According to a 2018 study by global management consultancy Bain & Company, the size of the global luxury market is USD 1.4 trillion. The luxury consumers are distributed across the global markets, with 33% luxury spend contribution from consumers in China, 22% from consumers in America, and 18% from consumers in Europe.
China also came in top in luxury spending growth globally, with 26% growth from 2017 to 2018. The global luxury market is forecasted to grow at an annual rate of 3 to 5% until 2025, with Chinese consumers contributing to 46% of global luxury spending.
For several years now, the global spotlight has been on Chinese luxury consumers, and for good reason. Between 2015 and 2018, Chinese consumers’ local spending contributed twice as much growth in absolute value as their spending abroad.
With double digit domestic growth as the norm until recently, luxury goods companies have jumped at the opportunity to expand in China, attracting the Chinese market with glitzy stores and prominent logos. Now, with domestic growth rates falling to single digits due to the pandemic, Chinese government efforts to mitigate ostentatious displays of wealth, and increased purchases of luxury abroad, global luxury goods companies need to make adjustments to their existing business models to meet the needs of the evolving Chinese market. This requires different strategies for luxury brands in China.
The vast and growing number of Chinese luxury consumers can be attributed to the rapidly rising disposable household incomes in China. The very wealthy Chinese households are of course powerful drivers of growth for luxury and the prime target for luxury brands. However, the rising Chinese middle-class, consisting of households with monthly incomes between USD 2,600 and USD 3,900 have become the fast rising consumer segment in China – they have become the subject of much attention from global brands.
These new entrants, who are mostly located in second tier cities, spend large amounts of their income on luxury, using their purchases as symbols to display their increasing social and financial status and aspirations, and to self-differentiate. Even though middle-class consumers spend less in total than their wealthier counterparts, their numbers are significant enough to make a strong impact on total luxury spending in China. According to McKinsey & Company, the global management consultancy firm, the Chinese middle class consisted of 45% of China’s total population in 2020. This proportion is predicted to grow to 76% by 2022.
An interesting characteristic of Chinese luxury consumers is that they are comparably younger than their European and American counterparts – 79% of Chinese luxury consumers are under the age of 40, with 56% classified as post-‘80s or Generation Y (age between 31-40) and 23% classified as post-‘90s or Generation Z (age between 21-30). They are on average 10-15 years younger than their European and American counterparts. Generation Y consumers have grown up together with China’s emergence as a superpower and typically spend to flaunt their success. On the other hand, as products of China’s single-child policy, Generation Z seek out more individualistic or customized products and expect digitally enhanced shopping experiences.
In the next three to five years, Chinese consumers between the ages of 25 and 30 will be the prevailing group in luxury consumption. This demographic of China’s new middle class is termed as Generation 2.
Women have also become an important rising demographic in the Chinese luxury goods market, which has traditionally been dominated by males between 35 and 45 years old. This is because Chinese women are beginning to catch up with men in numbers in the workplace, and thus are gaining more financial independence and social status. As a result, their purchasing power has increased, and they are buying more luxury goods than ever before to reward themselves for hard work and personal accomplishments. With 25% of Chinese women earning more than their male partners, they now account for three-fifths of the luxury goods market. Gender-oriented communication is increasing, with more luxury brands organizing VIP events exclusively for women.
Despite the slowing of domestic luxury consumption, Chinese tourists are spending more in luxury retail locations overseas. Of the 33% of total global luxury purchases by Chinese consumers, it is estimated that close to 70% of luxury consumption occurs outside the mainland and abroad. As traveling becomes easier, more accessible and more appealing, Chinese tourism has exploded, with the number of Chinese tourists exceeding 145 million in 2019. Chinese tourism is becoming an important stimulus to local economies around the world.
It is also interesting to note that Chinese consumers have increasingly diversified their luxury basket since 2016 as they spend more on other categories including luxury cars, fine food, luxury hospitality and designer furniture. Their spending in fine art, luxury experiences (private jets, yachts, luxury cruises) are also seeing a year-on-year steadiness.
There are several reasons why Chinese consumers prefer to buy luxury goods abroad rather than at home, including guaranteed authenticity as well as differences in price. In China, counterfeit goods are rampant, as intellectual property laws are weakly enforced. Buying luxury abroad decreases the concern of accidentally purchasing counterfeit goods for Chinese shoppers looking for high-quality, authentic products.
However, the most prominent reason for buying abroad is the large price gap that exists between luxury products in China and outside of the mainland. Luxury goods are extremely expensive in mainland China because of high import duties, consumption taxes, increasing rental and labor costs of luxury goods stores, as well as inefficient logistics and distribution systems. Price differences, depending on product categories, can range from anywhere between 11-40%. Often, Chinese consumers can actually save money by spending money on a trip and buying luxury abroad instead of buying at home.
The emergence of the global Chinese customer means luxury companies need to be more aware of such discrepancies between the Chinese market and the global Chinese demographic while crafting their business models.
With the prevalence of international Chinese consumers, luxury companies must globalize their marketing strategies to cater to Chinese tourists. Effective methods can include employing Mandarin speaking staff and providing Chinese payment options in stores around the world. With new trends, come new challenges, and luxury companies now have to maintain consistency, excellence, and exclusivity in their products and retail locations around the world. Failing to do so increases the risk of losing consumer trust. However, companies now have the opportunity to provide unique shopping experiences for Chinese consumers abroad that they cannot get at home.
Another important trend in the Chinese market is the increasing sophistication of the Chinese luxury consumer, as tastes of seasoned buyers mature with astonishing speed. There is a noticeable shift of demand from luxury products flaunting logos to more understated and stylish products, leaving well-known brands like Louis Vuitton and Gucci struggling to keep up with prior yearly growth rates. This phenomenon is most apparent in tier one cities, such as Beijing, Shanghai, and Shenzhen, where consumers have been buying luxury for a few years and are becoming knowledgeable about fashion and curious about what the world perceives as stylish. These tenured consumers are beginning to focus on brand heritage, craftsmanship, and scarcity in their luxury purchases rather than flashy logos overtly displaying wealth.
Simultaneously, large numbers of the Chinese middle class are coming into wealth where they can afford luxury for the first time. Therefore, there is still a strong demand for well-known, logo-emblazoned products that clearly display their newfound status in the Chinese social hierarchy. As the luxury goods market splinters across income levels and social classes, luxury goods companies are facing new challenges in tailoring their product portfolios to meet diverse preferences, while at the same time maintaining consistency and exclusivity in their brand cachet.
Accompanying increasing sophistication, Chinese luxury consumers are beginning to value the luxury experience in addition to just a product itself. Impulse purchasing is on the rise, making the architecture of a flawless in-store experience an invaluable component of a luxury company’s business and brand model. Luxury stores are ramping up customer service, hosting VIP events, and providing special perks aimed at communicating exclusivity and recognizing the status of their best customers.
Examples of this special treatment include closing an entire floor for VIP shoppers, providing special notifications of new products for individual customers, and assigning personal shoppers. As newcomers enter the ranks of Chinese luxury goods consumers, ultra-wealthy Chinese shoppers are looking to have their status validated by luxury companies, setting them clearly above the average consumer. For these top-spenders, luxury companies are employing a variety of methods to please, such as throwing lavish events and sometimes even sending VIPs on trips abroad.
A challenge that has arisen for luxury companies in the face of this new reality is providing service consistent with their brand image that is up to par with customer demands. Finding suitable sale associates for stores located in second and third tier cities is a recent problem that has surfaced. Implementing customer relationship programs where current customers are monitored is of utmost importance so data can be effectively collected and used to identify potential sales opportunities and provide customers with optimal service. In addition, with rising rental and labor costs, companies often find themselves in a position where they have to trade off between their number of stores and the quality of service they are able to provide. Both important components of luxury marketing strategies are used to increase brand awareness and present an image of extravagance.
A lot has been discussed about the digital revolution and more so in today’s pandemic era – the bigger question is, what can luxury and retail brands do to win over Chinese luxury consumers who are also digital natives? Besides having to convey superior quality and perceived exclusivity through the touch-and-feel of its products, luxury brands must also effectively convey this messaging through digital screens. According to a Business of Fashion report, digital marketing strategies that work in the West do not necessarily translate well in China. China’s innovation in mobile payments such as Alipay, advanced facial recognition, artificial intelligence and block-chain are forcing luxury brands to sit up, listen in and brainstorm new ways of consumer engagement.
One good example of how a luxury brand has managed to succeed at this digital engagement challenge is Dior. Since the start, Dior has been an early adopter of new social platforms like Weibo and WeChat, and ran advertisements on Youku to start being relevant to young Chinese consumers. It has also been running controlled experiments, taking occasional risks, and sometimes rejecting traditional best practices. In 2016, Dior was the first luxury brand to sell out 200 Lady Dior bags (specially produced for the Qixi Festival) through WeChat’s ecosystem within a mere 20 hours. Dior is also not afraid to adopt new formats like livestreaming (e.g. a 360-degree virtual reality live-stream of Dior’s Shanghai show), short video (e.g. Weibo Stories) and social commerce. Through its efforts, Dior has been seen as a digital trendsetter in China and constantly achieved top ratings on engagement and relevance for China’s Gen Z.
Simultaneously, the company’s approach to e-commerce in China demonstrates its commitment to its core values as a luxury brand and avoidance of brand dilution. Even though more and more luxury brands have partnered with local e-commerce marketplace giants like Tmall or JD.com in the hopes of reaching a larger consumer base, Dior has stubbornly refused to follow suit. Instead, it views time and accessibility as the new currency in luxury e-commerce, and uses omni-channel as a strategy to improve its offering.
When employing digital strategies in China, luxury brands must also ensure that content published is both region- and platform-specific. For example, the information-heavy strategy frequently used for WeChat must be vastly different for an entertainment-driven video site Douyin. Additionally, gaining followers is just the first step. Luxury brand leaders need to think of ways to eventually convert its social media audience into customers. Some strategies could be through engagement on product questions, or reposting user content.
Chinese luxury consumers are constantly growing and evolving. Now more than ever, it is important for luxury companies to stop viewing Chinese consumers as homogeneous, but instead structure their business models according to the differences within various regions, social classes, and income levels in China. As tenured Chinese consumers mature and demand one-of-a-kind products, while the emerging middle class continue to demand traditional logos, luxury companies need to find a middle ground in the tailoring of product portfolios that meet the needs of both groups.
With the Chinese luxury demographic shopping globally, it is important for companies to keep up consistent quality and service while taking advantage of opportunities to communicate brand heritage in unique ways not possible in China.
The companies that successfully meet the needs of the vastly different mainland Chinese consumer and the global Chinese consumer without jeopardizing brand cachet and exclusivity will be the ones that prevail in the shifting Chinese luxury landscape.
About the author: Martin Roll – Business & Brand Strategist
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