even tailors who can adapt products in-store to develop individual tastes and trends.
“We are seeing a more sophisticated consumer in mainland China, looking for new, more niche luxury brands, personalised services, and a hunger for more brand education,” agrees Joel Stephen, head of retailer representation in Asia, CBRE. “We are seeing growing pools of luxury consumers in Southeast Asia buying accessories from the big name brands. The Asian consumer is globally aware of the latest trends and fashions, they are mobile and they are demanding an ever higher quality of service.”
Responding to local tastes and highlighting traditions and craftsmanship is another approach that has proved popular with luxury customers. (story continues below)
The next wave of luxury
Regan Leggett, executive director, thought leadership and foresight, Southeast Asia, North Asia and Pacific, Nielsen
Southeast Asia represents the next big hotspot for premiumisation in Asia. As the region accelerates through this cycle of spreading consumer prosperity, it is predicted that the number of middle-income consumers will increase from 190 million in 2012 to 410 million in 2020.
We’ve already seen that premium products have reached 16 percent of grocery category sales in SEA—21-percent growth compared to value and mainstream products. China’s continuing growth in this space would suggest that SEA consumers’ sentiment toward premium products has a healthy future.
But the approach to premium is not as simple as it may first appear. There are a number of considerations to work through, particularly in diverse regions.
Asia has historically been dominated by traditional trade or local stores that are very simple and focused on neighbourhood custom, compared to modern trade which is more sophisticated and offers a compelling consumer environment. But it is logical to assume modern trade is a more natural fit for premium sales, with 20 percent of total sales in SEA alone coming from this segment and growing at 14 percent. Traditional trade now sees 8 percent of its sales come through premium products, growing at 20 percent. This reflects the shifting fortunes of consumers who have been traditional trade customers, and the trend will continue.
When looking at premium, it’s important to consider the application of the products for consumer—there are certain sweet spots manufacturers and retailers can focus on to tap into the biggest opportunities. These sweet spots may shift, though, as new considerations emerge. When it comes to categories where consumers pay extra prices more often, personal products such as face cleanser and face moisturizer, and home cleaning products have a heavy weighting towards premium. Food and beverage is also an area for premium products, but it does not have the same relevance to consumers seeking trade up.
“A highly bespoke car made to celebrate Singapore’s 50th anniversary, the SG50 Ghost, was sold to a true patriot last year and is a one-off car,” says Harris. “Phantom Sacred Fire, based on the Dong Son Collection that celebrates Vietnamese culture, was also delivered to Hanoi late last year. At the Bangkok Motor Show, KoChaMongKol, or ‘auspicious car’, was also presented, based on the iconic elephant which is highly respected in Thai culture.
“We strongly believe in experiential marketing, which is why our customers come to events in Goodwood. There is now a Bespoke Atelier facility where customers can take their time to commission their Rolls-Royce in detail—where, for example, they can view their select colour under the light of the region where they will own the car.”
Hermès-backed Chinese luxury brand Shang Xia has particularly focused on emphasising the traditional crafts and heritage that inspires their clothing and furniture, and the Shanghai flagship store frequently involves a craftsman demonstrating some of these long-passed-down skills. Making the store experience memorable gives shoppers a reason to enter the shop rather than buy online.
“In the luxury sector, the in-store experience and personal service is more important than any other sector—so hard to replicate that experience online,” adds Stephen. “Presence in the leading luxury malls and high streets across Asia is fundamental to the success of a luxury brand.”
Balancing the in-store and online experience can be a complicated task. “Although Asian markets can be very different, a trend we have noticed across the region as a whole is the shift of our consumers into digital,” says Kerner. “As we’re developing our campaigns, digital is not just a channel: it’s a strategy into itself.”
The other big shift is CRM. She says building customer loyalty is incredibly important for luxury brands. “Bigger investment around all of our CRM programmes is another critical shift in how our marketing strategies are changing ... It is no longer just about serving up great advertising campaigns—it is really all about customer loyalty.”
With this in mind, digital engagement is a must—not just ecommerce, but new ways to engage and intrigue the luxury consumer about the brand.
Korean cosmetics giant AmorePacific released a Laneige Beauty Mirror app in September 2015, which enables users to virtually try on the brand’s makeup products. The app featured mirroring technology and claimed to be the first to do so in Korea, which recognises detailed facial movements on a real-time basis and projects a 3D image to simulate how the makeup would look on a person’s face.
MinJeon Rhee, head of marketing strategy unit and executive vice-president at AmorePacific, told Campaign that the cosmetics group’s focus for 2016 is on retail and customer experiences, prioritising the ‘shopping’ aspect rather than simply ‘consuming’. He said that store upgrades, O2O and customer services were central to their focus.
Rolls-Royce has also been ambitious with its social media presence, including a Rolls-Royce Phantom app where customers could capture their own colours and apply it to the paint finish on a ‘virtual’ Rolls-Royce model. The brand has also experimented with social media blackouts in advance of big announcements, multi-sensory installations at exhibitions and mocrosites for specific events. Last year their Instagram followers soared by 740 percent, and their Facebook page has over four million likes.
Building loyalty in Asia means reaching all levels of existing, and potential, customers. “The key to being successful in Asia is to operate on all tiers,” adds Kerner. “It’s important at the mass level to build aspiration and interest in the brand. We are very active on WeChat, Weibo, all the key social media in China. And we have our global platforms too. We believe in being where our customers are. If that’s on social media, that’s where we need to be ... But we also want to continue to build those one-on-one relationships with customers and develop our top customers into lifetime customers.”
Given these shifting sands, brands anticipate future growth coming from a number of markets. “We continue to see Japan as a strong market, being the largest in Asia, excluding China. Korea is growing rapidly and we recently opened a second dealership in the country—in Busan,” says Rolls-Royce’s Harris. “We are present in emerging markets, such as Vietnam and Philippines, and we expect these to register steady and sustainable demand in the coming years, in line with economic growth.”
But when it comes to the dominant consumer base, brands are fairly clear who their target audiences are. Whether Chinese shoppers are buying at home or abroad, they are the key luxury spending group across Asia and will be for some time to come. The trend is only being bolstered by terrorist attacks in Europe, causing many to retrench in Asia over safety fears. For brands, Chinese consumers are hugely important: a recent study by Deutsche Bank found that some luxury brands make as much as 49 percent of their revenue from Chinese consumers, if their spend inside and out of China is combined.
“One of the biggest changes is to stop thinking of countries as geographic destinations: we really look at the Chinese as a demographic, not a geography,” concludes Tiffany’s Kerner.
“Whether they purchase in China or when they are travelling overseas, Chinese shoppers are going to continue to be important for all luxury brands. That means practical changes. It’s understanding that Chinese customer; looking at retail locations, the service within the store, Mandarin-speaking staff, serving warm water instead of cold, and just understanding these basic differences in customer behaviour. I think the brands that are able to do that best are going to be the most successful with those Chinese customers in the future.”