Mike Fromowitz
May 4, 2014

The party’s not over for luxury brands in China.

The Chinese market is huge and in order to do business there one must have a good understanding of the country’s people, their diverse ethnicities, and trends.

The party’s not over for luxury brands in China.

I find working on projects in China to be an enriching experience. I’ve been doing that for over 20 years. One trend I’ve noticed over the last few years, is the growth of several new and exciting mall projects which have sprung up like mushrooms almost everywhere. Parkview Green and China World Mall in Beijing, and Plaza 66, IFC Mall, and K11 in Shanghai, are excellent examples. They are attracting a new generation of international luxury designer brands and are successfully differentiating and branding themselves, bringing the shopping experience for luxury brands to a new level.

Little wonder then, the world is witnessing the rapid growth of China’s superpower status, and its consumer demand and hunger for luxury goods. In 2006, a KMPG survey revealed that 34 luxury brands were recognized in China. By 2012, that figure jumped to 59 brands. 

Despite the global economic slowdown and its subsequent impact on the luxury sector, China will become the world’s largest economy by the end of the year. China’s consumer sector continues to grow and also account for an increasing share of global sales for some of the world’s largest luxury brands.

A recent China Luxury Goods Market Study reports that Mainland China’s luxury goods market has slowed from seven percent growth in 2012 to around two percent in 2013, (with expectations of similarly slow growth in 2014), in a large part due to Chinese shoppers now doing two-thirds of their luxury shopping abroad. This has triggered slowdowns in store traffic and store openings domestically. Still, Chinese remain the largest nationality of luxury buyers worldwide, with purchases that make up 29 percent of the global market, a four percentage point increase versus last year. Today, total luxury sales in mainland China is estimated at $21 billion (Bain & Co.).

The evolution of China’s consumer culture, the emergence of its middle class, the rise of consumer spending, and the acquisition of luxury products as a means to identify and rank one’s wealth has been tantamount to the country’s rapid rate of change. 

New generation becoming more demanding and selective. 

A seismic demographic shift has taken place in that 43% of China’s population has been born since 1980 and they have seen nothing but economic growth. It is truly the power of youth that is driving the modern Chinese economy.

After decades of material deprivation, China today has become very fashionable and a new generation of younger consumers is becoming more demanding and selective, a result of the country’s and the peoples’ growing nationalism, international outlook, and self-confidence in its identity, both nationally and internationally. 

China is the country with the world’s largest number of luxury buyers, accounting for some 29% of the global market. The country’s new millionaires and billionaires are part of a vibrant culture of visible spending on pricey suits, handbags, fine wines, automobiles, perfumes, and watches. Consumer behavior patterns are changing at a rapid pace. Values linked to craftsmanship, selectivity in the distribution and scarcity of the product are becoming more important in the eyes of consumers in this market.

Chinese luxury consumers are turning increasingly toward spending their ample disposable income on lifestyle purchases in addition to pure social status products. The desire for “accessible luxury” brands (a sub- category of luxury below premium luxury) has also been a key growth driver among the nouveu riche as well as emerging middle class luxury consumers for the casual luxury of American brands and lifestyle living. This has had an effect on top-tier luxury products but has also been a bright spot for the likes of COACH, Michael Kors, and Tory Burch which are thriving in China.

Chinese consumers account for more than a quarter of global luxury spending

Chinese consumers have become increasingly modern in their tastes, but contrary to what many marketers think, they are not becoming 'Western’.  For certain, Apple, Prada, Kate Spade, Porsche, Nike, Starbucks, and Siemens, have taken the country by storm. Where else but in China could a luxury-brand ice cream like Häagen-Dazs, with 560 ice-cream parlours in the country, charge 60 yuan (US $10) for half a pint of its ice cream, yet still get young men to purchase it so their girlfriends would think them cool and hip. 

The Chinese account for more than a quarter of global luxury spending. As more Chinese travel abroad, sales of luxury brands are poised to accelerate given their allure, sense of exclusivity and the exotic.

According to a survey conducted by KMPG, the demand for luxury goods in China is booming as incomes continue to rise. As Chinese consumers increasingly travel further afield, their tastes and knowledge of products continues to widen. The number of Mainland Chinese traveling overseas has increased to 71 percent in 2012, from 53 percent in 2008, a significant change. Not only do millions of Chinese travel overseas, a number expected to reach 100 million by 2015, but income per capita has risen from under $100 U.S. dollars in 1978 to more than $4,000 in 2012. 

The Hurun Report, a luxury magazine which publishes China’s annual rich list, reported that China is home to 63,500 super-rich, defined as individuals with RMB 100 million (equivalent to USD16 million). China is also home to 7,500 individuals with RMB 1 billion (USD150 million) or more in total assets, up by 3,500 on last year.

On average, these millionaires are 39 years old, and 60 percent of them are male. They have two private bank accounts, three cars, 4.2 luxury watches, spend 8 days a month on business trips and go on 3 international trips per year. 85 percent plan to send their children abroad for education, whilst among billionaires, this figure is 90 percent.

Luxury products an integral part of life in China

Another report, the 2013 Julius Baer Wealth Report, states that affluent Chinese consumers see buying luxury products and services not as an occasional treat, but an integral part of their lives. From 2011 to 2012, the report says, the percentage of consumers with annual household incomes of more than US$78,000 doubled, as luxury purchases expanded into a wider number of categories, including watches and wine.

Overseas luxury brands with a presence in China are benefitting from this trend, as are some of the domestic Chinese brands that have or are planning to establish overseas operations. All this has lead to an expanding middle class’ pent-up demand for luxury goods. 

However, demand for luxury goods is set to slow this year.  The Chinese government has outlawed television and radio adverts that promote buying expensive and luxury gifts, amid an ongoing crackdown on graft and excess. Top brands can no longer figure that whatever they ship to China will be snapped up.

Winners and losers, and the expanding middle class

Chinese shoppers are increasingly favoring lesser-known luxury brands like Kate Spade, Givenchy and COACH over labels like Gucci and Louis Vuitton that have been in the country for years. Newcomers face challenges to stand out in China. But shifting consumer tastes are on their side. As China's market for luxury goods matures, some second-tier brands are seeing an opportunity to jump the queue. Chinese sales for COACH were up 35% from a year earlier.  A COACH handbag goes for about a third of the prices of a Louis Vuitton bag.The rising sophistication of the Chinese shopper is creating winners and losers in the luxury space. 

But it isn’t just about being cheaper, it’s about value. As Chinese consumers become more knowledgeable, they look for more value for their money. They also search for products that others don't have, and for new and different ways to express themselves.

Scene from "My Love For The Star"

Luxury brands get help from South Korea 

To reach Chinese consumers, some savvy luxury brands are boosting their sales with the help of South Korean style viral videos which have become all the rage with consumers. Luxury brands such as Gucci, Chanel and Louis Vuitton have used product placement in Korean TV dramas to broaden their appeal to young consumers. The draw of Korean shows is so strong that Chinese producers are trying to make them, complete with Korean actors, so they can fill the sets with Chinese brands.

Kim Soo Hyun in Samsonite TVC

South Korean produced sitcoms are particularly appealing to the fashion-obsessed young Chinese consumers. Celine dresses and Jimmy Choo shoes worn by Korean actress Jun Ji-hyun have seen big spikes in sales ever since Korean drama "My Love from the Star" raked in 34 million viewers in January.  Luxury brands often prefer Korean actors because they are cheaper to sponsor than Chinese and Hollywood stars.

After actor Kim Soo-hyun wore a new leather backpack from Samsonite in one episode of "My Love from the Star",  Chinese customers swarmed to stores with pictures of him on their phones. Sales tripled for the entire backpack line. Associating with young Korean stars has rejuvenated the 100-year old company and made Samsonite more glamorous. The company expects full-year sales of its backpacks in Asia to double to $60 million in 2014. 

In China, brand recognition continues to increase as consumers become more discerning and seek experiential luxury as well as unique one-of-a-kind luxury brands and products. 56 percent of KPMG’s survey respondents said they prefer to purchase well known luxury brands, whilst 69 percent indicated they would pay a premium for well known, popular luxury brands.  80 percent indicated exclusivity and uniqueness as key factors, while 72 percent said the heritage of the brand plays a significant role.

Chinese consumers also associate certain countries with particular products. Switzerland, for example, came top for luxury watches, while France scored highest for cosmetics and perfumes, clothes and bags, and Germany for automobiles. There continues to be a strong association towards European heritage brands in these categories. 

Luxury brands big on digital

The speed with which China's citizens have embraced all things digital is one more sign that luxury brands are in motion in the country. The growing power of new media and the explosion of e-commerce has also catapulted the luxury brand industry forward. Chinese consumers are increasingly engaging via online forums in discussions around luxury brands. There’s a surge in online shopping as consumers are interested in purchasing luxury goods on the internet—a substantial increase of 22 percent from 2011 to 2013. The growth of e-commerce has driven prices and value down for many of the previously highly desirable brands. Online sales of brands like GUCCI and PRADA have increased and are not always sold through brand sanctioned platforms.

As we see it, the winning brands will be those that can keep up with Chinese shoppers, whose sophistication continues to grow as they share pictures and tips online. China boasts 1.1 mobile users with 270 million smartphones. E-retail is expected to grow by 42% in 2013 to $185 billon. Mobile retail is growing even faster at 250%. And yet, the Chinese consumer still needs reassurance. When transactions are arranged online, most purchases are completed in person, with shoppers examining the product and handing over their cash offline. 

In 2013, Digital Luxury Group and Luxury Society joined forces to rank the top 50 most-searched for luxury brands on search engines in China. The ranking is based on more than 150 million consumer queries on the leading search engines in China: Baidu and Google. Their Top Ten brands were:

  1. Audi
  2. BMW
  3. Chanel
  4. Estee Lauder
  5. Louis Vuitton
  6. Lexus
  7. Mercedes-Benz
  8. Dior
  9. Porsche
  10. Lamborghini

To see all fifty: http://www.rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=244&nav=category

According to the World Luxury Index China 2013 report, Lexus has leapfrogged Mercedes-Benz to become the third most sought-after luxury automobile brand

The China market isn’t without its challenges

Without doubt, China’s retail landscape is ultra competitive – everybody’s there. Yet China is not without its challenges and brands need to be aware of the hurdles to market entry. Competition for example is increasing as well-to-do consumers increasingly travel further overseas and broaden their knowledge of products and therefore expect better consumer service and sales experience once they return to shop at home. 

For foreign brands, distribution is by far the biggest challenge of doing business in China. It is indeed, an art to master local idiosyncrasies and get the details right (e.g. retail shop location). 

As the country's luxury brands become increasingly popular, they bring with them competition from domestic brands. Despite these challenges, foreign brands need to stay there because of the markets influence over the rest of Asia. Another challenge for foreign brands is the growth of local Chinese department stores across the country. Many of them have completely transformed their image and quality, and effectively expanded the brand-positioning space by offering a much wider spectrum of prices and newly-created local brands in between.

The government in China is prominantly advocating the nurturing of domestic Chinese brands to compete with the international giants

China remains the big prize in the luxury industry, but the low-hanging fruit is gone. Luxury firms now have to venture beyond the top-tier coastal cities where they have made their easy fortunes.  In the interior, where locals are not yet used to luxury brand shopping jaunts, middle-class incomes are on the rise. For luxury brands that have been in the country for years, growth opportunities will come from cultivating new types of customers and market niches, and perhaps, having to experiment with new business models. As the tastes of rich Chinese evolve, business models combining local flavour and global savvy will emerge.

The Chinese have become, and will remain for a long time, the most important luxury consumers. As long as China’s economy continues to march ahead, it will keep churning out armies of newly minted wealthy folk who will adorn themselves in luxury goods. Luxury brands are fundamental to China’s advancement. Getting wealthy Chinese to open their wallets for luxury brands is evolving, and the opportunities for growth make it irresistible. Many Westerners may think that luxury products are a signal of superficiality, but in China materialism is really an indicator of hope for the future, and advancement. 

Mike Fromowitz

 

 

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