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China Luxury Industry Report for DFS Galleria

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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
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Page 1: China Luxury Industry Report for DFS Galleria

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

Page 2: China Luxury Industry Report for DFS Galleria

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

Page 3: China Luxury Industry Report for DFS Galleria

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

Page 4: China Luxury Industry Report for DFS Galleria

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

Page 5: China Luxury Industry Report for DFS Galleria

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

Page 6: China Luxury Industry Report for DFS Galleria

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.

Page 7: China Luxury Industry Report for DFS Galleria

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.

Page 8: China Luxury Industry Report for DFS Galleria

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.

Page 9: China Luxury Industry Report for DFS Galleria

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

[email protected]

Mobile: (44) 7767014770


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