How Should Brands Navigate The Multi-Faceted Chinese Luxury Market?

The Chinese market's resilience never fails to amaze. COVID cases were confirmed in several major Chinese cities this winter, including Hangzhou, Guangzhou, and Beijing. Despite the country's extremely strict "COVID-zero" policy, people were flocking to shopping malls once the various lockdowns and restrictions eased, as though the outbreak never happened.

China's unstoppable appetite for spending has also made it the fastest-recovering luxury market. According to Bain & Company's recently released study, China Luxury Report 2021, the personal luxury market in China is still expanding rapidly.

Following a 48 per cent increase in 2020, China's personal luxury market is expected to be valued at RMB 471 billion (approximately 65.5 billion Euro) in 2021, a 36 per cent increase and nearly double that of 2019.

However, this does not imply that brands will be able to easily ride this wave of success in China. There are still uncertainties in the market, such as policy restrictions, low consumer confidence due to weakness in the stock and real estate markets, and a continuous slew of COVID outbreaks affecting the regional market. This Bain report also discusses the tailwinds and challenges facing the Chinese luxury landscape.

A Market Of Contrasts

The repatriation of luxury purchases accounted for a large portion of the growth in China's local luxury market. According to data, prior to the pandemic, the domestic market accounted for 32 per cent of Chinese consumers' global luxury spending, while this share has now risen to 94 per cent to 98 per cent. But despite the ongoing domestic market expansion in China, consumer total consumption remains 30 to 40 per cent lower than pre-pandemic levels.

Although the domestic market is growing steadily overall, there are significant gaps in growth momentum across categories in the first and second half of 2021, with the sale of leather goods increasing by nearly 100 per cent in the first half compared to 2020, but by less than 30 per cent in the second half. Other categories, such as fashion, jewellery, and watches, experienced only single-digit growth in the second half of the year.

This also reflects the wide disparity in growth rates across segments, with leather goods remaining the strongest, growing by approximately 60 per cent year on year, while prestige beauty is expected to grow by only 20 per cent year on year.

The slowdown observed in the second half of 2021 is likely the result of a high comparative base, due to the "revenge spending" that took place following the return to semi-normal life in 2020. However, market challenges, such as the epidemic and uncertain economic scenarios, will continue to shape the market in the coming year. In addition, the scandals plaguing influencers and celebrities in the market of late has caused brands to reduce marketing spend and hedge their bets, resulting in subdued growth and a more risk-averse market.

New Channels, New Growth

However, the market remains dynamic and should not be underestimated. The report also focuses on China's key growth engines, with digital channels and the duty-free market poised to become pivotal channels for increasing conversions.

The luxury industry's digital transformation in China is well underway, and the opportunities for brands in any category to build complete consumer journeys online have further fueled brands' online performance. According to Bain, the sale of personal luxury goods online in China grew at a rate of approximately 56 per cent, while offline sales grew at a rate of 30 per cent.

The Hainan duty-free market is another battleground for brands to keep an eye on. Chinese consumers do not need a visa to travel to Hainan to buy luxury goods at least 20 per cent off retail prices, and the unit price of beauty products in Hainan duty-free stores is 30 to 55 per cent off regular retail prices. This price difference has piqued the interest of consumers.

Offshore duty-free spending in Hainan is expected to reach 50.49 billion RMB (approximately 7.02 billion Euro) in 2021, representing an 83 per cent increase year on year. Hainan duty-free store sales are expected to account for 13 per cent of the total Chinese domestic luxury market.

Bain expects retail shopping opportunities on the island to grow as more operators arrive. With more options for consumers, price competition is likely to heat up. At the same time, brands can also explore full-price travel retail opportunities on Hainan Island, a popular tourist destination in China.

What’s Next

The global personal luxury market is expected to reach 283 billion euros in 2021, exceeding pre-pandemic levels, but the full growth momentum in the Western market has yet to be established due to China's restrictions on international travel. Weiwei Xing, a Bain & Company Global Partner and co-author of the report stated, “Overall, we expect Chinese consumers’ personal luxury purchases to recover to pre-COVID levels between the end of 2022 and the first half of 2023. This will be supported by continuous repatriation of spending and boosted by the gradual reopening of international travel, first in Asia and then globally.”

The Chinese luxury market is expected to slow after two years of rapid expansion, and there will be an inevitable outflow of affluent Chinese consumer dollars as global travel becomes more accessible. However, the report believes that the fundamentals of Chinese consumption are still in place, with the overall personal luxury market expected to grow by the low double digits in 2022, slowing year on year in the first half of the year but picking up in the second half.

That said, the rise of the local middle class and rapid urbanisation across the nation will increase the penetration of luxury goods, with the market set to become the world's largest luxury market by 2025.

Differences between the Chinese market and the rest of the world will continue to grow – from consumer behaviour and the cultural landscape, to the retail environment and level of digitalisation. To keep up with this ever-changing country, brands must view China as a separate regional market – one that requires special attention and specific strategies to target its unique consumers.

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