The luxury goods market in China, characterized by expensive cars, high fashion, designer jewelry, jets, planes, perfumes and many more, is an industry that has been around for decades. Previously only available to a small percentage of the global population, the market for luxury goods is becoming an increasingly larger market as each year passes.
One of the biggest reasons for growth is the rise of the upper middle class Asian consumer, who is drastically changing the pattern of growth. Amongst the Asia growth boom lies the largest single country market, China. This article takes a look at the personal luxury goods market in China, as well as the new age Chinese consumers, who have taken the lead when it comes to luxury shopping.
A Holistic View of the Luxury Goods Industry
According to a ‘Luxury Good Worldwide Study’ carried out by Bain & Company in 2019 the overall worldwide luxury goods market was estimated to be valued at $155,5 trillion (€1,3 trillion). Luxury goods consists of 9 different segments that are made up of both goods and experiences.
Although there were 9 different segments, 80% of the market was made up of luxury cars, personal luxury goods and hospitality. Over the past few year’s growth has remained modest worldwide, with more robust growth coming from Mainland China, Japan, and some parts of Southeast Asia.
There has been sustained growth, as we have seen the global personal luxury goods market which was valued at $204 billion (€171 billion) in 2010, increased in value to $336 billion (€281 billion in 2019). This increase can be attributed to a number of factors (which we will look at later on in the article); however, we undoubtedly saw a decrease in 2020 due to the impact of COVID-19.
The Increasing Power of the Chinese Consumer
With China soaring to become the world’s second largest economy in 2010, all eyes have been fixed on their market potential for the past decade. With a working population larger than the size of Europe and the United States combined, their rate of growth over the past 2 decades has been monumental. An increase in incomes and increase in purchasing power has birthed what we may call a ‘new age Chinese consumer’.
The “average Chinese consumer” cannot be readily defined but Goldman Sachs have divided them into four categories, with future growth mainly coming from 2 groups; the white collar and blue collar workers.
An overall increase in wealth is further illustrated by the Forbes 2021 billionaires list which had Beijing as listed as the city which is home to the world’s most billionaires. The list also featured Shanghai, Shenzhen, Hangzhou and Hong Kong in the top 10, further showing the increase in Chinese wealth.
The Power of Chinese Consumers can be seen across a multitude of industries, from automobiles and manufacturing to food and beverage, the Chinese market has become an essential source of income and growth for large and medium sized companies alike. By observing an increase in trends, we find that travel and luxury are at the top of the list for many Chinese consumers.
Chinese Consumers and Luxury Goods
The value of the worldwide personal luxury goods market in 2019 was an all-time high of $336 billion (€281 billion) according to Statista. In 2018, retail sales of personal luxury goods in China amounted to $132 billion (€111 billion), which was the second highest spend, only behind the United States (Statista).
However, according to research by Mckinsey in 2018 there were more than 150 million trips abroad taken by Chinese consumers, with an estimated half of their luxury spending occurring outside of Mainland China. This means that the total spending of Chinese consumers may well have eclipsed that of the US, in 2018.
For the past decade, many Chinese shoppers have preferred to not purchase personal luxury items in the mainland and have opted instead to make their purchases in Hong Kong, Europe and other destinations around the world. The 2 leading reasons for this include high import duties and taxes, as well as travel itself.
For customers in China, luxury goods are significantly more expensive in the Mainland and as a result it may be more economically beneficial to purchase these goods elsewhere. The second reason, travel, is becoming a more frequently occurring theme as shoppers feel that buying things has become an important part of the travel experience.
Recent Changes to the Luxury Goods Market
Prior to the COVID-19 pandemic, young Chinese consumers were set to be the driving force of global luxury spending. The Chinese spend alone on luxury was forecasted to triple to $183 billion (1.2 trillion CNY) by 2025 (Mckinsey). In terms of growth, Chinese consumers are set to contribute almost two thirds of growth in luxury spending globally.
One of the key ingredients contributing to such growth is the social value attributed to being associated with such brands. In the past the luxury industry had a distinct set of rules that determined who can enter the market and in which direction the market would move.
Only a handful of players were able to enter, and big brands relied on their long-standing prominence to keep their small but affluent customer base. In today’s times, the young Chinese consumer needs a brand that it can connect to, that tells a story and gives them a VIP experience. In today’s times, these new age Chinese consumers have the power to drive a brand towards success, or leave it forgotten in yesterday.
The Impact of COVID-19 on the Luxury Market
Prior to the start of the Coronavirus Pandemic, many luxury brands were already in a precarious place. The market as a whole was not easy to classify in terms of averages due to how widely the margins were spread out across the spectrum. While some brands had experienced year on year growth, others were striving to remain relevant in a polarized market.
Normally high-end luxury brands would get to stay in touch, maintain relationships, and create new relationships with customers through events and shows. However, from 2020 brands have had to reimagine new, creative ways to remain connected with customers. Plans and calendars have had to be readjusted and the usual course of events was anything but usual coming into the new year.
In order for brands to survive the challenges brought on as a result of the pandemic, it was necessary for them to make adjustments. According to a Mckinsey report, there were several actions that could have been carried out by such brands to withstand the effects of COVID. Firstly, it was necessary for them to re-adjust supply chains and account for the change in supply and demand. Thereafter, they needed to set up a team to identify ways in which there could be reductions in expenses.
A review of inventory from the previous year, and a rework of the plans for 2021, could allow for certain reductions and avoid losing any brand equity. Transitioning to digital platforms and having a greater digital presence would become extremely important for customer engagement (as can be seen with brands like Burberry in China).
The Impact of COVID-19 on Chinese Consumers
The COVID-19 pandemic has undoubtedly had an impact on every industry, with the luxury goods industry being no different. The value of the global personal luxury goods market took a dive from $336 billion (€281 billion) in 2019 to $259 billion (€217 Billion) in 2020. Remarkably, while there was a decrease in worldwide spend, mainland China experienced an increase in consumer luxury spending.
Bain and Company attributed the increased growth to 4 main factors. The factors are repatriation, digitalization, the increase in Millennial and Generation Z (Gen Z) consumers, and the new duty-free shopping zone in Hainan.
With repatriation, because of the restrictions on travel, many shoppers who otherwise would have traveled overseas, have instead made their purchases domestically. Reductions in import taxes and duties, as well as brand harmonization have also made purchasing these goods locally, more attractive.
Moving Forward – The Changes Likely to Come Next
Due to pandemic restrictions and an increase in the influence of younger, more digitally savvy consumers, many brands in the domestic market have increased their presence on digital platforms. From livestreaming to opening online stores, brands have endeavored to create an omni-channel presence to reach a larger customer base. For brands with physical stores in only major cities, this helped reach those customers who were unable to travel but wished to purchase luxury goods. It also helped reach the younger audience who spends more time online shopping than going to physical stores.
One of the primary drivers of growth and an increasingly influential element is the emergence of millennial and Gen-Z consumers. These shoppers have necessitated brands to rethink their marketing strategies. Forming a significantly large part of online lifestyle, fashion and beauty consumers, they will continue to redefine the interaction between the brand-consumer relationship.
Millennials and Gen-Zers are seen as creative customers, who want to engage more with brands. They are not awe struck by the heritage of a brand, but rather want the brand to have a story that they can identify with. They have more disposable income and are more opinionated than previous generations, which will shape the way in which brands interact with consumers.
The implementation of the duty-free shopping zone in Hainan has led to a large growth in consumer purchases. Combined with travel restrictions and reduced import duties, it allowed Chinese consumers to purchase more goods domestically as well as allowed them the experience of shopping while they travel.
Luxury brands and the Long Term
A 2019 research analysis by Bain & Company revealed that the number of worldwide luxury consumers will increase by around 60 million, to a number of 450 million. This will largely be due to the growth in Asian consumers. The research also found that a large portion of these consumers will be the younger generations, as mentioned earlier with the millennials and Gen-Zers.
While on the face of it, the growth may appear as a positive for luxury brands, there are a number of challenges that accompany it. With the pace of innovation and the way in which consumers interact with brands, luxury brands will have to adapt fast to keep up with the new age demand.
It is clear that growth in the market will be inevitable, and the new age of Chinese consumers will have a large part to play in the growth. With the growing influence, will come an increase in power, so brands will have to be mindful of their engagement with these shoppers. While the Chinese luxury goods market offers huge opportunities for brands, they need to be aware of the changing landscape, increase in competition and relationship with consumers and the domestic market in Mainland China.
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