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The Chinese Luxury Goods Industry Report
By
Arvind Sabharwal
For
CONTENTS
Luxury Goods Market in China
The Customer Base
The Challenges Ahead
Forecast and Trends
1
4
6
8
While the worldwide luxury revenue is expected to fall by 10%
in 2009, the luxury goods market in China will climb by 7%. By
2015, China will have 4 million household holds with annual
income above 250,000 Yuan. The global economic slowdown is
having an adverse impact on the sales of luxury goods worldwide
but the big luxury companies are looking at Chinese customers as
the big bright spots to drive them out of this slowdown. This
report looks at the various aspects of the luxury goods industry in
China and why it has attracted the attention of luxury brands
world over.
The term luxury comes from the Latin word Luxus, which means
opulence and extravagant living. Luxury goods stand for success,
achievement, status, style and exude an aura of ‘better than the
rest’. More than desiring products that are of good quality and
that last long, more and more customers now want products that
they can emotionally connect to, have a strong sense of belonging
with; and it is luxury goods that given them this feeling. The
luxury goods industry was worth around $100 billion in 2008 and
is growing at the rate of 6% per year. With more dispensable
income, people especially in the upper middle strata have given a
huge boost to the luxury goods industry in China.
The growth has also been due to strong
marketing and communication strategies of
luxury goods companies. The Chinese luxury
market is only $ 8 billion at the moment and
growing around 20 percent per year. The luxury
industry analysts are quite unequivocal that
Chinese luxury market will surpass that of US,
Europe and Japan soon.
Companies such as LVMH have 17 percentage
of their revenue coming from Asia (excluding
Japan -13%). Studies have shown that China
alone will consume 29 percent of the total luxury goods
market by 2015. Many key luxury players reported strong
sales performance in China in 2008. The LVMH group led
the China market with very strong growth numbers.
According to LVMHs annual report, China became the
second largest customer base for Louis Vuitton.
Luxury Goods Market in China
Status and self reward are the two
main motivations for Chinese to buy
luxury goods. Cosmetics, perfumes
and watches are sold the most as
they are considered the perfect small
ways to reward oneself of good
performance. However, the average
number of consumers buying luxury
goods in China is far less than that
of Europeans. Over the past 20
years China has grown
tremendously.
From dusty roads where only bicycles rolled, to
shimmering Mercedes clogging the streets, China has
come a long way. It will not come as a surprise to
many that most of the luxury stores in China have
started to out-profit the same brand stores in other
countries. The Louis Vuitton boutique in Shanghai
Plaza 66 Complex does more business than the store
in Chicago. The Chinese economy has been growing
at over 9% since the last decade and has been
considered more open, liberal and efficient than a
number of other European economies. The stimulus
package too has given a powerful boost to Chinese
economy.
China’s world of luxury goods is ever expanding.
From small jewel houses to exquisite watchmakers,
both small and large luxury brands are entering China.
It’s not just the coastal cities but some of the second
tier cities such as Shenyang and Chengdu are fast
becoming luxury good hubs for their region. A typical
luxury shopper today is well educated, young, white
collar worker, who loves to splurge.
The Chinese are moving towards a culture of enjoy
life today rather than save it for the future. The one
child policy of China has produced pampered kids.
Along with the parents, both the maternal and paternal
grandparents shower all their love and wealth to the
single family heir, pampering the child right from the
birth and giving more than she or he ever needed.
The internet and foreign media has helped to bring
international people and cultures together. The
spending power of Chinese has increased
tremendously. The Chinese students are going abroad
for education. International superstores and
departments had set the stage for luxury industry to
follow in China. The Chinese have started to travel a
lot to Europe and America. They seek expertise and
admire success.
While 1st tier city consumers are becoming more
savvy in what they purchase and want to differentiate
themselves from others, luxury consumers in China’s
2nd and 3rd tier cities are generally motivated by a
variety of factors besides an increase in disposable
income. These factors include prestige, peer pressure,
advertising, optimism about the future, and greater
reliance on credit. The factors are similar to those that
motivated Chinese consumers in Beijing and Shanghai
5 years ago when they first were exposed to and able
to afford luxury products.
The A Chinese luxury shopper is quite different from her
American or European counterpart. The Chinese
shopper doesn’t mind mixing the luxury bag with
local shoes with a flashy watch, possibly fake. The
American or European shopper however will always
keep the casual wear separate from luxury products.
The Chinese are quite like the Japanese consumers
where the luxury often mixes with the casual gear. In
a recent survey by the China Market Research Group
-- CMR, 60% of respondents claimed to purchase
luxury goods; a large majority, 89%, were between
the ages of 20 and 30 with assets less than $25,000
USD.
Just as during the nineties, when there was a huge
demand for wine and champagne in Japan the same
phenomenon is being observed in China. LVMH
which has been in China since the 19 th century enjoys
market share in excess of 50 percent for cognac.
Group’s other wines and other spirits division is doing
exceedingly well and some liquors growing at the rate
of 15 percent. LVMH has around 40 stores now in
China in cities such as Xian, Chengdu, Shenzhen,
Hangzhou and not just Beijing and Shanghai.
In China, many developments are mall-based, since
few cities have defined or suitable downtown zones.
In Beijing, popular destinations for high-end stores
include Shin Kong Plaza and the mall inside
the China World Trade Centre. Many of the more
upmarket malls are attached to hotels, such as the
Grand Hyatt or the Peninsula. Growth in the luxury
goods market is also generating a lot of interest in
high tech, sparkling architecture, which too generates
a reason for the customer to visit.
Although limited spending power still
puts luxury goods out of reach of the vast majority of
the population, Chinese consumers are swiftly
becoming more sophisticated and knowledgeable
about international fashion. In addition, even a small
percentage of 1.3 billion people is still a large market
by Western standards. China has one hundred cities
with populations greater than one million, compared
to nine in the US. Many of these cities lack the flash
of Shanghai, but they are catching up quickly as
consumers have the disposable income to express
their uniqueness or aspire to certain social strata.
Tom Doctoroff, Chief Executive Officer of JWTs
Greater China division offers some insightful and
interesting views on the advertising of luxury goods in
China in his book “Billions : Selling to the new
Chinese consumer”. Doctoroff says that the idea of
beauty in China is quite different than it is in the west.
The white skinny models on the billboards may work
in the west but Chinese women definitely do not share
this idea of beauty. Luxury goods do not play the
same role in China as they do in the west.
Doctoroff asserts that even though China has shown
stupendous economic growth over the last decade, the
Chinese consumer still remains very conformist,
conventional and conformist. They want to climb the
socioeconomic ladder but do not want to stick out; to
convey success in a subtle and socially acceptable
manner and display wealth without flaunting it. It is
for this reason, Doctoroff goes on to say that Buick in
China is much more popular than the true luxury
car Mercedes Benz.
“Chinese women are extremely focused on the family;
their role has always been to protect the family," he
argued. "They have no valid social role unless they
are marrying and having a child. So the ultimate
destination of Chinese women, historically, has been
to have sons and protect the family from evil invaders,
everything from germs to political incorrectness to
gossip in the street. And still, today, marriage and
child are the ultimate destination of most women, they
will not consider themselves complete individuals if
they don't have that.”
"On the other hand, Mao stoked the instinct toward
social mobility by saying that women should hold up
half the sky. He was saying that women, like men,
have an obligation to contribute to the construction of
a social utopia."
Thus, Chinese women are torn between "two very
different archetypes: the protective, kind, loving angel
mother, and on the other hand, the worker warrior,
which accounts for a lot of the behaviour you see in
women," Doctoroff continued. "A woman, no matter
who she is, really wants to advance, but as they
advance they can never sacrifice their femininity -- be
masculine, or harsh, or abrupt. They need to be strong
on the inside, but outside as gentle as a little kitty. So
this need to balance femininity with advancement is a
basic need of Chinese women."
One area in which this plays out, Doctoroff said, is in
the Chinese concept of beauty. "Beauty in the West is
much more transformational – a woman wants to
recreate herself; you have these
goddesses on a pedestal. These are
completely inaccessible. Chinese
women don't want that; they want
accessible beauty, they want inclusive
beauty. They want to perfect
themselves, they want to sculpt
themselves, and they want to make their
skin smoother."
For example, "The dominant need of
hairstyling is alignment, keeping your
hair in place. It's not fashion creation, or coif creation,
it's really about alignment. You can have an
expressive element to your beauty, but still, explicit
showing off, or striking expression, does not make
people feel comfortable."
The fashion industry's propensity for using edgy-
looking models with outlandish hairstyles "is a
mistake in China," claimed Doctoroff. "Features that
stick out are horrifying; high cheekbones are OK, but
the best thing is a nice round, smooth face, practically
circular. Anything that sticks out -- figuratively,
literally, metaphorically is bad." It contradicts the
Chinese desire "to show off without giving the
impression that you're showing off. There's this
balance, conflict between being recognized and trying
to fit it. It's very coy, or understated."
In advertising, "Chinese prefer to see Chinese faces,"
he argued. Generally, local is better, but if you have a
truly iconic foreign celebrity, it will work.
Theoretically, celebrities should be very useful,
because Chinese admire expertise, they admire power
and status, so you can easily borrow interest with
celebrity.
The Challenges Ahead Luxury retailing in China presents tremendous
opportunities, but also risks and challenges. The most
significant of challenges for luxury brands concern the
Intellectual Property Rights (IPR) regulation, time
frame for return on investment, low luxury brand
awareness and limited retail infrastructure.
According to the US embassy in China, on average 20
percent of the consumer products are counterfeit. The
Chinese government has made several inroads in
establishing an effective and complete law system
regarding IPR protection and to strengthen the
enforcement, supervision an inspection of such laws.
However, the most serious issue
relating to IPR lies in its enforcement
and penalty at the local level because
jurisdiction is diffused throughout
many government agencies and offices.
Recent counterfeit cases have assisted
in raising awareness among Chinese
consumers of the importance of brand
authenticity.
Despite the fact that luxury sales in
China are on the rise, luxury brands
should not expect a quick return on
investment. The cost of setting up, training staff and
building brand awareness can be high, while the
demand remain limited in short run. High import
duties and consumption taxes will make it difficult to
target market segments beyond the economic elite. As
a result, many luxury brands expect to wait five to ten
years to see return on their Chinese investment.
While luxury brands have been placing
advertisements in internationally renowned
magazines, they often find that the message is lost.
This can be attributed to Chinese newsstands, which
are overflowing with advertisements to the extent that
most readers barely notice a luxury newcomer. While
a marketing effort in one city may yield result there, it
will have no impact elsewhere.
Many cities outside of the main commercial centres
may have potential customers, but reaching them
means doing something that they can see directly.
Heavy clutter of luxury companies, difficulty in
reaching targeting customers and building brand
equity can be a costly exercise.
Some luxury retailers, initially attracted by the low
cost of labour, have struggled because of a lack of
local management talent. There is a clear shortage of
trained staff in sales and service positions in luxury
goods. Luxury brands in China need to empower their
employees to become brand ambassador.
Some luxury retailers initially chose to license to
Chinese retailers. Unfortunately this strategy has led
to the failure of many who subsequently found that
distribution channels are not being adequately
controlled, particularly with retailers selling
counterfeit products alongside genuine products.
More and more luxury brands now are choosing to
build dedicated retail stores for their own. If however
a franchisee is chosen, it is important to monitor the
franchisee closely so that the brand is protected.
Forecasts and The China luxury market seems to be growing in all
the directions. Not just the tier 1 cities but more and
more tier 2 and tier 3 cities are being offered up to
date products. Going forward, more citizens in the 1st
tier cities will travel abroad to shop, making it
difficult for luxury retailers to actually sell to them in
China. For a Chongqing resident, there is the same
cache shopping in Shanghai as there is for a Shanghai
resident shopping in Hong Kong.
Thus, it is imperative that luxury product companies
begin to factor in 2nd and 3rd tier residents in their
retail expansion as well as in their 1st tier city
planning as many of their customers in Shanghai will
actually be vacationing folks from the inner Chinese
cities or businessmen travelling to Shanghai to work.
Luxury retailers on the mainland must be able to
serve a wide range of consumers, from the first-time
luxury purchaser to the superrich. Salespeople must
be able to provide guidance and education to newer
entrants to the luxury market, especially for fashion
items. According to CMR research, women are
generally interested in learning how to apply
cosmetics and about the most recent fashion trends,
and men are interested in learning how to match
items, such as suits with shirts and ties, and choose
Most of the brands are also opening manufacturing
facilities in China. But companies have to be wary of
this strategy as China still has to be recognised as a
producer of quality luxury goods manufacturer. It is
more about perception than quality. Brands are
building large stores to keep the global positioning
and brand. Very few Chinese luxury brands have also
emerged from this boom and are catering to
international tourists.
gifts for wives, girlfriends, and clients or business
partners.
Chinese consumers in 2nd and 3rd tier cities are
still relatively uneducated when it comes to
luxury shopping. They are eager to buy luxury
goods, and have the money to do so, but are
unfamiliar with many luxury brands. Chinese
consumers can be taught through creative
advertising. Companies have the opportunity to
educate the Chinese market about their brands,
especially in second tier cities where advertising
can be more cost effective and where consumers
know less about luxury brands. Despite the
slowdown in the global economy, Chinese
consumers – especially consumers in mid
twenties and thirties – remain optimistic. In
January 2009, market research by the group
China Market Research (CMR) interviewed
several hundred consumers in Beijing, Chengdu,
Fujian, Guangzhou, Guangdong, Shanghai,
Sichuan and Xian about how they adjusted their
spending because of the economic crisis. The
consumers said they will spend as planned except
with the purchases of auto and real estate.
Can China produce its own international brand?
Experts believe that it may still take one to two
generations before China produces its own brand
of international stature. Along with the creativity
and innovative products line, luxury is also about
historical legitimacy. In the minds of the
consumers luxury goods are attached to a past.
References
http://www.lasvegassun.com/news/2009/may/11/
luxury-brands-look-to-china-for-cushion-in-crisis/
http://chinaluxculturebiz.wordpress.com/
2009/05/09/luxury-brands-look-to-shoppers-in-
china-for-cushion-in-crisis/
http://www.aol.in/news-story/luxury-brands-look-to-
china-for-cushion-in-crisis/
2009051013170001527023
http://www.chinadaily.com.cn/english/doc/2004-
11/30/content_396017.htm
http://www.hkicpa.org.hk/APLUS/0710/p24_29.pdf
http://www.amcham-shanghai.org/NR/rdonlyres/
FCCD3DCF-18BB-4705-9C8D-
C677B764ACE1/2572/01_cover_story.pdf
http://seekingalpha.com/article/15478-growth-in-
chinas-luxury-goods-market-to-be-fueled-by-2nd-
tier-cities
http://www.kpmg.com.cn/en/virtual_library/
Consumer_markets/CM_Luxury_brand.pdf
Arvind Sabharwal
MBA 2009, University of Hong Kong
Mobile: (44) 7767014770