Techreport,
China?s Luxury Market - Are you ready for the opportunities and challenges?
InterChina, (April 2007)
Abstract
China?s luxury goods market is taking off, fuelled by the country?s
stunning economic growth, a corresponding increase in consumer spending
and the revaluation of China yuan. According to Goldman Sachs, excluding
private aircraft and yachts, the Chinese buy US$6 billion worth of
luxury goods a year, accounting for more than 12% of total worldwide
sales. China already is the worlds? third-largest consumer of luxury
products after the U.S. and Japan, and the market is forecast to
grow 10%-20% annually over the next decade. By 2015, China will surpass
Japan to become the world?s second-largest purchaser of luxury goods,
accounting for nearly a third of the world?s luxury sales. China
already is the largest market for the luxury car model Audi A6 and
is also BMW?s second-biggest market after Japan.
Viewing the seemingly insatiable Chinese appetite for top name cars,
accessories, jewelry and other brand-name luxury items as a golden
opportunity, most large international brands have already entered
the Chinese market, and nearly all have expansion plans. LVMH Moet
Hennessy Louis Vuitton, with sales in China surging by 50% annually,
plans to open two to three stores a year. The Mainland China is already
LVMH?s fourth-largest retail market. Armani plans to open another
20 to 30 stores by 2008, up from three stores in Shanghai, Beijing
and Hong Kong now.
Auspicious Beginnings, But No Guarantees of a Happy Ending
Even as incomes soar and sales grow by 20%-30% annually, successfully
breaking into China?s luxury market is no simple task. ?I was expecting
sales to be higher, the losses to be smaller. People are too optimistic
about China,? S Eric Douilhet, the president of Bluebell (Asia),
which operates Paul Smith, Moschino, Jaeger clothing and Davidoff
cigar in China was quoted by Bloomberg as saying.
There are plenty of reasons for the gap between expectations and reality.
First, most of the US$ 6 billion in luxury goods purchases by Chinese
are bought abroad, with only US$ 1 billion purchased in the mainland.
Chinese view shopping for such items as a main objective of travel
overseas, where they can enjoy a wider variety of choices at lower
prices. China?s steep import duties and value-added taxes mean luxury
goods companies have to charge as much as 30% more for products sold
in the China market than those sold elsewhere. IPR issues are another
serious concern. At the same time, rising operating costs prevent
retailers from winning a quick return on their investments. Winning
in such a market, especially for 2nd and 3rd-tier brands, has proved
to be extremely challenging. So far, only a handful of luxury brands,
including LVMH and Prada, have reported significant returns from
the Mainland Chinese market.
A Closer Look at the Chinese Consumers: Luxury with Chinese Characteristics
Chinese luxury goods buyers share some traits with top brand consumers
elsewhere, but second and third tier brands would do well to study
their potential customers when assessing the market. According to
the China Association of Branding Strategy (CABS), about 170 million
people, or 13%, of Chinese consumers can afford to buy luxury brands.
They can be divided into two categories: the affluent and the middle
class. There are 10 to 15 million affluent Chinese, including millionaires,
the nouveau riche, business elites and celebrities, who are active
purchasers of luxury goods. They earn RMB 240,000 (US$30,000) or
more annually, seek personalized services, and frequent luxury retail
outlets for the latest products. The middle class includes professionals
and white-collar employees, typically employed by foreign companies.
They might spend a high proportion of their earnings, as much as
an entire month?s salary, on a single purchase. Restricted by their
income level, they tend to buy small items and personal accessories
such as cosmetics, perfume, watches and jewellery.
The ?Face? Factor
The Asian concept of ?face? is a key motivation behind luxury goods
purchases, especially in China. Traditionally, ?face?, a concept
suggestive of ?pride? and ?dignity?, is translated into power and
influence. In a country like China that is witnessing aggressive
economic development, power and influence depend largely on wealth,
and luxury brands are used as status symbols. In a recent survey
by TNS, more than 70% of the respondents said they viewed luxury
brands as a way to demonstrate their status and success.
Young Consumers Lack Sophistication
Most Chinese buyers of luxury goods are between the ages of 25 and
40, considerably younger than their counterparts in Europe and the
U.S., who tend to be 40 or older. Luxury brand CEOs say Chinese 25-
to 30-year-olds are rapidly forming a significant luxury goods consumption
cluster, at a much faster rate than their counterparts in developed
countries.
Traditionally, men have been the main buyers of luxury goods, but
as women achieve greater social and economic independence, they are
gaining purchasing power and accounting for a larger share of the
market. Trendy young urban ladies increasingly are willing to indulge
themselves in the glamour of luxury brands.
Most Chinese luxury consumers are the ?newly rich,? very often the
first generation in their family to be able to afford such products.
Compared to westerners who might focus more on the real value of
what they are buying, Chinese consumers are less sophisticated and
not very brand savvy. They are often only aware of the most popular
labels. The main aim of such purchases is to reward themselves, show
off and validate their identities. A woman in the Chanel shop in
Shanghai?s swanky Plaza 66, was recently discussing with her husband
which handbag to buy: Her final choice was the handbag ?with a more
obvious Chanel logo.? Small wonder that so far, the most successful
luxury brands in China have been those whose labels are viewed as
obvious symbols of wealth.
Building Successful China Strategy
Success in the Chinese market requires far more than just opening
a slew of retail outlets. Getting the positioning right, investing
in marketing and brand-building and adopting proper distribution
models and retail channels are among the critical steps required
to triumph in this market.
Market Positioning
Some second and third-tier brands have found out the hard way that
simply shifting their usual marketing strategies to China will not
suffice - the market is still just beginning to take off and it is
unique in many ways. Companies need to investigate their markets,
identify target segments and unfilled niches, and match their core
strengths to market needs. Marketing, branding, pricing and distribution
strategies all have to be tailored to the local market.
While trying to target affluent consumers like their first-tier competitors,
second and third -tier brands should not neglect China?s emerging
middle class, which is more than 10 times the size of the affluent
group. Middle-class Chinese are well-educated and internationalized,
with a strong interest in learning about western cultures and lifestyles.
Most luxury consumers are status-conscious, and still seek a ?luxury
signature? - the eyecatching logos, colors, premium materials, celebrity
endorsements and other attributes that cater to their need to ?stand
out? from the crowd. Companies need to take this into consideration
in their product offerings and designs. Special designs catering
to local market needs could also be an option.
Marketing: Building Emotional Connections with the Brands
Since most Chinese consumers have low levels of brand awareness, they
have correspondingly low levels of brand loyalty. Having well-trained
sales staff can be crucial in instilling that loyalty by informing
consumers about the desirability of their brand and swaying them
toward making a purchase.
Marketing strategies should focus on brand building and nurturing
brand loyalty. Since a luxury is by definition an indulgence rather
than a necessity, a successful approach to selling such products
differs from that used for other consumer products. It?s a matter
more of promoting a lifestyle concept and culture than of selling
the products themselves. While the sudden jump in wealth among Chinese
has fuelled a boom in luxury purchasing, few of those consumers fully
understand or appreciate the ?luxury lifestyle.? Since those consumers
are usually eager to learn and catch up with their western counterparts,
marketing activities should target the consumers? lifestyle, educating
customers about ?luxury? and why they should pay a premium for it.
Suitable marketing channels include fashion magazines, special events,
cocktail parties, and direct mail and personal invitations to prospective
customers. All of these help create a luxury culture environment,
giving Chinese customers ample opportunities to develop their taste
for the good life and building emotional ties with the brands. A
successful marketing and branding strategy nurtures loyalty by making
consumers believe the brand reflects and resonates with their own
lifestyles.
At the same time, since tier-1 cities, especially Shanghai and Beijing,
are the trendsetters for the rest of the country, it is essential
that companies build brand image and awareness in those markets before
moving on to smaller cities.
Retail Channel
Good outlet locations are essential. High-end shopping malls in downtown
commercial complexes are most suitable: Given China?s cold winters
and torrid summers, for comfort and entertainment, Chinese shoppers
tend to prefer malls and department stores to exclusive stores or
boutiques. Keen to have a wide range of choices, the first instinct
of most Chinese shoppers is to head for a shopping mall. Retail
Asia magazine predicts that by 2020, China will be home to the seven
of the world?s ten largest malls. However, getting space in those
malls can be difficult in tier-1 cities. Property managers tend to
investigate potential tenants, with the exception of proven world-famous
brands, exhaustively. They study the brand?s existing presence, sales
track record, market positioning, and marketing plans. The best approach
for second and third tier brands may be to start with a stand-alone
flagship store in a tier-1 city to build brand image and awareness
before seeking space in high-end shopping malls.
Distribution Model
The common practice of authorizing franchise operations, used elsewhere
in the world, is generally not recommended in China given the importance
of quality and brand building. Franchises in China lack the legal,
financial, organizational and branding practices that are typical
of more mature markets. Despite an improving legal environment, China
still lacks a franchise culture. Most franchisees are small-scale
first-timers with a short-term business mentality that can take a
toll on brand reputation and profitability. Luxury brands need a
direct operation model, especially when entering tier-1 cities like
Shanghai and Beijing, where competition is fierce.
Summing Up
China?s luxury market is expected to grow immensely in the coming
years. Local consumers have started to mature and demand a wider
range of luxury goods. There are tremendous opportunities but also
greater competition and challenges. The market is still in its infancy,
though, and visionary strategic planning is required. Luxury companies
will need to look beyond short-term gains to secure market position
for the long term.
