Luxury Market Rises &Nbsp; Where Is The Next Round Of Growth?

By 2015, China's consumers will have more than 20% of the global luxury market.

What changes are taking place in the consumption behavior of luxury consumers in China? How should luxury goods businesses take the lead and make the best of them?

With generous hands and generous hands, willing to spend money, dare to spend money, buy luxury goods that can not afford many years ago, do not shake hands, do not tremble, this is today's wealthy Chinese consumers.

Luxury goods have become a symbol of wealth and fashion in China.

The Chinese craze for luxury goods is rapidly sweeping across the country and is driving the development of China's luxury market.

Even in the 2009 of the global recession, China's luxury consumption market increased by 16%, which was only slightly lower than the 20% growth rate in previous years, but still much better than many important luxury goods markets.

In 2009, China's luxury consumption reached 64 billion yuan (US $10 billion).

In 2010, the strong recovery of China's economy has made this "prosperous" market vibrant. We predict that the market will continue to improve and that it will reach 180 billion yuan in 2015 (at fixed exchange rate of about 27 billion US dollars).

By then, China will account for more than 20% of the global luxury market and replace Japan as the world's largest luxury market (chart 1).

To cater for the huge appetite and needs of this rapidly expanding consumer group, the world's most high-end and most prestigious luxury brands are scrambling to build large stores in the most fashionable shopping areas in China.

Louis Weedon has 36 stores in 29 cities and opened stores in 10 cities in 2005.

Hermes developed from 5 stores in 2005 to 20 stores today, an increase of more than four times.

GUCCI has expanded faster, and today there are 39 stores (there are only 6 stores in early 2006).

Who is China's luxury consumer?

We find four different luxury consumer groups. We take the proportion of luxury expenditure to household income to represent consumers' emphasis on luxury goods.

More than half of the luxury consumption comes from the so-called "core luxury buyers". They spend 12% to 20% of their income on luxury goods, and the total annual expenditure on luxury goods is 2~6 yuan (US $3000~9000).

The importance of the three other consumer groups is on the rise. Two of them (luxury consumption models and fashion enthusiasts) have decided the fashion trend.

By 2015, these two categories will account for 1/3 of the luxury goods market.

The fourth group, which we call the "middle class enterprising", is growing rapidly even though it is small now (chart 2).

"Luxury consumption model" is rich, young and fashionable with the most typical luxury lifestyle.

Although this group accounts for only 1% of the total number of consumers, they will spend 24% of the total market in 2015.

Most of them are private business owners or top management of the company. Many of them live in Beijing or Shanghai, and have overseas study or work experience.

In terms of luxury consumption, they are friends with the rich two generation and have long been associated with luxury brands.

These models spend more than 150 thousand yuan a year on luxury goods, accounting for about 10% of their disposable income.

They believe that these items are an integral part of their daily life. Most of them (71%) start buying luxury goods at least 5 years ago, which is only 34% of the other luxury goods consumers.

They often buy luxury goods to satisfy themselves, in order to make themselves feel special, not just to show wealth.

For them, good service is very important (44% of the "Paragon" holds this view, while only 20% of all other luxury consumers think so).

They are very sensitive to salesmen's attitude.

Some people say they prefer to shop abroad because the salesmen there are more in service.

If the brand can provide good service, the "model" people will be willing to patronize again.

The "fashion enthusiasts" are not the general definition of the rich (usually 10~20 yuan a year, 1.5 to 30 thousand dollars), such people account for only 3% of the total number of luxury consumers, but their spending on luxury goods accounts for two times the income of their families than other groups (40% of their income is spent on luxury goods). And spend a lot of time to understand the latest fashion trends, pay close attention to seasonal promotions.

They like to share their buying experiences and suggestions in the social circle and online, and have a great influence on other consumers.

This phenomenon of getting much more money is becoming more and more popular, because 1/3's "fashion enthusiasts" earn at least 20% more than they did a year ago.

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Fashion enthusiasts want to be at the forefront of fashion trends and even borrow money: 59% of people say they are willing to buy on credit, while only 32% of middle class entrepreneurs.

They do not pursue flashy products, but they want to be appreciated by friends.

Fashion enthusiasts enjoy a planned purchase. They go to the store to see products, study products online, and communicate with friends before buying them.

59% said they would find product information from more than three channels before purchasing novice bags, while only 41% of other luxury buyers would do so.

They enjoy browsing windows, visiting shops, and seeing what new products are available. Instead of being so concerned about salesmen's service, they tend to listen to others' advice or follow celebrities' clothes.

"Middle class enterprising" accounts for 51% of luxury consumers, and this figure will rise to 61% by 2015.

By then, their share of luxury spending will rise from 10% to 16%.

Most of them earn an annual income of 6~20 million ($9000~3), and often hold middle management positions in state-owned enterprises or foreign enterprises.

Many of them live in two or three tier cities, because their daily living expenses are relatively low, which allows them to spend time extravagant and enjoy luxury goods.

Their attitude towards money is relatively conservative. After enjoying luxury goods, they are likely to reduce other expenses in order to balance the total budget, which is also the attitude of mainstream urban consumers.

The group spends 5000 to 15 thousand yuan ($750~2250) a year on luxury goods, which is equivalent to 9% of the annual household income.

Their experience in luxury brands is less than that of other groups, but they are eager to integrate into more advanced social circles, and wish to stand out in the crowd and buy luxury goods to make them feel successful.

Every time they spend a lot of money on luxury goods, they are also very cautious: they will spend a lot of time studying, and may spend two or three months to study Internet reviews and suggestions. They will sell three goods for the best price (29% will be three, while only 19% of the fans will do so).

They usually do not travel as often as they are richer consumers.

They prefer Chinese brands.

The ranks of luxury consumers continue to grow.

These kinds of new luxury consumer groups have their own different sources of cultivation. They grow together with different growth rates to create a Chinese luxury consumption army, which has made the rise of China's luxury market.

In China's wealthier families, families with an annual income of 30~100 yuan (4.5 to 150 thousand dollars), many from two or three cities, have become a consumer group that can not be ignored. This group is expanding at the rate of 15% per year.

By 2015, 5 million 600 thousand households in China will reach this income level.

The growth rate of extremely wealthy families (annual income of more than 1 million yuan, usually more than 10 million yuan) is even faster, with an annual growth rate of around 20%. By 2015, 1 million households will achieve this income level.

In the next 5 years, the extremely well-off families will drive the growth of the luxury goods market by 38%.

In China, 13 million of the upper middle class families (annual income 100 thousand to 200 thousand yuan, equivalent to 15000~30000 U.S. dollars), many people are frugal, and continue to save money, in order to buy advanced watches, jewelry, handbags, shoes and clothing, and so on, these once wealthy people exclusive commercial products.

Although they can only buy luxury goods occasionally, they account for about 12% of the market share, and the number is increasing rapidly.

We expect that by 2015, 76 million households in China will enter this income range, accounting for 22% of the total consumption of luxury goods.

(chart 3)

The concept of consumption is becoming more mature.

The explosive popularity of the Internet, more and more overseas tourism, and personal experience of buying and using luxury goods and so on, let Chinese consumers have an unprecedented understanding of luxury goods, and also make them more and more astute, especially in terms of the relationship between value and price.

At the same time, they also have obvious changes in consumption concept and consumption behavior.

Price fixing

With the opening up of luxury stores in China's major cities and the latest fashion news released on magazines and websites, the number of brands that Chinese consumers are familiar with today is nearly two times that of two years ago.

Of the consumers surveyed in 2010, half of us could name more than three garment luxury brands, compared with 23% in 2008.

The Internet has promoted people's cognition of luxury goods.

Luxury consumers are more interested in using Internet information than any other mainstream Chinese consumer group. 52% of them will go online to see product details and price information, while only 13% of mainstream urban consumers do so.

About 2/3 luxury consumers have at least one overseas shopping experience. They can compare the price differences between domestic and foreign markets.

For example, in 2008, only two of the five people knew that the price of luxury goods in China was 20% higher than that in overseas markets such as Hongkong.

By 2010, 66% of consumers knew the price difference.

When they are more familiar with luxury goods, Chinese consumers no longer think that expensive prices are almost the same as good quality.

In 2010, only about half of consumers believed that the higher the price, the better the quality, compared to 66% in 2008.

But what is interesting is that some luxury consumers will be satisfied because of the higher price of luxury goods they buy at a lower price.

A consumer told us that she only bought luxury handbags with potential for appreciation. She said she was pleased to see that in 2008, she bought Chanel handbags for 25900 yuan (US $3700) in 2010 for a price tag of 30800 yuan (US $4500).

Real goods demand

Luxury companies have been busy with a seemingly endless war against counterfeit goods in China.

Despite the government's efforts to combat counterfeiting, counterfeit products are unlikely to disappear in the near future.

Though it may be hard for Chinese consumers to get rid of the impression that they are fond of using fake goods, the reality has begun to change slowly.

Consumers' desire for genuine products is stronger and stronger, and they are more and more capable of buying genuine products.

Our survey data show a trend that brings a glimmer of hope to luxury enterprises: Chinese consumers are increasingly enjoying authentic luxury goods.

Consumers willing to buy fake jewellery dropped sharply from 31% in 2008 to 12% in 2010.

Some luxury buyers say that if their friends recognize a fake, they will embarrass themselves.

A visiting consumer rewarded herself with a luxury handbag for the first month's salary. She told us that "if it's fake, it's meaningless."

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Strive for excellence

Consistent with the desire for goods, consumers value quality more.

Our consumer survey in 2010 found that good quality is the first important factor to buy luxury goods. Nearly half of the respondents agreed with this view, compared with 36% in 2008.

43% of people consider brand awareness, making it the second most important purchase consideration.

For garments, leather goods, jewellery and watches, quality and technology are two of the top three considerations, because these are the symbols of the history of product inheritance.

And the brand's international popularity has gradually replaced the innovative design, becoming one of the top three considerations of consumers when considering buying (Chart 5).

Less virtual

Our research shows that, contrary to the general impression of luxury consumers in China, more and more Chinese luxury consumers are no longer keen to be "open" and "rich".

More than half of China's luxury consumers said they did not want to be a conspicuous fashion, compared to 32% in 2008.

41% of people think that showing off luxury goods shows that their tastes are vulgar, while those in Japan and the United States share 45% and 27% respectively.

One interviewee said he liked the Hermes scarf but would not wear it in the office because he was worried that this might lead to criticism of "grabbing the boss".

Weighing the present

The most prominent feature of luxury goods consumers in China is different from other markets. It is light: 73% of Chinese luxury consumers are less than 45 years old, and this proportion is only a little more than 50% in the United States. China's 45% luxury goods consumers are below 35 years old, while Western Europe has only 28% of the luxury goods consumers in this age group.

These consumers spent their childhood in the gradual warming of China's economic reform. They never experienced the ordeal of economic recession; they saw a steady increase in family income and property value through their parents' lives.

Therefore, they are very optimistic about the growth of future wealth: 64% of people believe that income will continue to grow significantly in the next five years. Nearly half of the respondents said they should enjoy today rather than worrying about the future.

Self importance

More and more Chinese consumers are buying luxuries to satisfy themselves. The proportion of such people in the respondents increased from 25% in 2008 to 36% in 2010.

More than half said they bought luxury goods for "rewarding their hard work and success."

The desire to reward themselves with luxury goods is particularly strong in the upper middle class.

Many of these consumers continue to save money to buy Precious things and enjoy themselves.

The complaint of a visiting consumer is typical: "I will buy myself a Tiffany necklace for myself on my birthday, and reward myself". "When I get the bonus at the end of the year, I will buy another radar watch".

Where is the next round of growth?

The rapid urbanization process in China and the growing wealth outside of big cities are driving the rise of more luxury new markets.

Although China's mega cities (Beijing and Shanghai) will continue to maintain the central position of the luxury market in the next five years, the market growth rate of smaller cities, such as Taiyuan, Changchun and Yantai, is likely to be faster.

Moreover, more small cities will develop enough to attract luxury stores.

We expect that luxury goods consumption in cities like Qingdao and Wuxi will quadruple in the next 5 years.

By 2015, the consumption level of these cities will be close to the level of Hangzhou and Nanjing today (that is, the most developed luxury market level in China).

By then, the total consumption of luxury goods in more than 60 cities will be more than 500 million yuan (US $76 million), compared with 30 cities.

How can luxury enterprises seize the next wave of growth opportunities? We think the key is to find out which cities in China can contribute to the growth of the market.

At present, most marketing companies divide cities into different levels according to GDP, and we adopt different methods, namely, analyzing 650 cities according to the expected growth of urban household income.

We graded the cities according to their income levels, including those with a considerable number of upper middle class cities, and those with quasi middle class families (whose annual household income was between 5.5 and 100 thousand yuan).

We believe that the index can more accurately measure potential consumption capacity (chart 6).

Our research finds that:

China's 36 big cities, including 2 mega cities, 9 large cities and 25 developed cities, will contribute 74% to the growth of the luxury market in 2015, and they will account for 76% of China's luxury market.

The 2 mega cities (Beijing and Shanghai) will account for 21% of the total consumption of luxury goods, and will continue to maintain their important position, contributing 19% to market growth over the 2010~2015 years.

The 9 big cities (Tianjin, Chongqing, Dongguan, Foshan, Guangzhou, Hangzhou, Nanjing, Shenzhen, Wenzhou) account for 1/3 of the current luxury consumption, and they will still maintain a 30% share by 2015.

These markets will contribute 27% to market growth over the next 2015 years.

The other 25 developed cities, including some of the larger cities that are based on GDP and population, such as Xi'an, and relatively small cities such as Taiyuan or Yantai, now account for 25% of the luxury consumer market and are expected to account for 26% by 2015.

The contribution rate of these cities to growth from 2010 to 2015 is 27%.

The remaining more than 620 emerging cities will divide the remaining 22% of the luxury market share by 2015, accounting for 26% of the total expenditure on luxury goods in the next five years.

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Future competition strategy

The prospect of China's luxury market is improving, but luxury enterprises must grasp the growth opportunities and solve a series of key strategic issues.

Planning retail layout

Accurate location -- from choosing the target city to deciding the location of a specific store -- is very difficult in China.

Some luxury stores have been successful, while others have been left behind.

The main market is still concentrated in 36 big cities.

Between now and 2015, the market growth in these cities will account for 74% of the total growth. By 2015, the total sales of luxury goods in these cities will reach 76% in the Chinese market.

Beijing and Shanghai, the two mega cities with high coverage of luxury goods, have great potential for market growth: the market coverage of these two cities is far from being saturated, which is a good platform for expanding the retail business of luxury goods.

We believe that luxury enterprises should first take a firm foothold in these cities and then expand to other cities.

At present, Hermes has 20 stores in China, still far below its 45 stores in Japan.

Similarly, Chanel has 50 stores in Japan, while only 8 in China.

The same is true of other top brands: Louis Weedon has 36 stores in China, including 3 in Beijing and Shanghai, which is really amazing, but still not as good as its popularity in Japan: it has 12 stores in Tokyo alone, and 45 stores in 27 other cities.

The right choice of stores is another important decision.

Experience shows that in China's big cities, luxury stores with independent facades in shopping malls are 3~5 times more attractive than other retail formats, such as boutiques or department stores.

Providing excellent service

Emphasis on excellent store service - in fact, in all possible consumer contacts, 44% of luxury purchase decisions are influenced by store experience: Trial / try, conversation with sales staff, and display of products in the store (chart 7).

Among the consumers surveyed, 2/3 was disappointed with the indifference of the salesmen in the shop.

Although consumers' recognition of the importance of service attitudes is getting higher and higher (from 17% in 2008 to 30% in 2010), many luxury companies in China are slow to respond.

Let's talk more about brand heritage stories. Luxury companies need to hire more salesmen who are familiar with the latest fashion trends and are committed to Chinese consumers who are patient and not eager to sell.

Louis Weedon is very good at this.

They assign experts (sometimes the store manager themselves) to spend time telling shoppers about the origin of the brand, the company's profound European heritage, and the way of making leather products.

Better training + reward + support - encourage sales people to spend more time telling consumers stories and building in-depth customer relations.

In order to ensure that employees can focus more on the promotion of brand heritage, their remuneration is not affected by store sales.

Training for salesmen should focus on educating consumers' content and skills, not just selling goods.

Incentive measures should include inviting high performance people to visit the company headquarters or provide pure material rewards.

Many luxury brands have also started investing in multilevel member programs, using a global IT system to unify the relevant information / data of customers. No matter what customers purchase in Paris, New York or Shanghai, they can design / implement very targeted marketing campaigns.

Embracing digital marketing

The Internet, once abandoned by luxury goods companies, has now become a battleground for Chinese consumers.

Although store experience is still the most important determinant of purchase, the Internet has rapidly become the second largest consumer product information channel.

Make good use of social media - Chinese consumers spend a lot of time collecting brand and product information, reading others' comments on products.

Well known social networking sites, micro-blog websites, and ubiquitous bulletin boards (BBS) are often the first choice for obtaining such information. They should also become a ready platform for marketing companies to master and respond to consumers' needs, communicate with consumers and interact effectively and timely.

Luxury enterprises can choose and join some influential bloggers for brand promotion.

Lancome has launched its own brand website, as well as a very successful BBS forum.

Some auto companies advertise at Autohome (car home) and Xcar (love card car), which is the two most popular Internet Forum in China, with millions of comments every month.

CIC, a social media research firm, reviews more than 330 thousand items of luxury products every month.

Build its own e-commerce platform - this is a new marketing focus.

Now, many luxury brands have gradually discovered the necessity of building a strong online business.

This may mean building an official website on a well-known e-commerce platform or building an official website on its own. Even if it can not achieve substantial sales performance, at least it can better control its brand's image on the Internet.

Luxury businesses are still cautious about e-commerce, but some have taken bold steps.

For example, Armani created an e-commerce website in November 2010, where customers can place orders online and buy directly.

Excavating cultural charm

The temptation of a large part of luxury goods is to share the cultural heritage associated with the brand, especially the collection of products, such as jewellery, whose value does not disappear with the passage of time.

This concept caters to more and more Chinese luxury consumers and plays an important role in building marketing strategies.

Many leading brands have begun to promote the company's history and product technology, and even set up small museums to display brand history, classic design and products for decades.

Some enterprises will send production personnel to China to display professional production process, or invite large customers to visit their European factories and headquarters.

It is worth noting that although most Chinese consumers prefer foreign luxury products, 1/3 respondents prefer to buy products specifically designed for China and contain Chinese elements, especially among new middle class consumers (Chart 8).

Some enterprises have begun to try, such as Hermes recently launched a Chinese brand - up and down, has a store in Shanghai, and plans to open shop in Beijing and even Paris.

The brand developed in China and designed by the Chinese team will sell a series of products designed in China, most of which are also completed in China, and the price is 30% to 60% lower than that of Hermes.

China's luxury market is developing rapidly, consumer groups are becoming bigger and bigger, and tastes are always changing. Luxury enterprises are facing great opportunities and unprecedented challenges.

One size fits all is definitely not the answer.

From location, marketing, service, localization and so on, it is a feasible way to win.