China Luxury Industry Report For Dfs Galleria

The Chinese Luxury Goods Industry Report By Arvind Sabharwal For

CONTENTS Luxury Goods Market in China

1

The Customer Base

4

The Challenges Ahead

6

Forecast and Trends

8

Luxury Goods Market in China

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

alone will consume 29 percent of the total luxury goods

marketing and communication strategies of

market by 2015. Many key luxury players reported strong

luxury goods companies. The Chinese luxury

sales performance in China in 2008. LVMH are group Status and The self reward theled two the China market with main verymotivations strong growth numbers. for Chinese to buy

market is only $ 8 billion at the moment and growing around 20 percent per year. The luxury industry analysts are quite unequivocal that

According to LVMHs annual became the luxury report, goods. China Cosmetics, perfumes second largest customer base Louis Vuitton. andforwatches are sold the most as

Chinese luxury market will surpass that of US,

they are considered the perfect small

Europe and Japan soon.

ways to reward oneself of good performance. However, the average

Companies such as LVMH have 17 percentage

number of consumers buying luxury

of their revenue coming from Asia (excluding

goods in China is far less than that

Japan -13%). Studies have shown that China

of Europeans. Over the past 20 years

China

tremendously.

has

grown

From dusty roads where only bicycles rolled, to

The Chinese are moving towards a culture of enjoy

shimmering Mercedes clogging the streets, China has

life today rather than save it for the future. The one

come a long way. It will not come as a surprise to

child policy of China has produced pampered kids.

many that most of the luxury stores in China have

Along with the parents, both the maternal and paternal

started to out-profit the same brand stores in other

grandparents shower all their love and wealth to the

countries. The Louis Vuitton boutique in Shanghai

single family heir, pampering the child right from the

Plaza 66 Complex does more business than the store

birth and giving more than she or he ever needed.

in Chicago. The Chinese economy has been growing at over 9% since the last decade and has been

The internet and foreign media has helped to bring

considered more open, liberal and efficient than a

international people and cultures together. The

number of other European economies. The stimulus

spending

package too has given a powerful boost to Chinese

tremendously. The Chinese students are going abroad

economy.

for

power

education.

of

Chinese

International

has

increased

superstores

and

departments had set the stage for luxury industry to China’s world of luxury goods is ever expanding.

follow in China. The Chinese have started to travel a

From small jewel houses to exquisite watchmakers,

lot to Europe and America. They seek expertise and

both small and large luxury brands are entering China.

admire success.

It’s not just the coastal cities but some of the second tier cities such as Shenyang and Chengdu are fast

While 1st tier city consumers are becoming more

becoming luxury good hubs for their region. A typical

savvy in what they purchase and want to differentiate

luxury shopper today is well educated, young, white

themselves from others, luxury consumers in China’s variety of factors besides an increase in disposable 2nd and 3rd tier cities are generally motivated by a income. These factors include prestige, peer pressure,

collar worker, who loves to splurge.

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.

a reason for the customer to visit. Although

limited

spending

car Mercedes Benz. 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

The

consumers have the disposable income to express their uniqueness or aspire to certain social strata.

A Chinese luxury shopper is quite different from her American or European counterpart. The Chinese Tom Doctoroff, Chief Executive Officer of JWTs shopper doesn’t mind mixing the luxury bag with Greater China division offers some insightful and local shoes with a flashy watch, possibly fake. The interesting views on the advertising of luxury goods in American or European shopper however will always China in his book “Billions : Selling to the new keep the casual wear separate from luxury products. Chinese consumer”. Doctoroff says that the idea of The Chinese are quite like the Japanese consumers beauty in China is quite different than it is in the west. where the luxury often mixes with the casual gear. In The white skinny models on the billboards may work a recent survey by the China Market Research Group in the west but Chinese women definitely do not share -- CMR, 60% of respondents claimed to purchase this idea of beauty. Luxury goods do not play the luxury goods; a large majority, 89%, were between the same role in China as they do in the west. ages of 20 and 30 with assets less than $25,000 USD. Just Doctoroff as during asserts the nineties, that evenwhen though there China washas a huge shown stupendous economic growth overinthe last the decade, demand for wine and champagne Japan samethe phenomenon Chinese consumer is being observed still remains in China. very LVMH 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

“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.” which has been in China since the 19th century enjoys "On the other hand, Mao stoked the instinct toward market share in excess of 50 percent for cognac. social mobility by saying that women should hold up Group’s other wines and other spirits division is doing half the sky. He was saying that women, like men, exceedingly well and some liquors growing at the rate have an obligation to contribute to the construction of of 15 percent. LVMH has around 40 stores now in a social utopia." China in cities such as Xian, Chengdu, Shenzhen, Hangzhou and not just Beijing and Shanghai. Thus, Chinese women are torn between "two very different archetypes: the protective, kind, loving angel In China, many developments are mall-based, since mother, and on the other hand, the worker warrior, few cities have defined or suitable downtown zones. which accounts for a lot of the behaviour you see in In Beijing, popular destinations for high-end stores women," Doctoroff continued. "A woman, no matter include Shin Kong Plaza and the mall inside who she is, really wants to advance, but as they the China World Trade Centre. Many of the more advance they can never sacrifice their femininity -- be upmarket malls are attached to hotels, such as the masculine, or harsh, or abrupt. They need to be strong Grand Hyatt or the Peninsula. Growth in the luxury on the inside, but outside as gentle as a little kitty. So goods market is also generating a lot of interest in this need to balance femininity with advancement is a high tech, sparkling architecture, which too generates 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

themselves,

they

want want

to to

perfect 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,

Chinese desire "to show off without giving the

it's really about alignment. You can have an

impression that you're showing off. There's this

expressive element to your beauty, but still, explicit

balance, conflict between being recognized and trying

showing off, or striking expression, does not make

to fit it. It's very coy, or understated."

people feel comfortable." In advertising, "Chinese prefer to see Chinese faces," The fashion industry's propensity for using edgy-

he argued. Generally, local is better, but if you have a

looking models with outlandish hairstyles "is a

truly

mistake in China," claimed Doctoroff. "Features that

Theoretically, celebrities should be very useful,

stick out are horrifying; high cheekbones are OK, but

because Chinese admire expertise, they admire power

the best thing is a nice round, smooth face, practically

and status, so you can easily borrow interest with

circular. Anything that sticks out -- figuratively,

celebrity.

iconic

foreign

celebrity,

it

will

work.

literally, metaphorically is bad." It contradicts the

The Challenges Ahead

Luxury retailing in China presents tremendous

According to the US embassy in China, on average 20

opportunities, but also risks and challenges. The most

percent of the consumer products are counterfeit. The

significant of challenges for luxury brands concern the However, most Rights serious (IPR) issue regulation, time IntellectualtheProperty

Chinese government has made several inroads in

relating lies in enforcement frame to forIPR return on itsinvestment, low luxury brand and penalty and at the localretail levelinfrastructure. because awareness limited

regarding IPR protection and to strengthen the

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

establishing an effective and complete law system enforcement, supervision an inspection of such laws.

investment. The cost of setting up, training staff and

reaching targeting customers and building brand

building brand awareness can be high, while the

equity can be a costly exercise.

demand remain limited in short run. High import duties and consumption taxes will make it difficult to

Some luxury retailers, initially attracted by the low

target market segments beyond the economic elite. As

cost of labour, have struggled because of a lack of

a result, many luxury brands expect to wait five to ten

local management talent. There is a clear shortage of

years to see return on their Chinese investment.

trained staff in sales and service positions in luxury goods. Luxury brands in China need to empower their

While

luxury

advertisements

brands in

have

been

internationally

placing

employees to become brand ambassador.

renowned

magazines, they often find that the message is lost.

Some luxury retailers initially chose to license to

This can be attributed to Chinese newsstands, which

Chinese retailers. Unfortunately this strategy has led

are overflowing with advertisements to the extent that

to the failure of many who subsequently found that

most readers barely notice a luxury newcomer. While

distribution channels are not being adequately

a marketing effort in one city may yield result there, it

controlled,

will have no impact elsewhere.

counterfeit products alongside genuine products.

particularly

with

retailers

selling

More and more luxury brands now are choosing to Many cities outside of the main commercial centres Most of potential the brandscustomers, are also opening manufacturing may have but reaching them

build dedicated retail stores for their own. If however

facilities China. But that companies havesee to be wary of means doingin something they can directly. this clutter strategyofas Chinacompanies, still has todifficulty be recognised as a Heavy luxury in

franchisee closely so that the brand is protected.

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.

a franchisee is chosen, it is important to monitor the

Forecasts and The China luxury market seems to be growing in all gifts for wives, girlfriends, and clients or business the directions. Not just the tier 1 cities but more and partners. more tier 2 and tier 3 cities are being offered up to

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

date products. Going forward, more citizens in the 1st 2nd andto 3rd tier cities areit tierChinese cities consumers will travel inabroad shop, making

References

still relatively when it difficult for luxury uneducated retailers to actually sellcomes to themtoin luxury Theyresident, are eagerthere to buy luxury China. Forshopping. a Chongqing is the same

http://www.lasvegassun.com/news/2009/may/11/lux

goods, and have the money to is dofor so,a Shanghai but are cache shopping in Shanghai as there unfamiliar within many luxury brands. Chinese resident shopping Hong Kong. consumers can be taught through creative advertising. Companies have the opportunity to Thus, it is imperative that luxury product companies educate the Chinese market about their brands, begin to factor in 2nd and 3rd tier residents in their

ury-brands-look-to-china-for-cushion-in-crisis/ http://chinaluxculturebiz.wordpress.com/2009/05/09/ luxury-brands-look-to-shoppers-in-china-forcushion-in-crisis/

st especially in second tier as cities retail expansion as well in where their 1advertising tier city can beasmore cost and where consumers planning many of effective their customers in Shanghai will

http://www.aol.in/news-story/luxury-brands-look-to-

know beless about luxury brands. Despite the actually vacationing folks from the inner Chinese slowdown in thetravelling global toeconomy, Chinese cities or businessmen Shanghai to work.

crisis/2009051013170001527023

consumers – especially consumers in mid twenties and on thirties – remain must optimistic. Luxury retailers the mainland be ableInto January researchfrom by the thefirst-time group serve a wide2009, range market of consumers,

china-for-cushion-in-

http://www.chinadaily.com.cn/english/doc/200411/30/content_396017.htm

Chinapurchaser Market toResearch (CMR) interviewed luxury the superrich. Salespeople must in Beijing, be several able to hundred provide consumers guidance and educationChengdu, to newer

http://www.hkicpa.org.hk/APLUS/0710/p24_29.pdf

Fujian,to the Guangzhou, Guangdong, Shanghai, entrants luxury market, especially for fashion Sichuan and Xiantoabout they adjusted items. According CMRhow research, womentheir are

http://www.amcham-

spending becausein of the economic crisis. The generally interested learning how to apply consumers said they will spend as planned except

4705-9C8D-

with the purchases of auto and real estate.

shanghai.org/NR/rdonlyres/FCCD3DCF-18BBC677B764ACE1/2572/01_cover_story.pdf http://seekingalpha.com/article/15478-growth-in-

Can China produce its own international brand?

chinas-luxury-goods-market-to-be-fueled-by-2nd-

Experts believe that it may still take one to two

tier-cities

generations before China produces its own brand of international stature. Along with the creativity

http://www.kpmg.com.cn/en/virtual_library/Consum

and innovative products line, luxury is also about

er_markets/CM_Luxury_brand.pdf

historical legitimacy. In the minds of the consumers luxury goods are attached to a past.

Arvind Sabharwal MBA 2009, University of Hong Kong [email protected] Mobile: (44) 7767014770