The future perspectives of China’s luxury market and its real long term potential – an in-depth insight

In the past decade, China’s luxury market has been on a roller coaster ride, with all major international luxury brands craving for a share of the prosperity, the hunger for show-off and a readiness to spend big cash on luxury branded goods by the newly rich Chinese. Although most of the major international luxury brands have long been aware of China’s complex challenging market conditions, it seems that it is only recently that they are acknowledging the realities of this huge market and the perils that lie ahead, in the long term.

There are several clear signs of this wait-and-see approach that many international luxury brands have been adopting in the past 5 months in China – among these: for the first time in 4 years, this week’s Beijing Fashion Week is not hosting any international luxury fashion brand; most luxury brands have severely cut their marketing budgets in China; many brands have frozen the expansion of their retail with very few new store openings announced for 2013.

Besides the much talked-about high import tariffs, there are many other hurdles which have been putting additional pressure on the local operations of the international luxury brands:

- the costs of operations are growing – salaries in the Chinese luxury retail sector have increased an average 30% in the past 2 years, especially for  top management positions such as store manager or buyer, as they are increasingly attracted by foreign luxury shopping destinations such as Hong Kong, Dubai or Seoul, with European hubs such as Paris and London catching up in employing Chinese natives

- more Chinese wealthy shop abroad – a recent study by KPMG reveals that 71% of the wealthy Chinese interviewed travelled abroad (compared to 53% in 2008) and 72% of them purchased luxury goods on their trips abroad, especially cosmetics and fragrances (47% of those interviewed) but also watches (37%) and bags (32%)

- while the announced social oriented reforms and the crack-down on corruption by China’s new leadership may not have immediate implications on luxury, i.e. gifting, the mid-term can present an exnhanced inhibition of the desire to buy locally; already the public exposure of corruption cases is producing a wave of nervousness among the many rich who have been amassing their fortunes in dealings with the Chinese state

- with many luxury brands upgrading and enlarging their retail concepts in Europe, Chinese luxury consumers are less drawn to shop locally, especially in medium sized stores; operating one large flagship instead of 5 smaller stores will prove to be much more financially feasible in the mid to long term

- over half of the existing retail infrastructure (malls, shopping centre and galleries) lack the luxury shopping experience

- lack of understanding by many luxury brands of the lifestyle of the luxury Chinese consumer, especially the younger generation, which are nowadays drawn by the mix & match look (mixing luxury branded products with products of mass market brands)

- luxury brands in China have been ignoring essential consumer profile segments such as the gay consumers which may not represent a solid consumer base but are key influencers for wealthy female and male consumers

Gucci store Beijing

Has the Chinese luxury consumer matured? In many ways, yes! But, overall, Chinese still lack the sophistication that they can only learn from being exposed to it.

Travelling abroad has not only become cheaper, with increased air connectivity but also easier – visas for most destinations now take less time to obtain and the proceedures have been laxed. Luxury is now accessible to wider category of Chinese, especially the fast growing upper middle class, who are becoming more important than the super rich, especially from the point of view of loyalty. They may not afford the most expensive luxury items but they have proven to be more loyal and more frequent shoppers than the super rich.

Have luxury Chinese consumer become more demanding? Definitely, Yes! Nowadays, the Chinese luxury consumers:

- expect the same shopping experience they can find in Hong Kong, Paris or London – the latest interior design concept of each store and the latest window decorations of the stores in Paris or Milan

- aspire to a luxury lifestyle but they want to feel they are ‘taught” but rather ‘invited’ to experience true luxury lifestyle

- do not want to look up to local celebrities endorsing international luxury brands – they want to dream and live the Western lifestyle

- they want to feel luxury brands engage with them in a natural, realistic manner (one such recent example Lanvin hosted this weekend a casual night out in an understated venue in Shanghai, with popcorn and a local Chinese pop singer performing on stage and a simple Lanvin neon logo on the background).

- want to walk into the local Gucci or Vuitton store and find the same availability of products and the same representation of the collections as they can find in stores abroad

- limited and special editions of products but NOT overtly ‘Chinese limited’ editions (some luxury brands have sufficed with adding red colour or a Chinese symbol to a regular product, branding it ”limited edition” dedicated to Chinese

- in major cities such as Beijing, with brands scattered around in remote locations, Chinese consumers

to be continued in part 2 (March 25th 2013)

Oliver Petcu in Beijing

Diva Mode concept store at 798 Art District in Beijing