While still a rock-solid investment, the Chinese market is beginning to show signs of more ambiguous consumer behaviour and serious barriers at retail.
SHANGHAI – As the Japanese luxury market shrinks and the Western markets continue to reel from the global recession, China has never seemed more important for the future of the luxury industry. While there is little doubt that this giant country will one day be the biggest market for luxury goods, some question whether it can provide the growth needed to absorb the stagnation predicted in more mature markets.
The good news is that China still shows a lot of promising signs. Goldman Sachs believes its luxury market will break $5 billion in revenue this year and McKinsey & Company’s Insights China report from April indicated that in 2015 China will have the fourth largest number of wealthy households after the US, Japan, and the UK. McKinsey also noted that the number of households with a yearly income over 250,000 RMB ($36,500) is increasing at 16% per year.
And compared to other BRICs like Russia, luxury consumption is less concentrated at the very top of society. Strategic consultant Radha Chadha, author of The Cult of the Luxury Brand: Inside Asia’s Love Affair with Luxury, tells us: “There is the high-end in China, but also you will have people in the middle level of an organization or occasionally a secretary who will buy something. In that sense, China is a cross between Russia and Japan — with people from all sorts of income levels participating in luxury brands.”
China has also rebounded much quicker than other countries, thanks in part to resilient retail markets and consumer confidence across Asia.
“Their savings rate is much, much higher, so they are much better capitalized. When the sky didn’t fall and things continued, they thought, oh, I still have my job and the buses are still running, so I’ll start spending again," says Simon Lock, managing director of IMG’s Fashion Asia Pacific division, the global events and media group.
While the overall picture in China remains bright and the market relatively straightforward both in terms of entry and expansion, there are two great unknown quantities that cast uncertainty over “China’s luxury dream”: prohibitive retail pricing on the mainland and increasingly elusive consumer taste.
Chinese fashion consumers are still characterised as being strongly logophilic, mixing and matching conspicuously branded goods together in the same outfit. This may be slowly changing as the market grows and diversifies, but there are several social pressures that keep “big and bold” the guiding principle for Chinese tastes.
As a report in the July/August 2008 issue of The Atlantic outlined, sociologists no longer see conspicuous consumption as a universal behaviour of the wealthy but instead as one of affluent individuals in communities with large income disparities. As societies increase in wealth across the board, conspicuous consumption tends to go down.
At the moment, China is a classic unequal society, with only 1% of urban families considered “wealthy” (McKinsey), suggesting that luxury tastes will most likely stay conspicuous in the short to medium term. As Chadha explains, “China is in the ’show-off stage’, so people have money and the main purpose of buying luxury brands is showing that money off.”
But overemphasising shoppers’ tendency toward the flamboyant doesn’t paint an accurate picture of the many nuances in this fast-developing market.
“There are people who have used luxury brands for a while, and they have become more sophisticated,” says Chadha. “They don’t necessarily carry the logo or the more obvious brands. They are into somewhat more discreet brands and buying [them] for their own satisfaction. But even among these [individuals], you will find that invariably they will carry one or two pieces which are easy to recognize.”
Nels Frye, editor-in-chief of LifeStyle Magazine in Beijing, sees a similar pattern: an interest in the avant-garde balanced with more reassuring big brands.
“Comme des Garçons, Maison Martin Margiela, Vivienne Westwood, Viktor and Rolf, and Stella McCartney are all popular with the fashion-loving crowd. But limited edition items from Chanel, Dior, and Louis Vuitton are also especially prized.”
Except for the luxury superpowers, brand awareness is still very low in China. McKinsey found in its survey that only Louis Vuitton and Gucci had much unaided brand awareness in the leather goods category (at 50% and 40%, respectively), with brands like Coach at a meagre 4% and Ferragamo at 2%. Some of this is certainly a consequence of time spent in the market. Louis Vuitton opened its first Chinese boutique in 1992 while many of its competitors only began to penetrate the market around the turn of the century.
Considering the intense social pressures of conspicuous consumption in a market with limited alternative wealth signifiers, most consumers will continue to rush towards the few top brands for some time to come.
Luxury malls and developments have been sprouting up all over China. The 50,000-square-metre Plaza 66 in Shanghai offers Louis Vuitton, Christian Dior, Prada and all the major names, stunning customers as they enter the first floor. China World Shopping Mall in Beijing is home to brands such as Armani, Dunhill, Louis Vuitton, and Hermès, and a giant ice skating rink, to boot.
But despite the allure of these glamorous and expansive retail establishments, many anecdotal reports suggest that a significant proportion of Chinese shoppers don’t use local malls as the primary outlet to buy luxury goods.
IMG’s Lock explains: “At the moment, it’s all about the land grab for the brands, trying to establish spots in as many retail luxury shopping centres. These retail centres are acting more as showcases for the brand, which are distinct from actual retail sales. So you’ll find a lot of Chinese consumers will go into the Dior shop in Plaza 66 in Shanghai [for example] and they’ll look at the merchandise that’s in there. But because of the 30% luxury tax at the moment, their first luxury experience with the brand will actually be when they come to Hong Kong or Macau.”
As Lock suggests, the high price of luxury goods in Mainland China is the foremost hurdle. Between tariffs and value-added taxes, prices in Mainland China can be up to a third higher than in Hong Kong. Hence, a quick and cheap flight to Hong Kong can deliver more bang for their buck since travel visas are relatively easy to acquire for wealthy Chinese customers. For the hardcore luxury addict, Tokyo offers more luxury options than anywhere else in Asia, becoming an increasingly popular destination with visa restrictions now also reduced. McKinsey found in its “Coming of Age” survey that the Chinese rarely justify their foreign purchases on price differential alone, as they also want access to the more expansive product selection in Hong Kong and Tokyo retail branches.
But even if Hong Kong is driving away some sales from the mainland, boutiques in China do perform an important function within promotion and brand awareness, equally providing a critical communications channel for fostering sales abroad.
High taxes and high income disparity make Chinese luxury consumer behaviour broadly predictable for the time being. However, the challenges ahead will be in interpreting tastes that are ever more multilayered, as well as in targeting Chinese shoppers abroad wherever they may travel. The combined effect of lower prices and a greater breadth of luxury merchandise in other markets continues to be a significant barrier against realising the full potential of any mainland retail effort.
Sophistication and diversification are happening, but luxury brands should not make the mistake of accepting the status quo market profile. Instead, they will have to use a fine-tooth comb to discern the many subtle but important changes their Chinese consumers are on the cusp of undergoing.
W. David Marx, Tokyo Correspondent